Joe and Rich are both considering investing in a project with the following cash flows. Joe is
content earning a 9 percent return but Rich desires a return of 16 percent. Who, if either,
should accept this project?
1. What is the initial cash outlay (CF0)?
The initial cash outlay is -17,720,000.
2. What are the operating cash flows in years 1 thru 5 - adjusted for taxes and
The operating cash flow for year 1 is 3,836,602.5, for year 2 is 4,486,042.5, f
The ratio of gross margin represents the revenue the company retains as
gross profit. For NSC, the ratio of gross margin has grown slightly over the
past four quarters. For CSX, the ratio has also grown slightly overall and is
Chapter 2 Financial Statements, Taxes, and Cash Flow
Balance sheet identity
Assets = Liabilities + (Shareholders') Equity
Current assets + Net fixed assets = Current liabilities + Long-term debt + Equity
NFA + Net working capital (= CA - CL) = LTD + E
Chapter 7 Equity Markets and Stock Valuation
Stock price as the sum of discounted future dividends: Dividend Discount Model
Suppose buying a dividend-paying stock at P0 and selling it at P1 with D1 paid at t = 1.
Given the required return of r,
P0 = (D1+
Chapter 4 Introduction to Valuation: The Time Value of Money
Intertemporal choice of consumption
Simple interest vs. compound interest
PV = FV/(1 + d)t
Single Cash Flow stream over time
or simply, p = mx where m = 1/(1 + d)t
Present value (PV) = price
Weighted Average Cost of Capital (WACC)
The weighted average cost of capital (WACC) is an average cost of capital.
There are three sources of financing: common stock, preferred stock and debt.
The market-value weights of these financing sources are used t
Chapter 5: Discounted Cash Flow Valuation
Multiple cash flows (General cases): given the periods & periodic rate, compute PV or FV.
Apply the single-CF formula to each cash flow & sum them at t = 0 (PV calculation) or t = n (FV calculation).
BA II+: enter
Defense Electronics Inc. (DEI): A Radar Detection Systems (RDS) expansion project
5 year project
Land MV (after-tax) as of now
Land MV (after-tax) in 3 years
Plant construction cost
Plant life (years)
Salvage value after
Proxy right is a right of first refusal to buy new
stock issue to represent proportional
ownership if desired.
From now =
Concept #3 C
The internal rate of return method assumes
cash flows are reinvested at the market rate.
Relevant #2 B
Solve the letter equations below:
60 F 6 I = D from the P M to H P (on a B D)
25 = M P C
4 L in a T-T-T G
7 D without P make 1 W
13 = V in the B of S J
It was an excellent