FINC 2368
Spring 2012
Duarte
Depreciation
Accelerated depreciation methods, such as the modified accelerated cost
recovery system (MACRS), increase the present value of an investments tax
benefits.
Relative to MACRS, straight-line depreciation results in
FINC 2368
Spring 2012
Duarte
Opportunity Costs
Cannibalization
Cannibalization refers to the loss of sales of an existing product when a new product is
introduced.
Initial Investment for Classicaltunes.com
Projections for Jazz CD Proposal
Year Zero Cash F
FINC 2368
Spring 2012
Duarte
Term Structure of Interest Rates
Relationship between yield and maturity is called the Term Structure of Interest
Rates
Graphical depiction called a Yield Curve
Usually, yields on long-term securities are higher than on short-
FINC 2368
Spring 2012
Duarte
Expected Returns:
The Risk-Based Approach
Beta and Expected Returns
Portfolio Expected Return
Portfolio Expected Return
Portfolio Expected Return with Short Selling
Portfolio weights have to add up to one.
However, these weigh
FINC 2368
Spring 2012
Duarte
Risk and Return
For the various asset classes, a trade-off arises between risk and return.
Average Returns and Standard Deviations
for 11 Stocks, 1994-2006
Risk and Return Revisited
Risk Premiums Around the World
The Trade-off
FINC 2368
Spring 2012
Duarte
The Scale Problem
Why the conflict?
The scale of the Western Europe expansion is roughly five times that of the Southeast
U.S. project.
Even though the Southeast U.S. investment provides a higher rate of return, the
opportunit
FINC 2368
Spring 2012
Duarte
The Trade-off Between Risk and Return
Understanding Returns
Dollar Returns
Percentage Returns
Percentage Returns
The History of Returns: Nominal Returns
The Value of $1 Invested in Stocks, Treasury Bonds, and Bills
The History
FINC 2368
Spring 2012
Duarte
Valuing the Enterprise: Free Cash Flow Approach
Valuing the Enterprise: Free Cash Flow Approach
Steps
Estimate the free cash flow that the firm will generate over time.
Discount the free cash flow at the firms weighted average
FINC 2368
Spring 2012
Duarte
The Security Market Line
Are Stock Returns Predictable?
Risk, Return, and
The Capital Asset Pricing Model
Capital Budgeting
The Capital Budgeting Decision Process
Capital Budgeting Decision Techniques
A Capital Budgeting Proce
FINC 2368
Spring 2012
Duarte
The Secondary Market
Stock Valuation: Preferred Stock
Preferred stock is an equity security that is expected to pay a fixed annual dividend
indefinitely.
Stock Valuation: Common Stock
Suppose that an investor buys a stock toda