Capital Budgeting Tools
(1)
Payback Period
(1a)
Chapter 11
(2)
Net Present Value (NPV)
(2a)
(3)
The Basics of Capital Budgeting:
Evaluating Cash Flows
Discounted Payback Period
Profitability Index (PI)
Internal Rate of Return (IRR)
(3a)
(4)
Modified Inter
Variable
Initial capital expenditure
Investment in NWC inventory
Intial cash outlay
Life of the new production machine
Salvage value
Depreciation expense
Units sold
Sales price
Variable cost of product
Profit on product
Total Unit profit per year
Fixed Co
Variable
Initial capital expenditure
Investment in NWC inventory
Intial cash outlay
Life of the new production machine
Salvage value
Depreciation expense
Units sold
Sales price
Variable cost of product
Profit on product
Total Unit profit per year
Fixed Co
Portfolio Expected
Return
ERR
Electric Gene
0.4
Buckstar
0.6
ERR
Std Dev
0.16
0.09
0.064
0.054
0.118
Portfolio X Portfolio Y Portfolio Z
9.50%
8.80%
9.50%
4.90%
5.50%
5.50%
Beta of PortfoInvestment % Value
Beta
Stock A
$2,000
0.2
1.5
Stock B
$5,000
0.5
1.
HW 9 Chapter 11
P11-9
(Related to Checkpoint 11.4)(IRR calculation)Determine the internal rate of return on the
following project: An initial outlay of $10,500 resulting in a cash inflow of $1,800 at the end of year 1,
$5,200 at the end of year 2, and $7,
HW 8 CH 10
Q1
P10-10
(Measuring growth)Green Gadgets Inc. is trying to decide whether to cut its expected dividend
for next year from $10 per share to $7 per share in order to have more money to invest in new
projects. If it does not cut the dividend, Gre
Study Plan Chapter 7 Review
Rate of Return=
Cash Return
Ending Price+ DividendsBeginning Price
=
Beginning Price
Beginning Price
P 7-1
(Related to Checkpoint 7.1)(Calculating rates of return)On December 17, 2007, the common
stock of Google Inc. (GOOG) was
Chapter 1
1.1
There are three basic questions that are addressed by the study of finance. They are
How can the firm best manage its cash flows as they arise in its day-to-day
operations (working capital management decisions)?
How should the firm raise mon
HW 11 Chapter 14
P14-1
(Defining capital structure weights)Templeton Extended Care Facilities, Inc. is considering the
acquisition of a chain of cemeteries for $390 million. Since the primary asset of this business is
real estate, Templeton's management h
Independent Variable: An experiment usually has three kinds of variables:independent, dependent, and
controlled. Theindependent variable is the one that is changed by the scientist. To ensure a fair test, a good
experiment has only one independent variabl
Common Stock A
Common Stock B
Probability
Return Probability
Return
0.2 10%
0.15
-7%
0.6 16%
0.35
7%
0.2 21%
0.35
15%
0.15
20%
A
Probability
Return
0.2 x
10% =
0.02
0.35 x
16% =
0.056
0.2 x
21% =
0.042
x
=
0
11.80%
Investment Standard Deviation
4.87%
B
Pr
Chapter 8 Homework 5
You are considering buying some stock in Continental Grain. Which of the following is an example of
nondiversifiable risk?
Risk resulting from a general decline in the stock market
You are considering investing in a portfolio consisti
The Cost of Capital
Chapter 10
(def) - Cost of obtaining money to fund asset purchase use as estimate of r (discount rate)
If we can earn more than the cost of capital (r) from a
project than company should undertake.
The Cost of Capital
Accept Project if
Bond Valuation
Valuing the cash flows
Chapter 7
(1) coupon payment (interest payment)
= (coupon rate * principal)
Bonds, Bond Valuation,
and Interest Rates
usually paid every 6 months
(2) maturity value
= principal or par value
= $1000
Example (coupon rat
Topics
Chapter 5
Time Value of Money
Future Value - Compounding
Future Value - What is something worth in
the future at a rate of interest.
ex. $1,000 deposited into a bank today and
left in the account for 1 year earning
interest at 5%
1.
2.
3.
4.
5.
6.
Areas of Finance
Introduction to Finance
Chapter 1 and 6
An Overview of Financial
Management
Interest Rates (p 162-180)
Institutions - Study of banks, insurance
companies, S&Ls, credit unions
Money Management (Investments) Study of risk/return, portfoli
Common Stock
Chapter 9
Stocks and Their
Valuation
Common Stock - Provides ownership in a
corporation with resulting voting rights and
residual claims.
Features of Common Stock:
(1)
(2)
(3)
(4)
No maturity
Voting rights
Residual claim on assets
Residual cl
Risk and Return
Chapter 8
Risk and Rates of
Return
What do we know so far?
We know why returns vary between different securities!
Which is better?
(1) 4% return with no risk, or
(2) 15% return with risk.
Cannot say - need to know how much risk
comes with
HW 7 Chapter 9
P9-3 Q1
(Related to Checkpoint 9.3) (Bond valuation)Calculate the value of a bond that matures in
12 years and has a $ 1,000 par value. The annual coupon interest rate is 15 percent and the
markets required yield to maturity on comparable -
CH 7 Homework
1.
Which of the following best measures an assets risk?
A: The standard deviation
2.
Even though an investor expects a positive rate of return it is possible that the actual return will be
negative.
A: True
3.
Which of the following sequence
Ver A
A
A
A
C
A
A
C
A
C
D
C
B
C
A
B
C
C
B
A
B
A
A
D
A
D
D
C
C
D
D
A
A
Ver D
A
A
A
C
C
C
A
C
C
D
C
A
D
B
A
A
C
D
D
A
C
A
B
D
A
D
B
D
D
B
A
A
Ver C
D
B
A
C
D
C
A
B
D
A
A
B
A
D
D
B
A
D
B
A
C
D
D
C
A
D
A
D
A
C
A
A
Ver B
B
C
D
A
C
A
C
B
B
D
D
A
C
B
C
B
B
A
D
D
Variable
Initial capital expenditure
Expected sales next year
Expected sales in year 2
Marginal tax rate
Profit margin on sales
Depreciation
Value
$450,000.00
$2,450,000
$2,200,000.00
31%
40%
0
Increased Sales
Profit Margin on sales
Net operating Profit (