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
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