Three standard approaches to value a project under leverage
1. The Adjusted-Present-Value (APV) method
2. The Flows-to-Equity (FTE) method
3. The Weighted-Average-Cost-of-Capital (WACC) method
1. ADJUSTED-PRESENT-VALUE APPROACH
The approach sep
Efficient Capital Markets: Current market prices reflect available information. In an efficient market
1. Financial managers cannot time issues of bonds and stocks.
2. A firm can sell as many shares of stocks or bonds as it wants without fear o
Factors favoring a high dividend policy
Dividends refers to the cash distribution of earnings.
Another type of dividend is paid out in shares of equity- stock dividend. Stock dividend increases the number of
shares outstanding, therefore redu
Capital-Structure:Limits to the Use of Debt
Cost of Financial Distress - Bankruptcy Risk or Bankruptcy Cost ?
The possibility of bankruptcy has a negative effect on the value of the firm. However, it is
not the risk of bankruptcy itself that lower value.
Chapter 7 Making Capital Investment Decisions
Assets are depreciated for tax purposes using a system called capital allowances or tax depreciation. This makes
assets being depreciated by a certain percentage each year. For example: capital allowance rate
Chapter 6 Net Present Value and Some alternative Investment rules
6.1 Why use NPV?
Capital budgeting- the decision making process for accepting or rejecting project.
Uses cash flows
Uses All Incremental Cashflows
Includes Time Value of
5.2 How to value bonds:
Yield to Maturity for a bond means Internal Rate of Return or Market interest rate, interest
rate for that bond.
A bond is a certificate showing that the borrower owes a specified sum.
A firm has just issued 100
Future Value (FV) or Compound value value of sum after investing over one or more periods. The
compound value of 10 000 at 12 % is 10 000 x 1.12%= 11 200.
Present value (PV)- How much money must Keith put in the bank today so that
Chapter 3 Financial Statement Analysis and Long-term Planning
Corporate Finance deals with three main areas:
Capital budgeting what long-term investments the firm should undertake
Capital structure where to find long term financing, and proportions of deb