* PV(CF) = CF/(1+r)t AKA PV = FV/(1+r)t
* NPV = PV(CFs) – Investment = -C0 +C1/(1+r)+C2/(1+r)2+C3/(1+r)3+… = ∑(Expected CFt)/(1+r)t – Investment * Perpetuity – pays a fixed amount C per period forever * P(C,r) = C/r requires cash flow to begin NEXT period. If begin now, then PV = C + C/r * Annuity – fixed stream of cash flows that has a final period t * A(C,r,t) = C/r [1-1/(1+r)t]

* Growing Perpetuity – G(C,r,g) = C/(r-g) C is initial cash flow, r is discount rate, g is growth rate * P/E = 1/(r-g)
* High P-E multiple means the firm has good growth opportunities (high g), investments have low risk (low r), or both * Computing NPV – obtain the proper CF to use in the calculation * Rule: Determine all CF which will be realized if the project is taken. Subtract from this the CF that will be realized if the project is not taken. Result represents the CF impact of the project. The present discounted value of these incremental CF is the NPV of the project * CF = EBIT – Taxes + Depreciation – Capital Expenditures (CAPX) * EBIT (Earnings Before Interest & Taxes) = Revenues – Cost – Depreciation * EBIAT = EBIT * (1-TaxRate)

* Taxes = CorpTaxRate * (Revenues – Costs – TaxShield) * FinalCF = SellingPrice – Taxes
* NWC = Current Assets – Current Liabilities (change in NWC must = 0) * Projects of greater risk must have a higher discount rate as investors demand more return to compensate them for added risk * Risk Premium – the additional return above the riskless rate required for a particular investment based on the additional risk associated with it * Required Return: Ri = Rf + βi * (Rm - Rf) risk premium (how much extra return required to go from 0 to normal risk) * β: measure of risk inherent in investment (investment’s sensitivity to market). (0 = riskless, 1 = as risky as entire market) * βA = D/(D+E) βD + E/(D+E) βE, where D & E are Market Values of Debt & Equity *...

...The Net Present Value, Mergers and Acquisitions
Michael D. Black
Trident University
Module 5 CASE
Finance 501: Strategic CorporateFinance
Professor: Walter Witham
June 15, 2012
Net Present Value, Mergers and Acquisitions
Abstract
Financial managers must understand the value of dollars invested today in order to make decisions as to what capital ventures are worth pursuing for business growth. The money a business...

...Finance theory and Financial strategy
Strategic Planning means several things. But it certainly is a part of the decision-making in resource management of the business benefits. Finance theory has significant advantages in understanding the function of capital markets, the valuation of real assets and financial assets.
Discounted cash flow analysis(DCF) is a tool that derived from finance theory which has been widely used. However...

...Capital Budgeting Methods for Corporate Project Selection
In a 2001 Graham and Harvey survey of 392 chief financial officers (CFOs) asked “how frequently they used different capital budgeting methods?” Approximately 75% of the CFOs replied that they use net present value (NPV) or Internal Rate of Return (IRR) always or almost always (Smart, Megginson & Gitman, 2004, pg. 251). Projects are viewed as capital investments in the corporate world, and as such,...

...Summary: A note on Valuing Companies in Corporate Restructuring
The article is a note that describes how to apply the Discounted Cash Flow method of Company Valuation in companies undergoing corporate restructuring. The concept is based on the change in shareholders wealth as a direct result of the change in the firm’s value- which depends on multiple factors including corporate restructuring.
The note describes in details about the technical...

...operated in perfect capital markets without any taxes (no corporate or personal taxes), how will RMO’s market value change if the firm decides to issue 50 million € of debt, buying back 50 million € of common stock in return? In this scenario RMO will pay interest only on this debt and plans to hold that amount of debt permanently without further adjustments in the future. (2 points) b) In contrast to a) above assume now that there is a corporate tax with statutory...

...CorporateFinance Exam with Answers
Posted on May 10, 2012 by Sam
CorporateFinance, Chapters 8, 9 & 10. Exam Questions:
1. A project’s opportunity cost of capital is: A. The forgone return from investing in the project.
2. Which of the following statements is correct for a project with a positive NPV? A. The IRR must be greater than 1.
3. What is the NPV of a project that costs $100,000 and returns $50,000 annually for 3...

...costs each year. The machine will have a useful life of 10 years. For tax purposes, straight-line depreciation will be used with an estimated salvage value of $300,000 (which will be the market value at that time). The discount rate is 12% and the corporate tax rate is 32%. What is the NPV of this proposal?
11.3 After examining a potential project’s NPV analysis, the manager advises that the initial fixed capital outlay be increased by $480,000. The initial fixed capital...

...if it were the firm’s only asset
-Corporate or within-firm risk reflects effect of project on firm’s risk, measured by project’s effect on firm’s earnings variability
-Market or Beta risk reflects effects of project on stockholders’ risk, measured by project’s effect on firm’s beta coefficient
-Risk-adjusted cost of capital is cost of capital appropriate for given project, given its risk. Greater the risk, higher the cost of capital
Chapter 11
-Corporate...