* 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 *...