* 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 is willing to invest in new equipment or expansion opportunities must provide positive cash flows. This revenue can be earned through operational income growth or cutting costs resulting in savings. One of the purposes of this paper is to explain the concept of Net Present Value to Micron shareholders so they have an understanding whether to vote in favor or against the company taking on a new project costing $3,219,000. The next topic for analysis is whether a merger between Elpida Memory, Micron Technology and Nanya Technology will benefit shareholders for each company. Lastly, I’ll share what learning objectives I have mastered.
Net Present Value, Mergers and Acquisitions
Financial managers must understand the value of a dollar invested today in order to make decisions as to what capital ventures/projects the company should engage in to expand business operations, earn a profit and increase shareholder wealth. The idea that a dollar today is worth more than a...

...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. Howeverfinance theory also has little effect on strategic planning and there are three differences between financial theory and strategic planning:
1. Traditional financial theory and strategic planning might have some differences in language and culture.
2. Discounted cash flow analysis might be used in an incorrect way of strategy therefore it is not acceptable in terms.
3. Discounted cash flow analysis might fail to apply a strategic, even if it is used properly.
The most relevant financial concepts in strategic planning is firms’ capital investment decisions and it is also a critical component of “financial theory”. The theory is focused on
cash flow and return on the investment. The tool used in investment decisions is net present valued (NPV) which was calculated from present valued minus required investment or which was reduced to discounted cash flow formula because the net present value is a matter of cash flow that will gain in the future....

...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 aspects of the DCF method. First it defines the DCF as a sum of the PV of all expected future cash flows and how every method identifies two main sources of future cash flows namely operating cash and tax shields from interest an NOL.
The note then describes the methodology for calculating the discount rate applied to each cash flow. The main formula is
Rj = Rf + Bj (Rm-Rf)
Rj-expected rate of return
Rf-risk free rate
Bj-beta ie the correlation between the value of the asset and the value of the portfolio
The difference between Rm and Rf shows the market risk premium or the additional risk the market expects to receive on any given investment.
The note then goes on to explain how to calculate the B of any given asset as
Ba= (D/V)*Bd + (E/V) *Be
Ba=b of asset
D-value of total debt
V-value of entire company (E+D)
Bd-b of debt
Be-b of equity
Then the three main methods are identified and each described in detail.
1. Adjusted PV
In this method total cash flows form a...

...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, are evaluated closely for their possible financial impacts on the “bottom line” due to their higher risk of failure. Capital investments are those that are considered long-term investments such as manufacturing plants, R&D, equipment, marketing campaign, etc., and capital budgeting is “the process of identifying which of these investment projects a firm should undertake” (Smart, Megginson & Gitman, 2004, pg. 227). According to Smart, Megginson & Gitman, there are three steps in the capital budgeting process:
* Identifying potential investments
* Analyzing the set of investment opportunities, identifying those that will create shareholder value, and perhaps prioritizing them
* Implementing and Monitoring the investment projects selected
This paper will focus on step two, and will discuss the strengths and weaknesses of the four most common methods that are utilized for evaluating, selecting and prioritizing projects in the corporate world. Net...

...increasing the firm’s market value just by substituting debt for equity. a) If RMO 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 rate of 35% (but no personal taxes). What would be the effect of the same financial transactions on RMO’s value? (5 points) c) Personal taxes on investors’ income (from either interest payments on corporate debt, dividends or capital gains) might offset some of the tax benefits of leverage. Suppose the tax rate on interest income is 35% and the tax rate on dividends as well as capital gains is 10% for all investors. How high must the (marginal) corporate tax rate be for debt to still offer a tax advantage? (5 points) c) The CEO is skeptical about these valuation effects and seeks your advice. She asks whether there are also costs to debt financing not adequately accounted for in these calculations so far. What could these costs of leverage be? (3 points) d) Assume again that there is only a corporate tax with tax rate 35% (like in question b) above; no personal...

...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 years if the opportunity cost of capital is 14%? C. $16,085
4. The decision rule for net present value is to: C. Accept all projects with positive net present values
5. What is the maximum that should be invested in a project at time zero if the inflows are estimated at $50,000 annually for 3 years, and the cost of capital is 9%? C. $126,565
6. What is the NPV for the following project cash flows at a discount rate of 15%? [C0= ($1,000), C1= $700, C3= $700.] C. $138
7. Which mutually exclusive project would you select, if both are priced at $1,000 and your discount rate is 15%: Project A with three annual cash flows of $1,000; or project B, with 3 years of zero cash flow followed by 3 years of $1,500 annually? A. Project A
8. What is the approximate IRR for a project that costs $100,000 and provides cash inflows of $30,000 for 6 years? A. 19.9%
9. What is the IRR of a project that costs $100,000 and provides cash inflows of $17,000 annually for 6 years? A. 0.57%...

...of a new machine to produce this product
d. Salvage value of the new machine at the end of its useful life
e. Increase in net working capital at the beginning of the project’s life
f. Cost to develop a product prototype last year
11.2 A division of Blakewell Manufacturing is considering purchasing an auto insert machine to load computer components on mother boards for $1,500,000. The machine will have annual operating costs of $50,000 and save the company $370,000 in labor 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 outlay is fully depreciated straight-line over a twelve year life. The tax rate is 35 percent and the required rate of return is 10 percent. No other changes are made to the analysis. What is the effect on the project NPV?
11.4 Central Embroidery needs to purchase a new monogram machine and is considering two options. The first machine costs $100,000 and is expected to last 5 years, and the second machine costs $160,000 and is expected to last 8 years. Assume that the opportunity cost of capital is 8...

...rates of earnings or g = (1-payout)(return on equity)
-Firm has target capital structure, defined as mix of debt, preferred stock, and common equity that minimizes WACC
-Project Stand-alone Risk: risk the project would have 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 assets: include operating, financial, and non-operating
-Operating Assets: assets in place and growth options
-Non-operating assets include financial assets such as investments in marketable securities and non-controlling interests in stock of other companies
-Value of operations is present value of all future free cash flows when discounted at WACC
-Horizon Value: value of operations at end of explicit forecast period (terminal value), equal to present value of all free cash flows beyond forecast period, discounted at WACC
-Corporate valuation model: value of company = value of operations + value of non operating assets
-Intrinsic value of equity: total value of company minus value of debt + preferred stock; intrinsic price per share is value of...