FINS1613 Business Finance Semester 2 – 2009 Version 1.0.3 Contents Page 3 Page 7 Page 10 Page 14 Page 18 Page 23 Page 26 Page 29 Page 32 Page 38 Page 42 Basic Concepts Introduction to Financial Mathematics The Valuation of a Firm’s Securities Capital Budgeting Capital Budgeting Applications – Part 1 Capital Budgeting Applications – Part 2 Risk and Return The Capital Asset Pricing Model Cost of Capital and Raising Capital Capital Structure Dividend Policy Copyright © Ka Hei Yeh 2009 First
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e) secondary 3. Global communications has a 7 percent‚ semiannual coupon bond outstanding with a current market price of $1023.46. the bond has a par value of $1000 and a yield to maturity of 6.72 percent. How many years is it till this bond matures? a) 12.26 years b) 12.53 years c) 25.05 years d) 24.37 years e) 18.49 years 4. Net present value: a) Is less useful than the profitability index when comparing mutually exclusive projects b) Is less useful than the internal rate of return when
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marks) This first section of this paper will provide a brief explanation on theoretical rationale for the net present value (NPV) method of investment appraisal and then compare its strengths and weaknesses to two alternative methods of investment appraisal‚ those of internal rate of return (IRR) and pay-back. Theoretical rationale for the NPV approach The net present value rule or NPV devised by Hirshleifer (1958)‚ is the fundamental model of how firms decide whether to invest in a project
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NPV is short for Net Present Value and it makes difference between the present value and cost of a project. In addition‚ NPV takes into account all cash flows through out the whole life of the projects‚ as well as the time value of money. And it compares like with like as all inflows and outflows are discounted to today¡¯s date. Also‚ the cost of capital is very unlikely to be changed over a period of time. To judge if the NPV is good‚ we should see the value of it‚ and the rule is the high the better
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offer will be calculated to find the present value and then summarized; the offer with the highest present value will be identified for Dr. Wolf to review. Offer OneIn this offer‚ Dr. Wolf is expecting a future value of $4‚200‚000 in 15 years at a 10% interest rate‚ in which the probability of the expected future value is 70%. The numbers used in getting the future value is to add the present values of $1‚000‚000‚ $200‚000‚ and $3‚000‚000. The present value for the first offer is $1‚005‚446.61 which
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requires careful examination of the existence of the reinvestment opportunities at the end of the different economic lives of the projects. The current article deals with a method that may be adopted in situations wherein the level of investments‚ the life of the projects and cash inflows (or outflows) are unequal.) Risk is inherent in almost every business decisions. Capital budgeting being an important financial excise‚ before committing funds physically‚ one need to look investment proposition
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project will likely add value to the company‚ so we need to consider the return on investment versus the cost of capital. If the return on investment‚ measured by the net present value and internal rate of return‚ exceeds the cost of capital‚ the investment should be taken. In addition‚ we need to evaluate the project’s systematic risk (beta)‚ which includes risks that are not unique to a particular project and not easily manageable by a project team at a given point in time. How can the C.A.P
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Chapter 2 Opportunity cost of capital – rate of return expected to be received from alternate investments forgone. NPV – Present value of cash flows less the cost of acquiring the asset acquire assets with positive NPV‚ positive NPV = good project Rate of Return = profit/cost or investment (good investments have higher rate of return than opportunity cost) Higher discount rate ( lower discount factor (lower NPV Investment Decision Rules: 1. accept if positive NPV 2. accept
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of formation * Subject to few regulations * No corporate income taxes * Disadvantages * Limited life * Unlimited liability * Difficult to raise capital * Corporation- legal entity created by a state‚ and it is separate and distinct from its owner and managers. * Advantages * Unlimited life * Easy transfer of ownership * Limited liability * Ease of raising capital * Disadvantages
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THE PRINCIPLES OF CORPORATE FINANCE CHAPTER 1: The time value of money We are going to link the present and the future by using the notion of interest rate that could be called discount rate‚ required rate of return or cost of capital. Finance is all about cash flows but more precisely about the exact date of the realization of the cash flow. I) PRESENT VALUE Example 1: What is the value today of $110 to be received in one year? - suppose the interest rate ‚ r =10%
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