Professional Documents
Culture Documents
ie. FV = PV(1.06<EAR>)N
What is remaining bal on loan aQ making 30th pmt (remaining loan balance)? (1) Find PMT using
TVM (2) Enter the PMT no: eg. AMORT (30 > P1 & P2) (3) Enter, scroll down to bal
- To nd amt going towards repayment of int/prin - key in the exact Eme eg. 3, 3 for (3rd mth)
30y, $165 mortgage, mthly PMT and iNOM of 8%. What is total $ of int paid in 1st 3Y of
mortgage? (1) Find PMT using TVM (2) Enter the PMT no 3y=36mth eg. AMORT (1 for P1 & 36 for
P2)(3) Enter, scroll down to int
AmorEsaEon table
Uneven CF stream
SML > raise inaEon line shiQ up. incr risk-aversion grad incr
diversiable up to 40 stocks - SD of
porxolio tends to converge > 20%
Dividend yield:
MV LT debt = BV
MV common eq = mkt price x # of share
rd > YTM
EPS1 = EPS0 (1 + g <dec>) = $5.40(1.03)
Not tax-deducAble
Sustainable growth rate/expected future growth rate
g = (1 - payout<dec>)(ROE<%>)
Only applicable for long term; situaAon expected to cont
Component cost of equity (reasonable est. take avg of the 3)/ cost of RE
1. CAPM (rs)
2. DCF (DDM eqn making r the subject)
ans change to %
3. Bond yield + risk prem
Premise: cost of equity > cost of debt; since coupon rate xed by contract
Cost of issuing new stock
Corporate valuaAon (FCF) model
Add otaAon cost (cost of issue ie. fees to IB, underwriAng fee)
Horizon value (HV): similar to DDM aka D1
P0/D1 model
Factors inuencing WACC
MV of equity = MV of rm - MV of
Market cond, capital structure, div policy, investment policy (riskier proj higher WACC)
debt
Use debt 1st unAl opAmal pt where thereager rm may not be able to meet debt
Pecking order: managers prefer to use RE > debt > new equity (may send -ve signal and depress
Gain on sale = 5-4=1
Value/share = MV of equity # of
stock price)
Tax on gain = 1(0.4) =0.4
shares
AT salvage value = 5-0.4 = 4.6
WEEK 11: CAPITAL BUDGETING AND PROJECT ANALYSIS
WEEK 11: CASH FLOW ESTIMATION AND RISK ANALYSIS
Tax SV always, may incur cost in disposiAon of
Normal CF (-ve followed by posi6ve CF); non-normal (2 or more sign changes)
NOWC = CA - CL (excl n/p)
asset (if SV -ve then tax +)
1. NPV
Best method since it address directly the central goal of maximising shareholder wealth
Sum of the PVs of all cash inows and ouIlows of a proj
Choose NPV > IRR
exclude: research
(The conict between NPV and IRR
for project last
occurs due to the dierence in the
year *sunk cost
(PV of inows - cost = net gain in wealth)
size of the projects.
OR
Project B is 3X larger than Project A)
Add CFs into calc CF; enter I/R <%>; press NPV
Then nd ops cash ow like SCF
INT
BONDS
Independent proj - CF of 1 unaected by acceptance of other
Accept if NPV > 0
Dependent proj - CF of 1 can be adversely aected by other > each of the projects is
equally risky and as risky as the
Accept proj with highest +ve NPV
SL dont take into acc salvage val
rms other assets
2. IRR
Disc rate that forces PV of inows to be = cost; NPV = 0. Cannot use for non-normal since >1 IRRs
Ways to nd g: take arithmeAc/
weighted avg, forecast nancial
statements
!! = !! + !!
Finally, enter CFs into calc and I = WACC <%>. Press NPV
SensiAvity analysis
Eect of changes in a variable on projects NPV
ConsideraAons:
- +/- ( )% risk adjustment - for eg. cost of capital, +/- to get new NPV dep on whether low or high
NPV
risk proj
- Financing eects like div and int ex should not be incl (alr in WACC)
If we have unlimited capital, we
would just choose
Sunk costs irrelevant, only take into acc incremental CF
- Opp costs, erosion costs relevant
project 1 since it oers higher NPV.
- CannibalisaAon (ager-tax) and complementary CF relevant and should be considered
Since we have limited capital, we
- Consider subj risk factors - potenAal for lawsuit, whether assets can be redeployed or sold,
look at the total
NPV that $2000 can generate (eg.
country/poliAcal/currency risk
other investment opp)
WEEK 12: DERIVATIVES - FI whose value depends on value of underlying instrument (bond/share)
4. Regular payback
Leverage - pay low amt but potenAal payos high
Payback period: no. of years required to recover projs cost
Call opAon
NPV proles
Incr stock price - incr opAon value | incr ex price - decr | incr Ame to exp - incr | incr rF - incr | incr
Graphical rep of proj NPVs at di costs of
stock ret variance - incr
capital > downward sloping
- Why NPV proles cross? size (smaller free Comparisons
- Forward vs futures: asset exchanged at specied Ame in future at prices specied today (simi).
funds at t=0 for invest) and Ame (faster
Fut standardised trading on organised exchanges w daily rese^lement through clearinghouse
payback more CF earlier invest) di
- Call: right to buy; put: right to sell | short = sell; long = buy
5. Discounted payback
- Call: Spot (mkt) > strike (exercise) - in the money; put: s < x - in the money
- Call: bullish, can gain unlimited but limited downsides risk, put: bearish, max gain strike price -
cost of put but loss also limited to price paid for put
- PV dividends = (Div)e-rt
ST
- Black-Scholes OPM assumpAons: stock underlying call opAon no div during call opAon life, no
LT
transact costs, rF known and constant during op life, buyers can borrow any frac of purch price @
Comparing
ST rF rate, no penalty for short sell, call opAon only exercised on expiraAon date
NPV v IRR: indep proj 2 methods same decision(also when WACC > crossover rate). If < di decision Payback period
MIRR v IRR: MIRR assumes cash inows reinvested at WACC, IRR at projs IRR. MIRR avoids mulAple Strengths: Provides indicaAon of projects risk and liquidity, easy to calc and understand. Weakness:
ignores TVM. Requires arbitrary cuto point, ignores CFs occurring ager payback period - proj can
IRR prob when 2 or more sign changes in CF
have low CF in earlier yrs
In situaAon where there is non-normal CF (can also use for normal). IRR (but not MIRR) can relate to
NPV. Disc rate ^ causes PV of proj terminal value = PV of costs