Corporate Finance

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1、CorporateFinancePartA:CapitalBudgeting1.CashFlowProjectionsInitialOutlay=FCInvestment+NWCInvestment-Salvage0+T(Salvage0-BookValue0)AnnualATCF=(S-C-D)(1-T)+DepreciationTerminalYearNon-OperatingCashFlow:SalvageT+NWCInvestment-T(SalvageT-BookValueT)EffectofInflati

2、on:-Realcashflowsareadjusteddownwardtoremovetheeffectofinflation.-InflationEquation:(1+Nominal)=(1+Real)(1+Inflation)-Inflationreducesthevalueofdepreciationtaxsaving,andlowerinflationreducesrealtax.-Higherinflation,lowerprofitability.-Higherinflation,morewealth

3、shiftedfrombondholderstoissuingcorporations.2.ProjectAnalysisMutuallyExclusiveProjectswithUnequalLives(Repeatingassumptionrequired)-LeastCommonMultiples:usingleastcommonmultipletomakelivesequal.HighestNPVischosen-EquivalentAnnualAnnuity:DistributeNPVtoentirelif

4、easequalamount.HighestEAAischosenCapitalRationing-Usedwheninvestorhasfixedbudget.NPVorPI(=1+NPV/Investment)criterionapplied.-CapitalRationinghasthepotentialtomisallocateresourcesRiskAnalysis-Stand-AloneMethods:SensitivityAnalysis,ScenarioAnalysis,Monte-CarloSim

5、ulation-MarketRiskMethods:CAPMRealOptions-Categories:TimingOptions,SizingOptions,FlexibilityOptions,FundamentalOptions-Approaches:DCFwithoutOptions,NPV-CostofOptions+ValueofOptions.DecisionTrees,PricingModels3.AlternativeCapitalBudgetingApproachesEconomicandAcc

6、ountingIncome-EconomicIncome=CashFlow+(EndingMarketValue–BeginningMarketValue)EconomicProfit=EBIT(1-T)–WACC*CapitalInvestment,discountedatWACC.ResidualIncome:NI–EquityCharge,discountedatCostofEquityClaimsValuation-ValueofClaimsshouldequalvalueofassets.PartB:Cap

7、italStructure1.BusinessRiskandFinancialRiskSalesRisk:measuredbystandarddeviationofsalesandmeanvalueofsales.OperatingRisk:-Greaterthefixedcosts,moredifficultforacompanytoadjustoperatingcoststochangeinsales.-DegreeofOperatingLeverage:Q(P-V)/[Q(P-V)-F]-Industriesh

8、avinghighoperatingleverage:largeamountinvestedupfront.FinancialRisk:-Fixedcosts:long-termleaseanddebt.-DegreeofFinancialLeverage:[Q(P-V)-F]/[Q(P-V)-F-C]-FinancialLeverageist