Overview (Diujikan) Part 1: The Scope And Environment Of Financial Management Definition of financial management Understanding Financial Statements, Taxes, and Cash Flows Evaluating a Firm's Financial Performance Financial Forecasting, Planning, and Budgeting Part 2: Valuation Of Financial Assets The Value of Money Risk and Rates of Return Valuation and Characteristics of Bonds Stock Valuation Part 3: Investment In Long-term Assets Capital Budgeting Decision Criteria Cash Flows and Other Topics in Capital Budgeting Capital Budgeting and Risk Analysis Cost of Capital Managing for Shareholder Value
Overview (TidakDiujikan) Part 4: Capital Structure And Dividend Policy Raising Capital in the Financial Markets Analysis and Impact of Leverage Planning the Firm's Financing Mix Dividend Policy and Internal Financing Part 5: Working-capital Management And Special Topics In Finance Working-Capital Management and Short-Term Financing Cash and Marketable Securities Management Accounts Receivable and Inventory Management Part 6: Special Topics In Finance Risk Management International Business Finance Corporate Restructuring: Combinations and Divestitures Term Loans and Leases
Chapter 11 Capital Budgeting and Risk Analysis Risk And The Investment Decision Methods For Incorporating Risk Into Capital Budgeting Other Approaches To Evaluating Risk In Capital Budgeting
Risk And The Investment Decision (1) What Measure Of Risk Is Relevant In Capital Budgeting?
Risk And The Investment Decision (2)
Risk And The Investment Decision (3) Measuring Risk For Capital-budgeting Purposes And A Dose Of Reality – Is Systematic Risk All There Is? Complications: Undiversified shareholders The possibility of bankruptcy Indirect costs of bankruptcy also its implementation extremely difficult Therefore we will concern ourselves with both the project's contribution-to-firm risk and the project's systematic and not try to make any specific allocation of importance between the two for capital-budgeting purposes
Methods For Incorporating Risk Into Capital Budgeting (1) Certainty Equivalent Approach
Methods For Incorporating Risk Into Capital Budgeting (2) Risk-adjusted Discount Rates The primary difference between the certainty equivalent approach and the risk-adjusted discount rate approach involves the point at which the adjustment for risk is incorporated into the calculations.
Methods For Incorporating Risk Into Capital Budgeting (3) Historical data generally do not exist for a new project. Beta Estimation Using Accounting Data The Pure Play Method For Estimating A Project's Beta
Other Approaches To Evaluating Risk In Capital Budgeting (1) Simulation Sensitivity analysis Probability tree
Other Approaches To Evaluating Risk In Capital Budgeting (2) Probability Tree Example
OTHER SOURCES OF RISK: TIME DEPENDENCE OF CASH FLOWS The end effect of time dependence of cash flows is to increase the risk of the project over time. That is, because large cash flows in the first period lead to large cash flows in the second period, and low cash flows in the first period lead to low cash flows in the second period, the probability distribution of possible net present values tends to be wider than if the cash flows were not dependent over time.
Ch. 12: Cost of Capital Key Definitions And Concepts Determining Individual Costs Of Capital The Weighted Average Cost Of Capital Calculating Divisional Costs Of Capital: PepsiCo, Inc. Using A Firm's Cost Of Capital To Evaluate New Capital Investments
Key Definitions And Concepts Required rate of return Vs. Cost of Capital The minimum rate of return necessary to attract an investor to purchase or hold a security. Differences Taxes Floatation costs Financial policy WACC
Determining Individual Costs Of Capital (1) Cost of Debt Cost of Preferred Stock Cost of Common Stock Drawbacks of cost of common stock calculation: dividends are expected to grow at a constant rate g forever we must arrive at an estimate of that growth rate. CAPM
The Weighted Average Cost Of Capital
Calculating Divisional Costs Of Capital
Using A Firm's Cost Of Capital To Evaluate New Capital Investments Recall that the cost of capital depends primarily on the use of the funds, not their source. Consequently, the appropriate cost of capital for individual Investment opportunities should, in theory and practice, reflect the individual risk characteristics of the investment. the firm's weighted average cost of capital is the appropriate discount rate for estimating a project's NPV only when the project has similar risk characteristics to the firm. An investment's risk characteristics as coming from two sources: business risk; and financial risk