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Cost of capital and capital structure

This document discusses cost of capital and capital structure. It defines different types of capital like equity, debt, and preference shares. It explains how to calculate the overall cost of capital by determining the costs of each capital type and weighting them. The document also summarizes different approaches to determining an optimal capital structure, including EBIT/EPS analysis, valuation approaches, and cash flow analysis. It reviews relevant, irrelevant, and neutral capital structure theories, as well as Modigliani-Miller theory which argues capital structure does not affect firm value under certain assumptions.

Financial Statement Analysis

financial statement analysis
,
competencies for ratio analysis
,
function and purposes of ratio analysis
,
classes of ratios
,
liquidity ratios
,
activity ratios / asset management ratios
,
profitability ratios
,
debt or leverage ratios/solvency ratios
,
debt ratio
,
times interest earned ratio
,
market ratios
,
return on common equity (roe)
,
fixed-payment coverage ratio
,
gross profit margin
,
earnings per share (eps)
,
price/earnings (p/e) ratio
,
operating profit margin
,
market/book (m/b) ratio
,
return on total assets (roa)
,
net profit margin

CVP for multi products

The document discusses sale mix and weighted average contribution margin as it relates to a company that sells three sizes of cooking pans. It provides data on expected sales volumes and contribution margins for each pan size. It then calculates the weighted average contribution margin per unit as $6.80 and determines that the company needs to sell 6,000 pans to break even given total fixed costs of $40,800.

Variable costing a tool for management

This document discusses absorption costing and variable costing. Absorption costing includes both variable and fixed production costs in inventory and cost of goods sold, while variable costing includes only variable costs. Variable costing is more consistent with contribution margin analysis and decision making. Absorption costing is required for external financial reporting and tax purposes, but variable costing provides more useful information to management for decision making.

New ifrs 9

This document provides an overview of accounting for financial instruments under IFRS 9. It discusses key aspects such as classifying financial instruments, recognizing and derecognizing financial assets, and impairment of financial assets. The document defines various financial instruments and outlines their classification and measurement. It describes the criteria for classifying financial assets as amortized cost, fair value through other comprehensive income, or fair value through profit or loss depending on contractual cash flow characteristics and business models. The derecognition principles for financial assets and continuing involvement are also summarized.

Chapter 10.The Cost of Capital(WACC)

The document discusses the cost of capital and how to calculate the weighted average cost of capital (WACC) for a firm. It explains the different sources of capital including debt, preferred stock, and common equity. It also discusses how to estimate the costs of each type of capital and calculate WACC, as well as how to adjust the WACC for project-specific risks that differ from the average risk of the firm.

Solving The Supply Demand Mismatch

This document discusses matching supply with demand by considering both the volume and variability of demand for products. It proposes analyzing demand through a volume-variability profile to classify products into categories. Manufacturing and distribution strategies are then aligned based on this profile. Considering both factors can help minimize inventory levels while maintaining customer service.

Module-5-Assigned-Problems (1).pdf

The document contains 3 practice problems related to cost of equity, weighted average cost of capital (WACC), and determining the WACC for a proposed expansion. Problem 11-6 calculates the cost of equity for Carpetto Technologies using the dividend capitalization approach, capital asset pricing model (CAPM), and bond-yield-plus-risk-premium approach. Problem 11-9 calculates the WACC for Patrick Company using market value weights. Problem 11-10 determines the optimal capital structure and WACC for the last dollar raised in Klose Outfitters' expansion.

Cost of capital and capital structure

This document discusses cost of capital and capital structure. It defines different types of capital like equity, debt, and preference shares. It explains how to calculate the overall cost of capital by determining the costs of each capital type and weighting them. The document also summarizes different approaches to determining an optimal capital structure, including EBIT/EPS analysis, valuation approaches, and cash flow analysis. It reviews relevant, irrelevant, and neutral capital structure theories, as well as Modigliani-Miller theory which argues capital structure does not affect firm value under certain assumptions.

Financial Statement Analysis

financial statement analysis
,
competencies for ratio analysis
,
function and purposes of ratio analysis
,
classes of ratios
,
liquidity ratios
,
activity ratios / asset management ratios
,
profitability ratios
,
debt or leverage ratios/solvency ratios
,
debt ratio
,
times interest earned ratio
,
market ratios
,
return on common equity (roe)
,
fixed-payment coverage ratio
,
gross profit margin
,
earnings per share (eps)
,
price/earnings (p/e) ratio
,
operating profit margin
,
market/book (m/b) ratio
,
return on total assets (roa)
,
net profit margin

CVP for multi products

The document discusses sale mix and weighted average contribution margin as it relates to a company that sells three sizes of cooking pans. It provides data on expected sales volumes and contribution margins for each pan size. It then calculates the weighted average contribution margin per unit as $6.80 and determines that the company needs to sell 6,000 pans to break even given total fixed costs of $40,800.

Variable costing a tool for management

This document discusses absorption costing and variable costing. Absorption costing includes both variable and fixed production costs in inventory and cost of goods sold, while variable costing includes only variable costs. Variable costing is more consistent with contribution margin analysis and decision making. Absorption costing is required for external financial reporting and tax purposes, but variable costing provides more useful information to management for decision making.

New ifrs 9

This document provides an overview of accounting for financial instruments under IFRS 9. It discusses key aspects such as classifying financial instruments, recognizing and derecognizing financial assets, and impairment of financial assets. The document defines various financial instruments and outlines their classification and measurement. It describes the criteria for classifying financial assets as amortized cost, fair value through other comprehensive income, or fair value through profit or loss depending on contractual cash flow characteristics and business models. The derecognition principles for financial assets and continuing involvement are also summarized.

Chapter 10.The Cost of Capital(WACC)

The document discusses the cost of capital and how to calculate the weighted average cost of capital (WACC) for a firm. It explains the different sources of capital including debt, preferred stock, and common equity. It also discusses how to estimate the costs of each type of capital and calculate WACC, as well as how to adjust the WACC for project-specific risks that differ from the average risk of the firm.

Solving The Supply Demand Mismatch

This document discusses matching supply with demand by considering both the volume and variability of demand for products. It proposes analyzing demand through a volume-variability profile to classify products into categories. Manufacturing and distribution strategies are then aligned based on this profile. Considering both factors can help minimize inventory levels while maintaining customer service.

Module-5-Assigned-Problems (1).pdf

The document contains 3 practice problems related to cost of equity, weighted average cost of capital (WACC), and determining the WACC for a proposed expansion. Problem 11-6 calculates the cost of equity for Carpetto Technologies using the dividend capitalization approach, capital asset pricing model (CAPM), and bond-yield-plus-risk-premium approach. Problem 11-9 calculates the WACC for Patrick Company using market value weights. Problem 11-10 determines the optimal capital structure and WACC for the last dollar raised in Klose Outfitters' expansion.

Chapter 9 q&p

The document contains examples and explanations of various capital budgeting techniques including payback period, discounted payback, net present value, internal rate of return, and profitability index. It analyzes two hypothetical investment projects (A and B) using each method and determines that while some criteria favor project A and others favor project B, the net present value method is preferred and indicates that project A should be accepted.

Cost of capital, Cost of debt, Cost of equity, Cost of preference shares, Wei...

Cost of capital, Cost of debt, Cost of equity, Cost of preference shares, Wei...Dayana Mastura FCCA CA

This document discusses weighted average cost of capital (WACC) which is a calculation of a firm's cost of capital considering the costs of the different components of the firm's capital structure (debt, equity, preference shares). It defines WACC and explains its importance as the minimum return a firm needs to earn on new projects/investments to break even. The document also outlines how to calculate WACC and the costs of each capital component (cost of equity using CAPM, cost of debt, cost of preference shares). It discusses how WACC is used as a benchmark for projects, in determining leverage limits, for valuation, and in discounting cash flows in a DCF analysis.Dividend policy

,
concept of dividend
,
dividend policy
,
stock dividend
,
stock repurchase
,
types of dividend policy
,
dividend model: if div fixed

Financial Leverage Final .ppt

This document discusses operating and financial leverage. It defines operating leverage as a firm's ability to magnify changes in sales through the use of fixed operating costs. Financial leverage refers to the relationship between a firm's earnings before interest and taxes (EBIT) and earnings available to shareholders. The document provides examples to illustrate how both operating and financial leverage can amplify the percentage changes in profits resulting from changes in sales or EBIT. It also introduces formulas to calculate the degree of operating leverage (DOL) and degree of financial leverage (DFL).

Cash Flow Statement mcqs

In this exclusive page, you will get Cash Flow Statement MCQs for various exams such B.Com, BBA, MBA, CMA, CS and ICAI. These Cash Flow Statement MCQs are also very much for Class 12 CBSE and other state boards including AHSEC.
Visit Our official website:
https://www.dynamictutorialsandservices.org/
Cash Flow Statement MCQs
https://www.dynamictutorialsandservices.org/2020/09/mcq-cash-flow-statement-cash-flow.html

Corporate finance

This document discusses several concepts in corporate finance including time value of money, payback period, profitability index, net present value, and internal rate of return. It provides examples of calculating payback period and profitability index for two projects. It also explains that net present value and internal rate of return are equivalent methods for evaluating mutually exclusive projects, as both recognize the time value of money and measure costs and benefits in terms of cash flows over the project's lifetime.

dividend determinants.pptx

This document discusses factors that influence a company's dividend policy, including legal restrictions, earnings trends and magnitude, shareholder desires, industry characteristics, company age, future financial needs, government economic policy, and taxation policy. It notes that dividends can only be paid out of current or past profits and lists relevant legal provisions. Key considerations for boards include shareholder preferences, industry stability, growth needs, and external economic conditions when determining how much to distribute versus retain.

Capital structure theories 1

The document discusses several theories of capital structure:
1) Net income approach assumes capitalization rates are constant as debt increases, making 100% debt optimal.
2) Net operating income approach finds no optimal structure as equity rates adjust to keep overall rates constant.
3) Traditional approach finds an optimal structure where costs initially fall then rise with more debt.
4) MM theory initially argues capital structure is irrelevant without taxes but debt provides tax shields with taxes.
5) Trade-off theory balances tax shields against costs of financial distress and agency, finding an optimal balance.

comparison of Accounting Standards

The document discusses key aspects of Generally Accepted Accounting Principles (GAAP) including definitions, similarities and differences between Indian GAAP, International Financial Reporting Standards (IFRS) and US GAAP. It covers topics such as financial statements, revenue recognition, foreign currency translation and more. GAAP provides common standards for preparing financial statements to ensure consistency and comparability. While there are some differences between jurisdictions, the overall goals and many principles are largely similar across frameworks.

Capital structure analysis

The document discusses different approaches to capital structure and the Modigliani-Miller model. It summarizes key assumptions of the MM model, including that capital markets are perfect, leverage at the personal and corporate level are substitutes, and there are no taxes or transaction costs. The MM model shows that firm value and cost of capital are independent of capital structure.

Cost of capital

This document discusses the concept of cost of capital and how to calculate costs for different sources of financing including debt, preference shares, equity, and retained earnings. It provides formulas and examples for calculating costs of debt (both irredeemable and redeemable), preference shares, equity using different methods, and weighted average cost of capital (WACC). The key methods covered include dividend yield, dividend yield plus growth, earnings/price, and capital asset pricing model (CAPM).

Chapters 19 (ind_as)

The document contains several accounting questions related to consolidated financial statements. It provides the individual balance sheets of companies P and S, and asks the reader to prepare a consolidated balance sheet by eliminating intra-group transactions and accounting for non-controlling interests. The questions require calculating goodwill on acquisition, adjusting assets to fair value on acquisition, and accounting for deferred consideration and loans between the parent and subsidiary.

Pecking order theory-Finance

The pecking order theory proposes that firms have a hierarchy for financing sources:
1) They prefer internal financing such as retained earnings first.
2) If external financing is needed, they prefer to issue debt over equity to avoid the information costs associated with new share offerings.
3) Equity is seen as a last resort, issued only when debt capacity is exhausted.

Gaap

GAAP refers to the common set of accounting principles, standards and procedures that ensure consistent accounting procedures are followed in recording business transactions and preparing financial statements. GAAP is based on basic accounting assumptions like separate entity, monetary unit and time period, as well as principles like historical cost, full disclosure and revenue recognition. Publicly traded companies must follow GAAP to provide transparent and consistent financial reporting. Similarly, IAS are international standards that facilitate cross-border capital flows and global business by standardizing financial reporting across countries.

08 chapter 2

This document provides an overview of various capital budgeting techniques. It begins by introducing capital budgeting techniques under certainty, which are divided into non-discounted cash flow criteria and discounted cash flow criteria. The non-discounted criteria discussed are payback period and accounting rate of return. The discounted cash flow criteria discussed are net present value, internal rate of return, and profitability index. The document then explores each technique in detail and discusses their strengths and weaknesses for evaluating investment projects. It provides examples to illustrate how to calculate each technique.

Capital budgeting cash flow estimation

This document provides an overview of capital budgeting and cash flow analysis for investment projects. It defines key terms like capital expenditures, sunk costs, opportunity costs, and discusses how to estimate cash flows, including operating, terminal, and tax cash flows. It emphasizes the importance of using relevant cash flows to evaluate whether projects increase shareholder wealth.

Profitability index

The presentation discusses the profitability index (PI), which is a capital budgeting technique used to evaluate investment projects based on their profitability. The PI is calculated as the discounted cash inflows divided by the initial cash outflow. A PI greater than or equal to 1 indicates the project is profitable. The presentation provides an example calculation of the PI for a project with an initial investment of $200,000 and cash flows of $40,000, $30,000, $50,000 and $20,000 over 4 years with a 10% discount rate, resulting in a PI of 1.1235.

Ind AS 23 - Borrowing Costs

Ind AS 23 establishes the accounting requirements for borrowing costs. The core principle is that borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset must be capitalized as part of the cost of that asset. A qualifying asset takes substantial time to get ready for use or sale. Borrowing costs include interest expense, finance charges, and exchange differences arising from foreign currency borrowings to the extent they are treated as an adjustment to interest costs. Borrowing costs must be capitalized when funds are borrowed specifically for a qualifying asset or as part of general borrowings used for qualifying assets. Capitalization should cease when substantially all activities to prepare the asset are complete.

ch 11 Capital budgeting

This document provides an overview of capital budgeting techniques including NPV, IRR, MIRR, payback period, and profitability index. It discusses evaluating independent and mutually exclusive projects, dealing with normal and non-normal cash flows, and economic versus physical project life. Key points covered include using NPV profiles to evaluate projects, handling multiple IRRs, and putting projects on a common basis for comparison using techniques like replication chains.

GAAP, Accounting Standards and IFRS

What’s Accounting Standards? What’s GAAP? What’s IFRS? Major differences between IFRS and Indian GAAP? Why moving towards IFRS?

Cbproblems solutions

This document provides solutions to practice problems related to capital budgeting techniques and risk analysis. It addresses topics like sunk costs, cash flows, internal rate of return (IRR), modified internal rate of return (MIRR), sensitivity analysis, beta calculation, and risk adjustment. For example, it explains that the MIRR overcomes the unrealistic reinvestment assumption of the IRR method. It also provides steps to estimate a project's beta and discusses using risk-adjusted discount rates for projects with different risk levels.

Cbproblems solutions

This document provides solutions to practice problems related to capital budgeting techniques and risk analysis. It addresses topics like sunk costs, cash flows, depreciation, internal rate of return (IRR), modified internal rate of return (MIRR), net present value (NPV), risk measurement using standard deviation and coefficient of variation, beta estimation, sensitivity analysis vs simulation, cost of capital for small businesses, and risk-adjusted discount rates.

Chapter 9 q&p

The document contains examples and explanations of various capital budgeting techniques including payback period, discounted payback, net present value, internal rate of return, and profitability index. It analyzes two hypothetical investment projects (A and B) using each method and determines that while some criteria favor project A and others favor project B, the net present value method is preferred and indicates that project A should be accepted.

Cost of capital, Cost of debt, Cost of equity, Cost of preference shares, Wei...

Cost of capital, Cost of debt, Cost of equity, Cost of preference shares, Wei...Dayana Mastura FCCA CA

This document discusses weighted average cost of capital (WACC) which is a calculation of a firm's cost of capital considering the costs of the different components of the firm's capital structure (debt, equity, preference shares). It defines WACC and explains its importance as the minimum return a firm needs to earn on new projects/investments to break even. The document also outlines how to calculate WACC and the costs of each capital component (cost of equity using CAPM, cost of debt, cost of preference shares). It discusses how WACC is used as a benchmark for projects, in determining leverage limits, for valuation, and in discounting cash flows in a DCF analysis.Dividend policy

,
concept of dividend
,
dividend policy
,
stock dividend
,
stock repurchase
,
types of dividend policy
,
dividend model: if div fixed

Financial Leverage Final .ppt

This document discusses operating and financial leverage. It defines operating leverage as a firm's ability to magnify changes in sales through the use of fixed operating costs. Financial leverage refers to the relationship between a firm's earnings before interest and taxes (EBIT) and earnings available to shareholders. The document provides examples to illustrate how both operating and financial leverage can amplify the percentage changes in profits resulting from changes in sales or EBIT. It also introduces formulas to calculate the degree of operating leverage (DOL) and degree of financial leverage (DFL).

Cash Flow Statement mcqs

In this exclusive page, you will get Cash Flow Statement MCQs for various exams such B.Com, BBA, MBA, CMA, CS and ICAI. These Cash Flow Statement MCQs are also very much for Class 12 CBSE and other state boards including AHSEC.
Visit Our official website:
https://www.dynamictutorialsandservices.org/
Cash Flow Statement MCQs
https://www.dynamictutorialsandservices.org/2020/09/mcq-cash-flow-statement-cash-flow.html

Corporate finance

This document discusses several concepts in corporate finance including time value of money, payback period, profitability index, net present value, and internal rate of return. It provides examples of calculating payback period and profitability index for two projects. It also explains that net present value and internal rate of return are equivalent methods for evaluating mutually exclusive projects, as both recognize the time value of money and measure costs and benefits in terms of cash flows over the project's lifetime.

dividend determinants.pptx

This document discusses factors that influence a company's dividend policy, including legal restrictions, earnings trends and magnitude, shareholder desires, industry characteristics, company age, future financial needs, government economic policy, and taxation policy. It notes that dividends can only be paid out of current or past profits and lists relevant legal provisions. Key considerations for boards include shareholder preferences, industry stability, growth needs, and external economic conditions when determining how much to distribute versus retain.

Capital structure theories 1

The document discusses several theories of capital structure:
1) Net income approach assumes capitalization rates are constant as debt increases, making 100% debt optimal.
2) Net operating income approach finds no optimal structure as equity rates adjust to keep overall rates constant.
3) Traditional approach finds an optimal structure where costs initially fall then rise with more debt.
4) MM theory initially argues capital structure is irrelevant without taxes but debt provides tax shields with taxes.
5) Trade-off theory balances tax shields against costs of financial distress and agency, finding an optimal balance.

comparison of Accounting Standards

The document discusses key aspects of Generally Accepted Accounting Principles (GAAP) including definitions, similarities and differences between Indian GAAP, International Financial Reporting Standards (IFRS) and US GAAP. It covers topics such as financial statements, revenue recognition, foreign currency translation and more. GAAP provides common standards for preparing financial statements to ensure consistency and comparability. While there are some differences between jurisdictions, the overall goals and many principles are largely similar across frameworks.

Capital structure analysis

The document discusses different approaches to capital structure and the Modigliani-Miller model. It summarizes key assumptions of the MM model, including that capital markets are perfect, leverage at the personal and corporate level are substitutes, and there are no taxes or transaction costs. The MM model shows that firm value and cost of capital are independent of capital structure.

Cost of capital

This document discusses the concept of cost of capital and how to calculate costs for different sources of financing including debt, preference shares, equity, and retained earnings. It provides formulas and examples for calculating costs of debt (both irredeemable and redeemable), preference shares, equity using different methods, and weighted average cost of capital (WACC). The key methods covered include dividend yield, dividend yield plus growth, earnings/price, and capital asset pricing model (CAPM).

Chapters 19 (ind_as)

The document contains several accounting questions related to consolidated financial statements. It provides the individual balance sheets of companies P and S, and asks the reader to prepare a consolidated balance sheet by eliminating intra-group transactions and accounting for non-controlling interests. The questions require calculating goodwill on acquisition, adjusting assets to fair value on acquisition, and accounting for deferred consideration and loans between the parent and subsidiary.

Pecking order theory-Finance

The pecking order theory proposes that firms have a hierarchy for financing sources:
1) They prefer internal financing such as retained earnings first.
2) If external financing is needed, they prefer to issue debt over equity to avoid the information costs associated with new share offerings.
3) Equity is seen as a last resort, issued only when debt capacity is exhausted.

Gaap

GAAP refers to the common set of accounting principles, standards and procedures that ensure consistent accounting procedures are followed in recording business transactions and preparing financial statements. GAAP is based on basic accounting assumptions like separate entity, monetary unit and time period, as well as principles like historical cost, full disclosure and revenue recognition. Publicly traded companies must follow GAAP to provide transparent and consistent financial reporting. Similarly, IAS are international standards that facilitate cross-border capital flows and global business by standardizing financial reporting across countries.

08 chapter 2

This document provides an overview of various capital budgeting techniques. It begins by introducing capital budgeting techniques under certainty, which are divided into non-discounted cash flow criteria and discounted cash flow criteria. The non-discounted criteria discussed are payback period and accounting rate of return. The discounted cash flow criteria discussed are net present value, internal rate of return, and profitability index. The document then explores each technique in detail and discusses their strengths and weaknesses for evaluating investment projects. It provides examples to illustrate how to calculate each technique.

Capital budgeting cash flow estimation

This document provides an overview of capital budgeting and cash flow analysis for investment projects. It defines key terms like capital expenditures, sunk costs, opportunity costs, and discusses how to estimate cash flows, including operating, terminal, and tax cash flows. It emphasizes the importance of using relevant cash flows to evaluate whether projects increase shareholder wealth.

Profitability index

The presentation discusses the profitability index (PI), which is a capital budgeting technique used to evaluate investment projects based on their profitability. The PI is calculated as the discounted cash inflows divided by the initial cash outflow. A PI greater than or equal to 1 indicates the project is profitable. The presentation provides an example calculation of the PI for a project with an initial investment of $200,000 and cash flows of $40,000, $30,000, $50,000 and $20,000 over 4 years with a 10% discount rate, resulting in a PI of 1.1235.

Ind AS 23 - Borrowing Costs

Ind AS 23 establishes the accounting requirements for borrowing costs. The core principle is that borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset must be capitalized as part of the cost of that asset. A qualifying asset takes substantial time to get ready for use or sale. Borrowing costs include interest expense, finance charges, and exchange differences arising from foreign currency borrowings to the extent they are treated as an adjustment to interest costs. Borrowing costs must be capitalized when funds are borrowed specifically for a qualifying asset or as part of general borrowings used for qualifying assets. Capitalization should cease when substantially all activities to prepare the asset are complete.

ch 11 Capital budgeting

This document provides an overview of capital budgeting techniques including NPV, IRR, MIRR, payback period, and profitability index. It discusses evaluating independent and mutually exclusive projects, dealing with normal and non-normal cash flows, and economic versus physical project life. Key points covered include using NPV profiles to evaluate projects, handling multiple IRRs, and putting projects on a common basis for comparison using techniques like replication chains.

GAAP, Accounting Standards and IFRS

What’s Accounting Standards? What’s GAAP? What’s IFRS? Major differences between IFRS and Indian GAAP? Why moving towards IFRS?

Chapter 9 q&p

Chapter 9 q&p

Cost of capital, Cost of debt, Cost of equity, Cost of preference shares, Wei...

Cost of capital, Cost of debt, Cost of equity, Cost of preference shares, Wei...

Dividend policy

Dividend policy

Financial Leverage Final .ppt

Financial Leverage Final .ppt

Cash Flow Statement mcqs

Cash Flow Statement mcqs

Corporate finance

Corporate finance

dividend determinants.pptx

dividend determinants.pptx

Capital structure theories 1

Capital structure theories 1

comparison of Accounting Standards

comparison of Accounting Standards

Capital structure analysis

Capital structure analysis

Cost of capital

Cost of capital

Chapters 19 (ind_as)

Chapters 19 (ind_as)

Pecking order theory-Finance

Pecking order theory-Finance

Gaap

Gaap

08 chapter 2

08 chapter 2

Capital budgeting cash flow estimation

Capital budgeting cash flow estimation

Profitability index

Profitability index

Ind AS 23 - Borrowing Costs

Ind AS 23 - Borrowing Costs

ch 11 Capital budgeting

ch 11 Capital budgeting

GAAP, Accounting Standards and IFRS

GAAP, Accounting Standards and IFRS

Cbproblems solutions

This document provides solutions to practice problems related to capital budgeting techniques and risk analysis. It addresses topics like sunk costs, cash flows, internal rate of return (IRR), modified internal rate of return (MIRR), sensitivity analysis, beta calculation, and risk adjustment. For example, it explains that the MIRR overcomes the unrealistic reinvestment assumption of the IRR method. It also provides steps to estimate a project's beta and discusses using risk-adjusted discount rates for projects with different risk levels.

Cbproblems solutions

This document provides solutions to practice problems related to capital budgeting techniques and risk analysis. It addresses topics like sunk costs, cash flows, depreciation, internal rate of return (IRR), modified internal rate of return (MIRR), net present value (NPV), risk measurement using standard deviation and coefficient of variation, beta estimation, sensitivity analysis vs simulation, cost of capital for small businesses, and risk-adjusted discount rates.

Ch10

This document discusses relevant cash flows for capital budgeting decisions. It begins by outlining key topics like opportunity costs, side effects, and taxes. An example of Amazon building a new distribution center is provided. The relevant cash flows are the incremental cash flows between having the project and not. Sunk costs and cash flows that would exist without the project should be excluded. The document also discusses using pro forma financial statements to project a project's cash flows over multiple years. It provides an example of Whole Foods considering a new drink product, showing the pro forma income statement and cash flow timeline. Key terms discussed include depreciation, net working capital, and the depreciation tax shield.

Capital Budgeting

Capital budgeting is the process of evaluating long-term investments to maximize shareholder wealth. It involves assessing projects that require fixed assets operating for over one year. The key evaluation techniques are payback period, net present value (NPV), and internal rate of return (IRR), with NPV preferred as it considers total cash flows over time. NPV accepts projects when the present value of inflows exceeds outflows, while IRR accepts projects when the rate of return exceeds the cost of capital.

Ch12 cost

The document discusses various capital budgeting techniques used to evaluate investment projects, including:
1) The cash payback period method which calculates the years to recover initial costs from annual cash flows.
2) The net present value method which discounts future cash flows to determine if a project's present value exceeds costs.
3) The internal rate of return method which calculates the discount rate that sets a project's present value of cash flows equal to its costs.
4) The annual rate of return and profitability index methods which evaluate profitability as a percentage of investment size. Post-audits of actual results are recommended to improve future investment analyses.

Course03

This document provides an overview and summary of the key concepts covered in the course on capital budgeting analysis. It discusses the three stage process of decision analysis, option pricing, and discounted cash flow analysis. It emphasizes that capital expenditures require evaluating all relevant costs and benefits over multiple years. Examples are provided to illustrate how to calculate project cash flows, account for taxes, depreciation, and terminal values to determine the net present value of capital projects.

7.12Chapter 7 Problem 12a). Complete the spreadsheet below by esti.docx

7.12Chapter 7 Problem 12a). Complete the spreadsheet below by estimating the project's annual after tax cash flow.b). What is the investment's net present value at a discount rate of 10 percent?c). What is the investment's internal rate of return?d). How does the internal rate of return change if the discount rate equals 20 percent?e). How does the internal rate of return change if the growth rate in EBIT is 8 percent instead of 3 percent?Facts and AssumptionsEquipment initial cost $$ 350,000Depreciable life yrs.7Expected life yrs.10Salvage value $$0Straight line depreciationEBIT in year 128,000Tax rate38%Growth rate in EBIT3%Discount rate10%Year012345678910Initial cost350,000Annual depreciation50,00050,00050,00050,00050,00050,00050,000EBIT28,00028,84029,70530,59631,51432,46033,43334,43635,47036,534Net present value @ 10%Internal rate of return
7.13Chapter 7 Problem 13In many financial transactions, interest is computed and charged more than once a year. Interest on corporate bonds, for example, is usually payable every six months. Consider a loan transaction in which interest is charged at the rate of 1 percent per month. Sometimes such a transaction is described as having an interest rate of 12 percent per annum. More precisely, this rate should be described as a nominal 12 percent per annum coumpounded monthly.Clearly, it is desirable to recognize the difference between 1 percent per month compounded monthly and 12 percent per annum compounded annually. If $1,000 is borrowed with interest at 1 percent per month compounded monthly, the amount due in one year is:F = $1,000(1.01)12 = $1,000(1.1268) = $1,126.80 This compares to F = $1,000(1+.12) =$1,120.00 for annual compounding.Hence, the monthly compounding has the same effect on the year-end amount due as the charging of a rate of 12.68 percent compounded annually. 12.68 percent is referred to as the effective interest rate. To generalize, if interest is compounded m times a year at an interest rate of r/m per compounding period. Then,The nominal interest rate per annum, or the APR = m(r/m) = r.The effective interest rate per annum,or the EAR = (1+r/m)m - 1.Consider a $100,000, 30 year, fixed-rate, 9 percent, home mortgage requiring monthly payments.a. The monthly interest rate on the mortgage is 9%/12 months = .75%. What is the APR on the mortgage?b. What is the EAR on the mortgage?c. The borrower's payment book will look something like the following. Complete the entries for the first 6 months.Outstanding Balance Beginning of MonthMonthly paymentInterest duePrincipal paymentOutstanding Balance End of MonthDate01-31$100,00002-2803-3104-3005-3106-30d. After paying on this mortgage for 15 years, what will be the remaining principal outstanding? e. Suppose after 15 years the borrower has the opportunity to refinance the remaining principal on the mortgage with a new 15-year mortgage carrying an interest rate of 7 1/8%. Refinancing will involve $250 in costs and "points.

present worth analysis.ppt

The document discusses present worth analysis and evaluating mutually exclusive project alternatives. It provides examples of calculating net present worth (NPW) to evaluate single projects and compare alternatives. The key points are:
1. Present worth analysis uses discounted cash flow techniques to calculate the net present value (NPW) of projects by discounting cash inflows and outflows.
2. Projects with a positive NPW that exceeds the minimum acceptable rate of return should be accepted.
3. Mutually exclusive alternatives must be compared over an equal time period using NPW.
4. The analysis period may differ from project lifetimes, requiring adjustments like estimating salvage value.

Task 4 - Resume Making Capital Investment Decisions.pptx

This document discusses various concepts related to making capital investment decisions. It covers relevant cash flows, the stand-alone principle, situations involving incremental cash flows like sunk costs and opportunity costs. It also discusses net working capital, financing costs, pro forma financial statements, and calculating project cash flows. An example of evaluating a mulch and compost company project is provided to illustrate cash flow calculations. Different approaches for calculating operating cash flow like the bottom-up, top-down, and tax shield approaches are also explained.

Business Finance Chapter 8

The document discusses various investment criteria for capital budgeting decisions, with a focus on net present value (NPV). It defines NPV as the difference between the present value of a project's expected future cash flows and the initial investment cost. The document also discusses other criteria like payback period, accounting rate of return, and internal rate of return. It provides examples to demonstrate how to calculate NPV and compares it to other criteria. It emphasizes that NPV is preferable because it considers the time value of money and risk, and indicates whether a project will increase firm value.

Capital budgeting methods lecture notes

This document provides an overview of capital budgeting methods. It discusses traditional methods like payback period and accounting rate of return. It also covers modern discounted cash flow methods like net present value, internal rate of return, and profitability index. For each method, it provides examples of how to calculate it and discusses the advantages and disadvantages. It also discusses capital structure, the cost of capital, and methods for calculating the cost of equity, cost of debt, and weighted average cost of capital.

Top of Form 1.The difference between the present value.docx

Top of Form
1.
The difference between the present value of an investment?s future cash flows and its initial cost is the:
net present value.
internal rate of return.
payback period.
profitability index.
discounted payback period.
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
2.
Which statement concerning the net present value (NPV) of an investment or a financing project is correct?
A financing project should be accepted if, and only if, the NPV is exactly equal to zero.
An investment project should be accepted only if the NPV is equal to the initial cash flow.
Any type of project should be accepted if the NPV is positive and rejected if it is negative.
Any type of project with greater total cash inflows than total cash outflows, should always be accepted.
An investment project that has positive cash flows for every time period after the initial investment should be accepted.
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
3.
The primary reason that company projects with positive net present values are considered acceptable is that:
they create value for the owners of the firm.
the project's rate of return exceeds the rate of inflation.
they return the initial cash outlay within three years or less.
the required cash inflows exceed the actual cash inflows.
the investment's cost exceeds the present value of the cash inflows.
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
4.
Accepting a positive net present value (NPV) project:
indicates the project will pay back within the required period of time.
means the present value of the expected cash flows is equal to the project’s cost.
ignores the inherent risks within the project.
guarantees all cash flow assumptions will be realized.
is expected to increase the stockholders’ value by the amount of the NPV.
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
5.
The net present value method of capital budgeting analysis does all of the following
except:
incorporate risk into the analysis.
consider all relevant cash flow information.
use all of a project's cash flows.
discount all future cash flows.
provide a specific anticipated rate of return.
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
6.
What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent.
−$287.22
−$1,195.12
−$1,350.49
$204.36
$797.22
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
7.
Maxwell Software, Inc., has the following mutually exclusive projects.
Year
Project A
Project B
0
–$29,000
–$32,000
1
16,500
17,500
2
13,000
11,500
3
3,800
13,000
a-1.
Calculate the payback period for each project.
(Do not round interme ...

Capital investment appraisal Decission

Capital budgeting decisions are much vital than the decisions on management of working capital as these decisions requires careful analysis of the expected costs and benefits to be derived from each capital expenditure on acquisition of land, building, equipments and for permanent additions to working capital associated with the plant expansion.
The level of investments that maximizes the present value of the firm is simultaneously determined by the interaction of supply and demand forces under conditions of uncertainty

INVESTMENT DECISION AND RELATED PROBLEM

Investment Decision — Capital Budgeting Techniques — Pay Back Method — Accounting Rate Of Return — NPV — IRR — Discounted Pay Back Method — Capital Rationing — Risk Adjusted Techniques Of Capital Budgeting. — Capital Budgeting Practices.

Sheet4Assignment 1 LASA # 2—Capital Budgeting TechniquesSheet1So.docx

Sheet4Assignment 1 LASA # 2—Capital Budgeting Techniques
Sheet1
Solution
:-A) Computation of WACC:-Cost of equity (Ke) will be calculated using dividend discount model which is as under:-Price of share (P0) = D1/(Ke-g)Ke = (D1/(P0*(1-f))) + gWhere,D1 = D0*(1+g)F = Flotation costKe = ((2.50*(1+6%))/(50*(1-10%))) + 6%Ke = 11.89%i) Equity financing and debt financing are two different sources of financing being used by the organizations to procure funds. Equity and debt are two different sources of financing, equity financing represents internal source of finance whereas debt financing represent external source of finance. Mixture of both is always used by the business organizations to procure funds and is most commonly known as target ratio or capital structure ratio. This ration varies from industry to industry and company and company depending upon various circumstances, equity financing can be raised only through issuing shares in market by the help of initial public offer whereas debt financing can be raise from many sources such as bonds, long term loans, money market instruments etc.Equity Financing has following advantages:1. The total cash flows generated can be used solely for investment purpose, rather than paying back the investors.2. Funds can be raised in shorter time as compared to other sources of funds.However, in equity financing, dilution of ownership easily occurs and more investors can lead to loss of Control.Cost of debt (Kd) will be calculated as follows:-Kd = Market rate of deb*(1-tax rate)Kd = 5%*(1-35%)Kd = 3.25%Debt is a more common source of finance used by most of the organizations, the reason for the same is as follows:-a. Debt is cheaper source of finance as compared to equity the reason being the cost associated with issuing the common stock like. Underwriters commission, legal expenses, various registration charges, issuing of prospectus, printing of various documents etc.b. Debt financing provide leverage to the company which will increase the Earning per Share (EPS) which in turn leads to increase in market value of share, this helps organization to maximize its market capitalization.However, if the expansion venture does not work in favour of the company, then these obligations of repayment of principal and interest may turnout to be a burden to the company. WACC = (Ke*We) + (Kd*Wd)WACC = (11.89%*70%) + (3.25%*30%)WACC = 9.30%B) Computation of NPV of project A:-Depreciation = Cost of the asset – salvage value Life of the asset = 1,500,000/ 3 = 500,000Calculation of cash flows:Revenue – 1,200,000Less Cost – 600,000Less Depreciation – 500,000Profit - 100,000Less taxes (35%) 35,000Profit after taxes .

Capital budgeting

- Capital budgeting refers to the process of making investment decisions regarding long-term assets. It involves evaluating potential capital projects and determining which ones to undertake.
- Capital budgeting decisions are important because they impact the firm for several years. A bad decision can significantly affect the firm's future operations.
- Common techniques for evaluating capital projects include payback period, net present value (NPV), and internal rate of return (IRR). The NPV and IRR methods account for the time value of money, unlike payback period.

Ch14sol cash flow estimation

This document provides answers and solutions to end-of-chapter questions and problems from a textbook on cash flow estimation and risk analysis. It defines key terms like incremental cash flows, sunk costs, and opportunity costs. It also provides examples of calculating operating cash flows, salvage value, and net present value. The document aims to help students understand the concepts and calculations involved in capital budgeting and project valuation.

Cb-1.pptx

Capital budgeting is used to evaluate long-term investment projects. There are two types of capital budgeting decisions - screening decisions determine if a project meets an acceptance standard, and preference decisions select among competing options. Common evaluation methods include payback period, net present value (NPV), and internal rate of return. NPV discounts future cash flows to determine if a project's present value of cash inflows exceeds the present value of cash outflows.

Capital Budgeting

This document discusses capital budgeting methods for evaluating projects that span multiple years. It covers key concepts like net present value, internal rate of return, payback period, and accrual rate of return. The document provides examples to illustrate how to calculate NPV, IRR, and payback period for hypothetical capital investment projects. It also discusses how depreciation affects after-tax cash flows and how performance evaluation using accrual rates can conflict with capital budgeting decisions made using discounted cash flow methods.

Financial Management for Co-ops

The document provides an overview of key financial management concepts for cooperatives, including cost of capital, capital budgeting techniques, and relevant costing. It defines cost of capital as the minimum return required to justify an investment. Capital budgeting techniques include non-discounting methods like payback period and accounting rate of return, as well as discounting methods like net present value and internal rate of return. Relevant costing involves identifying differential costs that differ between alternatives to determine the most cost-effective option. Examples are provided to illustrate weighted average cost of capital calculation, capital budgeting analysis, and relevant costs analysis for make-or-buy and product line decisions.

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present worth analysis.ppt

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- 1. Get Homework/Assignment Done Homeworkping.com Homework Help https://www.homeworkping.com/ Research Paper help https://www.homeworkping.com/ Online Tutoring https://www.homeworkping.com/ click here for freelancing tutoring sites Solutions Guide: Please reword the answers to essay type parts so as to guarantee that your answer is an original. Do not submit as your own. It has been 2 months since you took a position as an assistant financial analyst at Caledonia Products. Although your boss has been pleased with your work, he is still a bit hesitant about unleashing you without supervision. Your next assignment involves both the calculation of the cash flows associated with a new investment under consideration and the evaluation of several mutually exclusive projects. Given your lack of tenure and Caledonia, you have been asked not only to provide a recommendation but also to respond to a number of questions aimed at judging your understanding of the capital-budgeting process. The memorandum you received outlining your assignment follows: To: The Assistant Financial Analyst From: Mr. V. Morrison, CEO, Caledonia Products Re: Cash Flow Analysis and Capital Rationing We are considering the introduction of a new product. Currently we are in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital. This project is expected to last 5 years and then, because this is somewhat of a fad product, be terminated. The following information describes the new project: Cost of new plant and equipment: $7,900,000 Shipping and
- 2. installation costs: $100,000 Unit Sales: Year 1: Units sold: 70,000 Year 2: Units sold: 120,000 Year 3: Units sold: 140,000 Year 4: Units sold 80,000 Year 5: Units sold 60,000 Sales price per unit: $300/unit in years 1 through 4, $260/unit in year 5 Variable Cost per unit: $180/unit Annual Fixed Costs: $200,000 Working capital requirements: There will be an initial working-capital requirement of $100,000 just to get production started. For each year, the total investment in new working capital will be equal to 10 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5. The depreciation method: Use the simplified straight- line method over 5 years. Assume that the plant and equipment will have no salvage value after 5 years. A.) Should Caledonia focus on cash flows or accounting profits in making its capital-budgeting decisions? Should the company be interested in incremental cash flows, incremental profits, total free cash flows, or total profits? B.) How does depreciation affect free cash flows or total profits? C.) How do sunk costs affect the determination of cash flows? D.) What is the project’s initial outlay? E.) What are the differential cash flows over the project’s life? F.) What is the terminal cash flow? G.) Draw a cash flow diagram for this project H.) What is its net present value? I.) What is its internal rate of return? J.) Should the project be accepted? Why or why not? K.) In capital budgeting, risk can be measured from three perspectives. What are those three measures of a projects risk? L.) According to CAPM, which measurement of a project’s risk is relevant? What complications does reality introduce into the CAPM view of risk, and what does that mean for our view of the relevant measure of a project’s risk? M.) Explain how simulation works. What is the value in using a simulation approach? N.) What is sensitivity analysis and what is its purpose? Please provide answers in excel showing the work for each answer. a. We focus on free cash flows rather than accounting profits because these are the flows that the firm receives and can reinvest. Only by examining cash flows are we able to correctly analyze the timing of the benefit or cost. Also, we are only interested in these cash flows on an after-tax basis as only those flows are available to the shareholder. In addition, it is only the incremental cash flows that interest us, because, looking at the project from the point of the company as a whole, the incremental cash flows are the marginal benefits from the project and, as such, are the increased value to the firm from accepting the project. b. Although depreciation is not a cash flow item, it does affect the level of the differential cash flows over the project's life because of its effect on taxes. Depreciation is an expense item and, the more depreciation incurred, the larger are expenses. Thus, accounting profits become lower and in turn, so do taxes which are a cash flow item. c. When evaluating a capital budgeting proposal, sunk costs are ignored. We are interested in only the incremental after-tax cash flows, or free cash flows, to the company as a whole. Regardless of the decision made on the investment at hand, the sunk costs will have already occurred, which means these are not incremental cash flows. Hence, they are irrelevant. Parts d, e, & f.
- 3. Section I. Calculate the change in EBIT, Taxes, and Depreciation (this become an input in the calculation of Operating Cash Flow in Section II). Year 0 1 2 3 4 5 Units Sold 70,000 120,000 140,000 80,000 60,000 Sale Price $300 $300 $300 $300 $260 Sales Revenue $21,000,000 $36,000,000 $42,000,000 $24,000,000 $15,600,000 Less: Variable Costs 12,600,000 21,600,000 25,200,000 14,400,000 10,800,000 Less: Fixed Costs $200,000 $200,000 $200,000 $200,000 $200,000 Equals: EBDIT $8,200,000 $14,200,000 $16,600,000 $9,400,000 $4,600,000 Less: Depreciation $1,600,000 $1,600,0000 $1,600,0000 $1,600,0000 $1,600,0000 Equals: EBIT $6,600,000 $12,600,000 $15,000,000 $7,800,000 $3,000,000 Taxes (@34%) $2,244,000 $4,284,000 $5,100,000 $2,652,000 $1,020,000 Section II. Calculate Operating Cash Flow (this becomes an input in the calculation of Free Cash Flow in Section IV). Operating Cash Flow: EBIT $6,600,000 $12,600,000 $15,000,000 $7,800,000 $3,000,000 Minus: Taxes $2,244,000 $4,284,000 $5,100,000 $2,652,000 $1,020,000 Plus: Depreciation $1,600,000 $1,600,000 $1,600,000 $1,600,000 $1,600,000 Equals: Operating Cash Flow $5,956,000 $9,916,000 $11,500,000 $6,748,000 $3,580,000 Section III. Calculate the Net Working Capital (This becomes an input in the calculation of Free Cash Flows in Section IV). Change In Net Working Capital: Revenue: $21,000,000 $36,000,000 $42,000,000 $24,000,000 $15,600,000 Initial Working Capital Requirement $100,000 Net Working Capital Needs: $2,100,000 $3,600,000 $4,200,000 $2,400,000 $1,560,000 Liquidation of Working Capital $1,560,000 Change in Working Capital: $100,000 $2,000,000 $1,500,000 $600,000 ($1,800,000) ($2,400,000) Section IV. Calculate Free Cash Flow (using information calculated in Sections II and III, in addition to the Change in Capital Spending). Free Cash Flow: Operating Cash Flow $5,956,000 $9,916,000 $11,500,000 $6,748,000 $3,580,000 Minus: Change in Net Working Capital $100,000 $2,000,000 $1,500,000 $600,000 ($1,800,000) ($2,400,000) Minus: Change in Capital Spending $8,000,000 0 $0 0 0 0 Free Cash Flow: ($8,100,000) $3,956,000 $8,416,000 $10,900,000 $8,548,000 $5,980,000 NPV = $16,731,096 IRR = 77%
- 4. g. Cash flow diagram $3,956,000 $8,416,000 $10,900,000 $8,548,000 $5,980,400 ($8,100,000) h. NPV = $16,731,096 i. IRR = 77% j. Yes. This project should be accepted because the NPV ≥ 0. and the IRR ≥ required rate of return. k. First, there is the total project risk also called project standing alone risk, which is a project’s risk ignoring the fact that much of this risk will be diversified away as the project is combined with the firm’s other projects and assets. Second, we have the project’s contribution to firm risk, which is the amount of risk that the project contributes to the firm as a whole; this measure considers the fact that some of the project’s risk will be diversified away as the project is combined with the firm’s other projects and assets, but ignores the effects of diversification of the firm’s shareholders. Finally, there is systematic risk, which is the risk of the project from the viewpoint of a well-diversified shareholder; this measure considers the fact that some of a project’s risk will be diversified away as the project is combined with the firm’s other projects, and, in addition, some of the remaining risk will be diversified away by the shareholders as they combine this stock with other stocks in their portfolio. l. According to the CAPM, systematic risk is the only relevant risk for capital-budgeting purposes; however, reality complicates this somewhat. In many instances, a firm will have undiversified shareholders; for them, the relevant measure of risk is the project’s contribution to firm risk. The possibility of bankruptcy also affects our view of what measure of risk is relevant. Because the project’s contribution to firm risk can affect the possibility of bankruptcy, this may be an appropriate measure of risk since there are costs associated with bankruptcy. m. The idea behind simulation is to imitate the performance of the project being evaluated. This is done by randomly selecting observations from each of the distributions that affect the outcome of the project, combining each of those observations and determining the final outcome of the project, continuing with this process until a representative record of the project’s probable outcome is assembled. In effect, the output from a simulation is a probability distribution of net present values or internal rates of return for the project. The decision maker then bases his decision on the full range of possible outcomes. n. Sensitivity analysis involves determining how the distribution of possible net present values or internal rates of return for a particular project is affected by a change in one particular input variable. This is done by changing the value of one input variable while holding all other input variables constant. 4
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