Forgets Flashcards
IRR rule if - CFS front/back loaded
front
IRR> r
back
IRR< r
IRR assumes
all FCFs reinvested at IRR
MIRR 3 different approaches
Discounting
- disc all -CFS back to 0
Reinvestment
- put all CFS but CF0 forward to end
Combination
- both disc - CFS to 0 and put all other Cfs forwards to end
NPV and IRR give same decision BUT
mutually exclusive (CFo and timing very different)
non-conventional CFs
Payback Period problem
NPV could be -
PI helpful when
funds are limited
Dep Tax Shield
Tc x Dep
3 techniques for comparing mutually exclusive projects with different lives and which method to use
LCLife
NPV Perpetuity
Equivalent Annul Cost
- identical r give all same
- diff r use NPV perp first, LCF and NPV give different and then never use EAC
scenario vs sensitivity analysis
sensitivity is effect of change of one avr and scenario is whole bunch of assumptions
What about NPV at accounting BE?
-
Acct vs Finc BE
when net profit=0
sales when NPV=0 or IRR=r
real and financial options represent ____ to __( end part diff for each)
the right but not obligation to
real: take some action in future
finc: purchase something in future for price set today
3 real options
expand, delay, abandon
what 4 things need to be true for options analysis to exist in real investment analysis
flexbility
uncertainty
learning
irreversibility
2 limitations to real options
increase capital investment values which increase agency risk
assumes perfect foresight
goal for capital structure
minimize WACC, maximise firm value
business risk
equity risk arising from nature of firms operating activities and is directly related to systematic risk of firms assets
financial risk
equity risk arising from capital structure of firm
when earnings perform good and and with debt and what is BE
good: EBIT> BE pt
bad: EBIT< BE pt
BE pt: EPSu=EPSl
why lev increases ROE if ROA>Rb
as ROA measures how efficiently a company’s assets can generate profits.
if RA>Rb it means the company is earning more from its investments than it is paying in interest
Homemade leverage
Unlev + Lev
Not paying int but want to, Shint gonna be -
Borrow D/E of shares owned money from bank at same rate as firm and use to buy shares
CF going to be EPSU x new number shares (more than before) - SH int
De-lever
Lev + de-lever
Paying int but don’t want to so going to receive int
Sell D/V shares and put those into bank at same rate as firm
CF going to be EPSL x new shares owned(less) + SHint
MM1,2,3
value, Rs, WACC
MM1,2,3 with and without taxes
without
1
Vu=Vl, cap structure/debt is irrelevant
2
Rs is increased with D as shareholders need compensating
3
WACC u=WACC l=Ro
with taxes
1
Vl= Vu+ TcB (dtax shield), debt increases value of firm
2
cost of eq to lev firm is cost of unless firm plus risk premium
3
lev firm WACC is lower as increased value