The Dividend Discount Model

DIVIDEND DISCOUNT MODEL Discounted cashflow model of today's stock price which states that share value equals the present value of all expected future dividends. We have managed to explain today's stock price P0 in terms of the dividend DIV1 and the expected stock price next year P1. But future stock prices are not easy to forecast directly, though you may encounter individuals who claim to be able to do so. A formula that requires tomorrow's stock price to explain today's stock price is not...

Net Present Value

Earlier you learned how to discount future cash payments to find their present value. We now apply these ideas to evaluate a simple investment proposal. Suppose that you are in the real estate business. You are considering construction of an office block. The land would cost 50,000 and construction would cost a further 300,000. You foresee a shortage of office space and predict that a year from now you will be able to sell the building for 400,000. Thus you would be investing 350,000 now in the...

What If There Are Three Or More Sources Of Financing

We have simplified our discussion of the cost of capital by assuming the firm has only two classes of securities debt and equity. Even if the firm has issued other classes of securities, our general approach to calculating WACC remains unchanged. You simply calculate the weighted-average after-tax return of each security type. For example, suppose the firm also has outstanding preferred stock. Preferred stock has some of the characteristics of both common stock and fixed-income securities. Like...

The Dividend Discount Model With No Growth

Consider a company that pays out all its earnings to its common shareholders. Such a company could not grow because it could not reinvest.6 Stockholders might enjoy a generous immediate dividend, but they could forecast no increase in future dividends. The company's stock would offer a perpetual stream of equal cash payments, DIV1 DIV2 . . . DIVt . . . 6 We assume it does not raise money by issuing new shares. The dividend discount model says that these no-growth shares should sell for the...

Coupon X annuity factor face value X discount factor

If you need to value a bond with many years to run before maturity, it is usually easiest to value the coupon payments as an annuity and then add on the present value of the final payment. V Self-Test 2 Calculate the present value of a 6-year bond with a 9 percent coupon. The interest rate V EXAMPLE 1 Bond Prices and Semiannual Coupon Payments Thus far we've assumed that interest payments occur annually. This is the case for bonds in many European countries, but in the United States most bonds...

Further Notes And Wrinkles Arising From Bloopers Project

Before we leave Blooper and its magnoosium project, we should cover a few extra wrinkles. ACCELERATED COST RECOVERY SYSTEM (MACRS) Depreciation method that allows higher tax deductions in early years and lower deductions later. A Further Note on Depreciation. We warned you earlier not to assume that all cash flows are likely to increase with inflation. The depreciation tax shield is a case in point, because the Internal Revenue Service lets companies depreciate only the amount of the original...

Summary

Convertible bonds give their holder the right to convert the bond to shares. They therefore resemble a package of straight debt and a warrant. What are recent trends in firms' use of different sources of finance Internally generated cash is the principal source of company funds. Some people worry about that they think that if management does not go to the trouble of raising money, it may be profligate in spending it. In the late 1990s, net equity issues were negative that is, companies...

Sensitivity Analysis

Uncertainty means that more things can happen than will happen. Therefore, whenever managers are given a cash-flow forecast, they try to determine what else might happen SENSITIVITY and the implications of those possible events. This is called sensitivity analysis. ANALYSIS Analysis of Put yourself in the well-heeled shoes of the financial manager of the Finefodder su- the effects on project permarket chain. Finefodder is considering opening a new superstore in Gravenstein profitability of...

How should the cash flows properly attributable to a proposed new project be calculated

Here is a checklist to bear in mind when forecasting a project's cash flows Discount cash flows, not profits. Estimate the project's incremental cash flows that is, the difference between the cash flows with the project and those without the project. Include all indirect effects of the project, such as its impact on the sales of the firm's other products. Include opportunity costs, such as the value of land which you could otherwise sell. Beware of allocated overhead charges for heat, light,...

Arranging A Public Issue

Once a firm decides to go public, the first task is to select the underwriters. Underwriters are investment banking firms that act as financial midwives to a new issue. Usually they play a triple role first providing the company with procedural and financial advice, then buying the stock, and finally reselling it to the public. A small IPO may have only one underwriter, but larger issues usually require a syndicate of underwriters who buy the issue and resell it. For example, the initial public...

Practice Problems

Shareholders are issued rights to buy shares if bidder acquires 5. Offer to buy shares directly from stockholders. 6. Company or business bought out by private investors, largely debt-financed. a. One of the first tasks of an LBO's financial manager is to pay down debt. b. Shareholders of bidding companies earn higher abnormal returns when the merger is financed with stock than in cash-financed deals. c. Targets for LBOs in the 1980s tended to be profitable companies in...

Components Of A Financial Planning Model

A completed financial plan for a large company is a substantial document. A smaller corporation's plan would have the same elements but less detail. For the smallest, youngest businesses, financial plans may be entirely in the financial managers' heads. The basic elements of the plans will be similar, however, for firms of any size. Financial plans include three components inputs, the planning model, and outputs. The relationship among these components is represented in Figure 1.16. Let's look...

How do firms assess the probability that a customer will pay

Credit analysis is the process of deciding which customers are likely to pay their bills. There are various sources of information your own experience with the customer, the experience of other creditors, the assessment of a credit agency, a check with the customer's bank, the market value of the customer's securities, and an analysis of the customer's financial statements. Firms that handle a large volume of credit information often use a formal system for combining the various sources into an...

Discount Nominal Cash Flows by the Nominal Cost of Capital

The distinction between nominal and real cash flows and interest rates is crucial in capital budgeting. Interest rates are usually quoted in nominal terms. If you invest 100 in a bank deposit offering 6 percent interest, then the bank promises to pay you 106 at the end of the year. It makes no promises about what that 106 will buy. The real rate of interest on the bank deposit depends on inflation. If inflation is 2 percent, that 106 will buy you only 4 percent more goods at the end of the year...

Key Terms

Www.windpower.dk tour econ econ.htm Evaluation of a sample energy-saving project www.palisade.com Software for Monte Carlo analysis capital budget sensitivity analysis fixed costs variable costs scenario analysis simulation analysis break-even analysis operating leverage degree of operating leverage DOL decision tree 1. Fixed and Variable Costs. In a slow year, Wimpy's Burgers will produce 1 million hamburgers at a total cost of 1.75 million. In a good year, it can produce 2 million hamburgers...

Solutions to Spreadsheet Model Questions

Although the real discount rate is barely affected by the change in inflation, the real value of depreciation and the present value of the depreciation tax shield increase, 1 Remember, discount cash flows, not profits. Each tewgit machine costs 250,000 right away. Recognize that outlay, but forget accounting depreciation. Cash flows per machine are Each machine is forecast to generate 50,000 of cash flow in Years 4 and 5. Thus it makes sense to keep operating for 5 years. 2 a,b. The site and...

The Income Statement

Financial statement that shows the revenues, expenses, and net income of a firm over a period of time. If Pepsi's balance sheet resembles a snapshot of the firm at a particular time, its income statement is like a video. It shows how profitable the firm has been during the past year. Look at the summary income statement in Table A.2. You can see that during 1998 Pepsi sold goods worth 22,348 million and that the total expenses of producing and selling goods was 9,330 291 8,912 18,533 million....

How do firms compute weightedaverage costs of capital

Here's the WACC formula one more time WACC rdebt x 1 - Tc x D V r x E V The WACC is the expected rate of return on the portfolio of debt and equity securities issued by the firm. The required rate of return on each security is weighted by its proportion of the firm's total market value not book value . Since interest payments reduce the firm's income tax bill, the required rate of return on debt is measured after tax, as rdebt x 1 - Tc . This WACC formula is usually written assuming the firm's...

Mutually Exclusive Projects And The Irr Rule

Whereas the NPV rule deals easily with mutually exclusive projects, the IRR rule does not. Because of the potential pitfalls in the use of the IRR rule, our advice is always to base your final decision on the project's net present value.7 7 The other rules we've considered, such as payback or book rate of return, give poor guidance even in the much simpler case of the accept reject decision of a project considered in isolation. They are of no help in choosing among mutually exclusive projects....

Payback

Using Financial Calculators to Find NPV and IRR Earlierwe saw that the formulas for the present and future values of level annuities and one-time cash flows are built into financial calculators. However, as the example of the office block illustrates, most investment projects entail multiple cash flows that cannot be expected to remain level over time. Fortunately, many calculators are equipped to handle problems involving a sequence of uneven cash flows. In general, the procedure is quite...

Fraction of portfolio rate of return in second asset on second asset

For example, autos have a weight of .75 and a rate of return of -8 percent in the recession, and gold has a weight of .25 and a return of 20 percent in a recession. Therefore, the portfolio return in the recession is the following weighted average 9 Portfolio return in recession .75 X -8 .25 X 20 Table 3.17 expands Table 3.15 to include the portfolio of the auto stock and the gold mining stock. The expected returns and volatility measures are summarized at the bottom of the table. The...

Problems

Talia's Tutus bought a new sewing machine for 40,000 that will be depreciated using the MACRS depreciation schedule for a 5-year recovery period. a. Find the depreciation charge each year. b. If the sewing machine is sold after 3 years for 20,000, what will be the after-tax proceeds on the sale if the firm's tax bracket is 35 percent Proper Cash Flows. Conference Services Inc. has leased a large office building for 4 million per year. The building is larger than the...

Shareholders Want Managers To Maximize Market Value

For small firms, shareholders and management may be one and the same. But for large companies, separation of ownership and management is a practical necessity. For ex- Internet sites for careers in finance Basic salary data. Extensive salary information, general advice, and industry prospects. Government site with job and qualification profiles, as well as salary data. Go to Publications and Research Papers and then Occupational Handbook. A site for beginning job seekers, with job tips and...

Book Rate Of Return

BOOK RATE OF RETURN Accounting income divided by book value. Also called accounting rate of return. We pointed out that net present value and internal rate of return are both discounted cash-flow measures. In other words, each measure depends only on the project's cash flows and the opportunity cost of capital. But when companies report to shareholders on their performance, they do not show simply the cash flows. Instead they report the firm's book income and book assets. Shareholders and...

Nonconstant Growth

Many companies grow at rapid or irregular rates for several years before finally settling down. Obviously we can't use the constant-growth dividend discount model in such cases. However, we have already looked at an alternative approach. Set the investment horizon Year H at the future year by which you expect the company's growth to settle down. Calculate the present value of dividends from now to the horizon year. Forecast the stock price in that year and discount it also to present value....

Variance And Standard Deviation

The third histogram in Figure 3.15 shows the variation in common stock returns. The returns on common stock have been more variable than returns on bonds and Treasury bills. Common stocks have been risky investments. They will almost certainly continue to be risky investments. Investment risk depends on the dispersion or spread of possible outcomes. Sometimes a picture like Figure 3.15 tells you all you need to know about past dispersion. VARIANCE Average But in general, pictures do not...

Book Values And Market Values

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES GAAP Procedures for preparing financial statements. BOOK VALUE Net worth of the firm according to the balance sheet. Throughout this material we will frequently make a distinction between the book values of the assets shown in the balance sheet and their market values. Items in the balance sheet are valued according to generally accepted accounting principles, commonly called GAAP. These state that assets must be shown in the balance sheet at their...

Selftest

Therefore, the project is still worth pursuing. The project is viable as long as construction QUESTIONS costs are less than the PV of the future cash flow, that is, as long as construction costs are NPV falls to zero at an interest rate of 8.9 percent. less than 357,143. However, if the opportunity cost of capital is 20 percent, the PV of the 400,000 sales price is lower and NPV is negative The present value of the future cash flow is not as high when the opportunity cost of capital is higher....

A risky dollar is worth less than a safe one

Most investors avoid risk when they can do so without sacrificing return. However, the concepts of present value and the opportunity cost of capital still apply to risky investments. It is still proper to discount the payoff by the rate of return offered by a comparable investment. But we have to think of expected payoffs and the expected rates of re- Not all investments are equally risky. The office development is riskier than a Treasury bill, but is probably less risky than investing in a...

Net Present Value And Other Investment Criteria

A Comment on Risk and Present Value Valuing Long-Lived Projects A Closer Look at the Rate of Return Rule Calculating the Rate of Return for Long-Lived Projects Investment Criteria When Projects Interact Mutually Exclusive Projects and the IRR Rule A positive NPV always inspires confidence. This man is not worrying about the payback period or the book rate of return. Jim Levitt Impact Visuals term consequences. The assets you buy today may determine the business he investment decision, also...

How can one calculate the present value of a stock given forecasts of future dividends and future stock price

Stockholders generally expect to receive 1 cash dividends and 2 capital gains or losses. The rate of return that they expect over the next year is defined as the expected dividend per share DIV1 plus the expected increase in price P1 - P0, all divided by the price at the start of the year P0. Unlike the fixed interest payments that the firm promises to bondholders, the dividends that are paid to stockholders depend on the fortunes of the firm. That's why a company's common stock is riskier than...

The Assumption In Percentage Of Sales Models

When forecasting Executive Fruit's capital requirements, we assumed that both fixed assets and working capital increase proportionately with sales. For example, the black line in Figure 1.18 shows that net working capital is a constant 10 percent of sales. Percentage of sales models are useful first approximations for financial planning. However, in reality, assets may not be proportional to sales. For example, we will see that important components of working capital such as inventories and...

What are the differences between the bonds coupon rate current yield and yield to maturity

A bond is a long-term debt of a government or corporation. When you own a bond, you receive a fixed interest payment each year until the bond matures. This payment is known as the coupon. The coupon rate is the annual coupon payment expressed as a fraction of the bond's face value. At maturity the bond's face value is repaid. In the United States most bonds have a face value of 1,000. The current yield is the annual coupon payment expressed as a fraction of the bond's price. The yield to...

External Financing and Growth

Financial plans force managers to be consistent in their goals for growth, investments, SEE BOX and financing. The nearby box describes how one company was brought to its knees when it did not plan sufficiently for the cash that would be required to support its ambitions. Financial models, such as the one that we have developed for Executive Fruit, can help managers trace through the financial consequences of their growth plans and avoid such disasters. But there is a danger that the...

Financial Ratios

We have all heard stories of whizzes who can take a company's accounts apart in minutes, calculate a few financial ratios, and discover the company's innermost secrets. The truth, however, is that financial ratios are no substitute for a crystal ball. They are just a convenient way to summarize large quantities of financial data and to compare firms' performance. Ratios help you to ask the right questions they seldom answer them. INCOME STATEMENT FOR PEPSICO, INC., 1998 figures in millions of...

Financial Planning Focuses On The Big Picture

Many of the firm's capital expenditures are proposed by plant managers. But the final budget must also reflect strategic plans made by senior management. Positive-NPV opportunities occur in those businesses where the firm has a real competitive advantage. Strategic plans need to identify such businesses and look to expand them. The plans also seek to identify businesses to sell or liquidate as well as businesses that should be allowed to run down. Strategic planning involves capital budgeting...

Options For Shortterm Financing

Suppose that Dynamic can borrow up to 40 million from the bank at an interest cost of 8 percent per year or 2 percent per quarter. Dynamic can also raise capital by putting off paying its bills and thus increasing its accounts payable. In effect, this is taking a 6 Maybe people buy more mattresses late in the year when the nights are longer. loan from its suppliers. The financial manager believes that Dynamic can defer the following amounts in each quarter Quarter First Second Third Fourth...

Leverage Ratios

When a firm borrows money, it promises to make a series of interest payments and then to repay the amount that it has borrowed. If profits rise, the debtholders continue to receive a fixed interest payment, so that all the gains go to the shareholders. Of course, the reverse happens if profits fall. In this case shareholders bear all the pain. If times are sufficiently hard, a firm that has borrowed heavily may not be able to pay its debts. The firm is then bankrupt and shareholders lose their...

Do Managers Really Maximize Firm Value

Owner-managers have no conflicts of interest in their management of the business. They work for themselves, reaping the rewards of good work and suffering the penalties of bad work. Their personal well-being is tied to the value of the firm. In most large companies the managers are not the owners and they might be tempted to act in ways that are not in the best interests of the owners. For example, they might buy luxurious corporate jets for their travel, or overindulge in expense-account...

Susan Webb Research Analyst Mutual Fund Group

After majoring in biochemistry, I joined the research department of a large mutual fund group. Because of my background, I was assigned to work with the senior pharmaceuticals analyst. I start the day by reading the Wall Street Journal and reviewing the analyses that come in each day from stockbroking firms. Sometimes we need to revise our earnings forecasts and meet with the portfolio managers to discuss possible trades. The remainder of my day is spent mainly in analyzing companies and...

Short-term Planning. Paymore Products Places Orders For Goods Equal To 75 Percent Of Its Sales Forecast In The Next

Why do firms need to invest in net working capital Short-term financial planning is concerned with the management of the firm's short-term, or current, assets and liabilities. The most important current assets are cash, marketable securities, inventory, and accounts receivable. The most important current liabilities are bank loans and accounts payable. The difference between current assets and current liabilities is called net working capital. Net working capital arises from lags between the...

How can stock valuation formulas be used to infer the expected rate of return on a common stock

The present value of a share is equal to the stream of expected dividends per share up to some horizon date plus the expected price at this date, all discounted at the return that investors require. If the horizon date is far away, we simply say that stock price equals the present value of all future dividends per share. This is the dividend discount model. If dividends are expected to grow forever at a constant rate g, then the expected return on the stock is equal to the dividend yield DIV1...

Example 16 The Effective Interest Rates on Bank Accounts

Back in the 1960s and 1970s federal regulation limited the APR interest rates banks could pay on savings accounts. Banks were hungry for depositors, and they searched for ways to increase the effective rate of interest that could be paid within the rules. Their solution was to keep the same APR but to calculate the interest on deposits more frequently. As interest is calculated at shorter and shorter intervals, less time passes before interest can be earned on interest. Therefore, the effective...

Reading The Financial Pages

The prices at which you can buy and sell bonds are shown each day in the financial press. Figure 3.2 is an excerpt from the bond quotation page of The Wall Street Journal and shows the prices of bonds and notes that have been issued by the United States Treasury. A note is just a bond with a maturity of less than 10 years at the time it is issued. The entry for the 6 percent bond maturing in July 2002 that we just looked at is highlighted. The letter n indicates that it is a note. Prices are...

Yield To Maturity Versus Current Yield

Suppose you are considering the purchase of a 3-year bond with a coupon rate of 10 percent. Your investment adviser quotes a price for the bond. How do you calculate the rate of return the bond offers For bonds priced at face value the answer is easy. The rate of return is the coupon rate. We can check this by setting out the cash flows on your investment Cash Paid to You in Year You Pay 12 3 Rate of Return Notice that in each year you earn 10 percent on your money 100 1,000 . In the final year...

What are the usual steps in credit management

The first step in credit management is to set normal terms of sale. This means that you must decide the length of the payment period and the size of any cash discounts. In most industries these conditions are standardized. Your second step is to decide the form of the contract with your customer. Most domestic sales are made on open account. In this case the only evidence that the customer owes you money is the entry in your ledger and a receipt signed by the customer. Sometimes, you may...

Terms of Sale

Whenever you sell goods, you need to set the terms of sale. For example, if you are supplying goods to a wide variety of irregular customers, you may require cash on delivery COD . And if you are producing goods to the customer's specification or incurring heavy delivery costs, then it may be sensible to ask for cash before delivery CBD . Some contracts provide for progress payments as work is carried out. For example, a large consulting contract might call for 30 percent payment after...

Challenge 17 Problems

Galenic has recently commissioned a detailed statistical study of the payment record of its customers over the past 8 years and, after considerable experimentation, has identified five variables that could form the basis of a new credit scoring system. On the evidence of the past 8 years, Galenic calculates that for every 10,000 accounts it would have experienced the following default rates By refusing credit to firms with a poor credit score worse than 80 Galenic calculates that it would...

The Credit Decision

Standards set to determine the amount and nature of credit to extend to customers. You have taken the first three steps toward an effective credit operation. In other words, you have fixed your terms of sale you have decided whether to sell on open account or to ask your customers to sign an IOU and you have established a procedure for estimating the probability that each customer will pay up. Your next step is to decide on credit policy. If there is no possibility of repeat orders, the credit...

Credit Decisions With Repeat Orders

What effect does the possibility of repeat orders have on your credit decision One of the reasons for offering credit today is that you may get yourself a good, regular customer. Cast Iron has been asked to extend credit to a new customer. You can find little information on the firm and you believe that the probability of payment is no better than .8. If you grant credit, the expected profit on this order is Expected profit on initial order p x PV REV - COST - 1 -p x PV COST This is the correct...

Suppose That The Rate Of Interest Increases From 4 To 8 Percent Per Year. Would Firms Cash Balances Go Up Or Down

What is float and why can it be valuable The cash shown in the company ledger is not the same as the available balance in its bank account. When you write a check, it takes time before your bank balance is adjusted downward. This is payment float. During this time the available balance will be larger than the ledger balance. When you deposit a check, there is a delay before it gets credited to your bank account. In this case the available balance will be smaller than the ledger balance. This is...

The Statement of Cash Flows

The firm requires cash when it buys new plant and machinery or when it pays interest to the bank and dividends to the shareholders. Therefore, the financial manager needs to keep track of the cash that is coming in and going out. STATEMENT OF CASH FLOWS Financial statement that shows the firm's cash receipts and cash payments over a period of time. We have seen that the firm's cash flow can be quite different from its net income. These differences can arise for at least two reasons 1. The...

Original values Market values measure current values of assets and liabilities

The difference between book value and market value is likely to be greatest for shareholders' equity. The book value of equity measures the cash that shareholders have contributed in the past plus the cash that the company has retained and reinvested in the business on their behalf. But this often bears little resemblance to the total market value that investors place on the shares. If the market price of the firm's shares falls through the floor, don't try telling the shareholders that the...

What are some potential pitfalls of ratio analysis based on accounting data

Interest Rate Long Terms Chat

Financial ratio analysis will rarely be useful if practiced mechanically. lt requires a large dose of good judgment. Financial ratios seldom provide answers but they do help you ask the right questions. Moreover, accounting data do not necessarily reflect market values properly, and so must be used with caution. You need a benchmark for assessing a company's financial position. Therefore, we typically compare financial ratios with the company's ratios in earlier years and with the ratios of...

Three Requirements For Effective Planning

The firm will never have perfectly accurate forecasts. If it did, there would be less need for planning. Still, managers must strive for the best forecasts possible. Forecasting should not be reduced to a mechanical exercise. Naive extrapolation or fitting trends to past data is of limited value. Planning is needed because the future is not likely to resemble the past. Contingency Planning at Georgia Power Company The oil price hikes in 1973-1974 and 1979 caused consternation in...

What are the essential features of the taxation of corporate and personal income

For large companies the marginal rate of tax on income is 35 percent. In calculating taxable income the company deducts an allowance for depreciation and interest payments. It cannot deduct dividend payments to the shareholders. Individuals are also taxed on their income, which includes dividends and interest on their investments. Capital gains are taxed, but only when the investment is sold and the gain realized. RELATED Web www.ibm.com investor FinancialGuide Guide to understanding financial...

Effective Annual Interest Rates

Interest rate that is annualized using compound interest. ANNUAL PERCENTAGE RATE APR Interest rate that is annualized using simple interest. Thus far we have used annual interest rates to value a series of annual cash flows. But interest rates may be quoted for days, months, years, or any convenient interval. How should we compare rates when they are quoted for different periods, such as monthly versus annually Consider your credit card. Suppose you have to pay interest on any unpaid balances...

Future value of 100 100 x 1 r

Future Value

Notice in our example that your interest income in the first year is 6 6 percent of 100 , and in the second year it is 6.36 6 percent of 106 . Your income in the second year is higher because you now earn interest on both the original 100 investment and the 6 of interest earned in the previous year. Earning interest on interest is called compounding or compound interest. In contrast, if the bank calculated the interest only on your original investment, you would be paid simple interest. Table...

What are the advantages and disadvantages of the most common forms of business organization Which forms are most

Businesses may be organized as proprietorships, partnerships, or corporations. A corporation is legally distinct from its owners. Therefore, the shareholders who own a corporation enjoy limited liability for its obligations. Ownership and management of corporations are usually separate, which means that the firm's operations need not be disrupted by changes in ownership. On the other hand, corporations are subject to double taxation. Larger companies, for which the separation of ownership and...

Table 111

Financial statements of Executive Cheese Company for past year Planning model in which sales forecasts are the driving variables and most other variables are proportional to sales. Variable that adjusts to maintain the consistency of a financial plan. Also called plug. Suppose that Executive Cheese has prepared the simple balance sheet and income statement shown in Table 1.10. The firm's financial planners forecast that total sales next year will increase by 10 percent from this year's level....

Ethics And Management Objectives

We have suggested that managers should try to maximize market value. But some idealists say that managers should not be obliged to act in the selfish interests of their stockholders. Some realists argue that, regardless of what managers ought to do, they in fact look after themselves rather than their shareholders. Let us respond to the idealists first. Does a focus on value mean that managers must act as greedy mercenaries riding roughshod over the weak and helpless Most of this book is...

You should never compare cash flows occurring at different times without first discounting them to a common date By

SEE BOX The importance of discounting is highlighted in the nearby box, which examines the value of an extension of Eurotunnel's operating franchise from 65 to 999 years. While such an extension sounds as if it would be extremely valuable, the article and its accompanying diagram points out that profits 65 years or more from now have negligible present value. An Introduction to Financial Calculators Financial calculators are designed with present value and future value formulas already...

Hybrid Forms Of Business Organization

Businesses do not always fit into these neat categories. Some are hybrids of the three basic types proprietorships, partnerships, and corporations. For example, businesses can be set up as limited partnerships. In this case, partners are classified as general or limited. General partners manage the business and have unlimited personal liability for the business's debts. Limited partners, however, are liable only for the money they contribute to the business. They can lose everything they put...

Using Discounted Cash Flow Analysis to Make Investment Decisions 377

Discount Cash Flows, Not Profits 379 Recognize the Investment in Working Capital 383 Beware of Allocated Overhead Costs 384 Discount Nominal Cash Flows by the Nominal Cost of Capital 385 Separate Investment and Financing Decisions 386 Capital Investment 387 Investment in Working Capital 387 Cash Flow from Operations 388 Calculating Blooper's Project Cash Flows 391 Calculating the NPV of Blooper's Project 392 Further Notes and Wrinkles Arising from Blooper's Project 393 Related Web Links 398 Key...