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10 Cards in this Set
- Front
- Back
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The most expensive source of capital is...
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New common stock due to flotation costs
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NPV/IRR decision for mutually exclusive projects
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Choose project with greater NPV
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IRR
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rate of return that equates present value of projects estimated cash inflows with the PV of project costs. Rate of return in which NPV of project is 0.
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Net Cash flow
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=NI + depreciation = return on capital + return of capital
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Operating Cash flows
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=(Revenue - cost)(1-t) + (depreciation x t)
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Changes in net working capital (NWC)
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Included in initial outlay and returned in terminal year cash flow
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Equivalent annual annuity
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Used to equate separate projects with different lives. Find PV of each CF separately, then use PV to calculate PMT. Choose project with greatest PMT.
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SML (Security market line)
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=RFR + B(Er-RFR) Same equation as CAPM
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Pure Play method
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Company would look for other companies with similar product lines to the one being considered. An average of all betas is used to estimate the projects cost of capital
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Accounting beta method
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Regression of a company's (or projects) accounting ROA against ROA for a market proxy (ie S&P 500). Slope coefficent is called the accounting beta
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