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by: Mrs. Oleta Okuneva


Mrs. Oleta Okuneva
GPA 3.74

Stanmore Marshall

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Stanmore Marshall
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This 2 page Study Guide was uploaded by Mrs. Oleta Okuneva on Saturday September 26, 2015. The Study Guide belongs to COB 300B at James Madison University taught by Stanmore Marshall in Fall. Since its upload, it has received 40 views. For similar materials see /class/214043/cob-300b-james-madison-university in College of Business at James Madison University.

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Date Created: 09/26/15
Dr Marshall Finance COB 300 Test 3 Study Guide Finance Test 3 SG Chapter 4 Future Value compounds all future cash ows and outputs the future amount Present Value discounts all future cash ows to arrive at the amount you would pay for the future cash ows today given a certain IRR Perpetuity annuity with an infinite life never stops paying out Future Value of a Mixed Stream Annuity Get the NPV then put in your N 0 PMT and hit FV Nominal Rate of Interest The rate of interest agreed upon contractually charged by a lender or promised by a borrower Annual Percentage Rate APR periodic rate X number of periods nominal rate of interest Chapter 8 CAPEX outlay of funds expected to produce benefits over a time period greater than 1 yr Operating Expenditure outlay resulting in benefits received over 1 yr Motives for adding fixed assets are Expansion most common replacement renewal Independent Projects cash ows are unrelated or independent the acceptance of one does not rule out another Mutually Exclusive have the same function and compete with one another Capital Rationing fixed number of dollars that all projects must compete for Conventional Cash Flow Pattern initial out ow followed by a series of in ows Nonconventional Cash Flow Pattern initial out ow is followed by a series of in owsout ows Relevant Cash Flows the incremental cash in owsout ows that result from CAPEX that must be determined to evaluate an investment Cash Flow Components of Conventional Pattern Project 1 Initial Investment 2 Operating Cash in ows 3 Terminal cash ows aftertax nonoperating cash ow occurring in the final period of the project most likely from liquidation of the assets Not involved in every investment Sunk Costs cash outlays that have already been made and have no effect on cash ows relevant to the current decision Determining Initial Investment Installed new cost of Asset Price Installation 7After Tax Proceeds from Sale of old Asset Sale price Book value tax adjustments Chan e in Net Workin Ca ital Generall CA increase more than CL creatin an initial out ow Initial Investm ent Operating Cash Inflows EBIT 7 Depreciation 7 Taxes NOPAT Depreciation Incremental Relevant OC In ows replacement The proposed Machine in ows 7 the present machine in ows Terminal Cash Flow Replacement Projects Aftertax Proceeds from new asset sa e 7 After tax proceeds old asset sale Change in net working capital same as initial investment Terminal Cash Flow Chapter 9 Net Present Value present value of cash ows 7 initial investment NP gt 0 Accept lt reject IIR the discount rate that equates to a NPV of 0 Compound rate of return that the firm will earn if it receives the cash in ows from the outlayed project IRR gt Cost of Capital accept project NPV assumes intermediate cash ows are reinvested at the cost of capital39 IRR assumes they are reinvested at the projects return rate Projects with high early year cash in ows prefer high discount rates because the money is worth more the earlier it comes in Projects with low early cash in ows prefer low discount rate because the money is discounted less early on before larger cash ows begin comin in NPV has stronger theoretical roots because it takes the conservative approach of reinvesting at the cost of capital IR is more commonly used because people like rates of return because they are so common Cha ter 10 Risk and Cash in ow the likelihood a project will actual produce projected cash in ows to be an acceptable project given considerations such as costs revenues tax rates labor rates etc Scenan0 Analysis uses multiple outcome analysis Good normal bad tighter the ranges the less risk Simulaii0n39 Monte Carlo repeat to get a distribution Dr Marshall Finance COB 300 Test1 Study Guide Chapter 2 Benchmarking comparing your nancial ratios to competitors to get an idea of how well you are doing A rms net pro t after taxes is EBIT 7 Interest and taxes but before preferred dividends A rms EPS is EBIT 7 Interest taxes and preferred dividends avg C Stock RE on the balance sheet is representative of all the money reinvested into the company and not given out to shareholders since inception REs are not cash they ve been utilized to nance the rm Balance sheet is a summary of a rm s nancial position at a given point in time Chapter 3 MACRS gov t mandated depreciation method for tax purposes Full cost installation cost is depreciated with no adjustment for salvage value Depreciable life shorter more cash ow created by right off Shorter is preferred Firm must be pro table for this to matter Tax depreciation methods are relevant to cash ows A decrease in any asset including cash is an in ow of cash An increase in any liability is an outflow Depreciation because of its shielding effect from taxes is considered a cash in ow The nance de nition of OCF excludes interest as an operating cash ow the accounting de nition includes it 2 key aspects of nancial planning Cash planning develop cash budget Pro t planning develop pro forma Longterm to more short term plans Cash budget states the rm s planned in ows and outflows of cash to predict borrowing needs Sales forecast is the most important part of shortterm nancial planning Depreciation and other noncash charges are not included in the cash budget The net investment in xed asset investment is de ned as the change in net xed assets plus depreciation expense Shortrun outputs are the proforma nancial statement incomeBalance sheet cash budget Sales forecast then production plans proforma income statement which leads to the cash budget Longterm nancing plan xed asset outlay plan current period balance sheet proforma balance s eet LT nancing plan xed asset outlay plan cash budget The easiest component of the cash budget to estimate is cash disbursements A projected excess cash budget at the end of the month maybe invested in shortterm securities OCF take out depreciation as an op expense take out taxes and then add back depreciation If you end up with excess cash you invest it in marketable securities if you end up with a shortage you take on debt You should never have both at the same time Pro t planning relies on accrual concepts to project the rms pro t and overall nancial position Proforma statements need two inputs nancial statements for the preceding year and sales forecasts Chapter 11 Longterm nancing supports the rm s xedasset investments otation costs costs incurred through the issuance of public debt or equity Underwriting costs and legal costs all increase the cost of debt by reducing the amount of nancing actually received LT debt is typically the cheapest because of its tax deductibility Page 512 the cost of preferred stock Common stock equity RE earnings and c stock two sources of equity nancing are C stock and Preferred stock Keep s as whole numbers when calculating CAPM The cost of REs is the same as the cost of common equity because the market expects that if REs is not going to be paid out in dividends then they should only keep it if they can get a comparable return to the cost of common equity Companies issue new c stock under the market price because of dilution and market equilibrium factors WACC convert weights to decimal leave costs as whole percentages Common stock equity RE cost New common stock Cost hierarchy Debt Preferred RE New common stock Market value weights for WACC are preferred over book value weights because they closely approximate the actual dollars to be received from sale Book value weights accounting measure


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