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G202 Exam 2 Review

by: Victoria Carr

G202 Exam 2 Review BUS-G202

Marketplace > Indiana University > Business > BUS-G202 > G202 Exam 2 Review
Victoria Carr
GPA 3.2
Corporate Social Strategy

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Corporate Social Strategy
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This 4 page Study Guide was uploaded by Victoria Carr on Monday January 19, 2015. The Study Guide belongs to BUS-G202 at Indiana University taught by Kreft in Fall. Since its upload, it has received 410 views. For similar materials see Corporate Social Strategy in Business at Indiana University.


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Date Created: 01/19/15
F305 Exam 1 Review Time Value of Money Dollar received today is worth more than a dollar in a year This is why we discount future cash ows when calculating a PV Perpetuity stream of level cash payments that NEVER ends Annuity stream of level cash payments for a certain number of periods Growing Perpetuity and Annuity the cash ows will grow at a constant rate throughout time 0 Different formulas for these types 0 Important that the growth rate lt discount rate but anything else is rare to happen Due Cash Flow will start today instead of in 1 period Delayed Either Annuity or Perpetuity will start later than the usual 1 period from today In ation rate of increase in the price of a basket of goods CPI A part of the discount rate matters because it reduces the real valuequot of money reduces the purchasing power of money 0 Nominal vs Real Rate 0 Nominal stated rate of interest 0 Real interest rate that is actually given while accounting for in ation Use Fisher Equation to convert between nominal and real interest 1 Tnominal 1In f lation Rate CPI at end of year CPI at start 0 f year Fishers Equation 1 rReal 1 Inflation Rate Important to be consistent with using nominal and interest or Real or interest Free Cash Flow cash ow from continuing operations NOT the same as the accounting view of cash ow Doesn t relate to financing or investments Calculating Net Income Sales COGS Depr SGampA Interest Expense Taxes Net Income 0 Net Income is different from FCF F305 Exam 1 Review Adjustments to Net Income for FCF Indirect Method starts with Net Income and adjust for non cash Net Income Non cash charges Depreciation Amortization Operating Adjustment Operating Adjustment 7 Increase in NWC EXCLUDING Cash NIP or ST borrowing Account Receivable Inventories Other current assets Account Payable 2 Net investment in Property Plant 8 Equipment PPampE Aftertax portion of interest expense Aftertax portion of interest income Free Cash Flow Operating Adjustment Financial Adjustment If you struggle to remember whether to add or subtract 9 think of the effect it has on Accounts Receivable Depreciation add back in because it is a non cash expense 0 When you add it back in the tax shield is accounted for so there is an effect on FCF from depreciation I This tax shield is accounted for because it is an investment in Operations 0 ACRS Depreciation accelerated depreciation this is the method most commonly used in the real world Calculating Increase in NWC Current Assets Current Liabilities 0 Current Assets Cash Inventory Accounts Receivable Other Current Assets 0 Current Liabilities Accounts Payable Notes Payable Short Term Borrowing Other Current Liabilities o Subtract for credit sales or purchases that have not had been collected in cash or investments that have not been expenses 0 END of project assume the investment will be recovered in part or in whole Net Investment in PPE account for because adding or selling assets has an effect on your cash ow Interest Expense and Income add back the after tax effect because it is a financing aspect and we only want to handle operating effects in FCF F305 Exam 1 Review Direct Method begins with cash sales and works in cash charges from Income Statement 0 Why do we do each of these adjustments Using Free Cash Flows 0 Used to pay security holders debt stockholders o FCF gt O Operations are generating more cash than is required and either pay out to stockholders or build cash balance I Shows the balance between investment and financing choices the company makes 0 FCF using Balance Sheet and Income Statement 0 Balance Sheet Accounts Receivable Inventory Net Fixed Assets Accounts Payable Other Current Liabilities 0 Income Statement Interest Expense Net Income Marginal Tax Rate and Depreciation Capital Budgeting Incremental Cash Flows o Sunk costs costs that have already occurred and can t be removed so they should not be factored into project 0 Opportunity costs the cost for the next best thing that you would use the asset for if the project did not go through 0 Side Effects a project could have an effect I Positive new project will increase sales of existing projects I Negative Erosion customers will switch products so it should be treated as a cost of the new project I Side Effects change in sales should be accounted for in sales 0 Indirect Effects 0 Single Project 0 Mutually Exclusive Project 0 Chose the project with the HIGHER NPV because that means more value added to the firm Setting BidPrice 0 Want to set the lowest bid price while still adding value to the firm I Lowest possible bid is where NPV 0 1 Find what we know and what we want to know 2 Compute OCF that sets NPV O 3 Work from OCF back to the unit sale price 4 Unit sale price found is the minimum price we can bid for Equipment with Different Lives 0 Calculate the NPV of each piece equipment and than calculate EAC 0 Compare the projects based on an annual basis using the cash ows I Equivalent Annual Cost EAC F305 Exam 1 Review Use an annuity formula where the PV would be the NPV of the equipment You would take the smaller EAC I Equivalent Annual Value EAV negative sign You would Annualize NPV PVA 1 0 Project Analysis 0 Scenario Analysis Estimating NPV under different scenarios I Many assumptions changing 0 Sensitivity Analysis measures impact on NPV due to a change in one underlying parameter leaving all the other parameters constant 1 1 rn


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