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picture1_Capital Budgeting 75387 | Module 6 1 1ysw90x


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File: Capital Budgeting 75387 | Module 6 1 1ysw90x
where do we stand earlier chapters on capital budgeting focused on the appropriate size and timing of cash flows this chapter discusses the appropriate discount rate when cash flows are ...

icon picture PPTX Filetype Power Point PPTX | Posted on 02 Sep 2022 | 3 years ago
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    Where Do We Stand?
     Earlier chapters on capital budgeting 
       focused on the appropriate size and 
       timing of cash flows.
     This chapter discusses the appropriate 
       discount rate when cash flows are risky.
     Will also now be employing our CAPM 
       tools as well.
                                                          13-2
     13.1 The Cost of Equity Capital
                                                                    Shareholder 
               Firm with                                              invests in 
              excess cash          Pay cash dividend                  financial 
                                                                         asset
                     A firm with excess cash can either pay a 
                      dividend or make a capital investment
                                        Shareholder’s 
               Invest in project           Terminal 
                                             Value
        Because stockholders can reinvest the dividend in risky financial assets, 
        the expected return on a capital-budgeting project should be at least as 
        great as the expected return on a financial asset of comparable risk.             13-3
     The Cost of Equity Capital
         From the firm’s perspective, the expected 
            return is the Cost of Equity Capital:
                          Rs RF β(RM  RF)
        • To estimate a firm’s cost of equity capital, we need 
           to know three things:
             1.  The risk-free rate, R
                                      F
             2.  The market risk premium, RM  RF
                                            Cov(R,R )          σi,M
             3.  The company beta, β               i   M 
                                        i     Var(R )          σ2
                                                      M          M
                                                                            13-4
    Example
       Suppose the stock of Stansfield Enterprises, a 
         publisher of PowerPoint presentations, has a beta 
         of 1.5. The firm is 100% equity financed. 
       Assume a risk-free rate of 3% and a market risk 
         premium of 7%.
       What is the appropriate discount rate for an 
         expansion of this firm?
                     Rs RF β(RM  RF)
                      Rs 3%1.57%
                           Rs 13.5%                           13-5
     Example
           Suppose Stansfield Enterprises is evaluating the following 
           independent projects. Each costs $100 and lasts one year.
           Project   Project b   Project’s         IRR        NPV at 
                                 Estimated Cash               13.5%
                                 Flows Next 
                                 Year
           A         1.5         $125              25%        $10.13
           B         1.5         $113.5            13.5%      $0
           C         1.5         $105              5%         -$7.49
                                                                            13-6
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...Where do we stand earlier chapters on capital budgeting focused the appropriate size and timing of cash flows this chapter discusses discount rate when are risky will also now be employing our capm tools as well cost equity shareholder firm with invests in excess pay dividend financial asset a can either or make investment s invest project terminal value because stockholders reinvest assets expected return should at least great comparable risk from perspective is rs rf rm to estimate need know three things free r f market premium cov i m company beta var example suppose stock stansfield enterprises publisher powerpoint presentations has financed assume what for an expansion evaluating following independent projects each costs lasts one year b irr npv estimated next c...

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