Maximizing Firm Value Through Investment Analysis

Chapter 8- NPV

Opportunity Cost of Capital: expected rate of return given up by investing in a project

Net Present Value: Present value of cash flows minus initial investment--> difference between value and cost.-->reflects time value of money

Risky dollar worth less than safe one

Capital Budgeting Decision: is concerned with finding out investments that maximize value of the firm

IRR: the discount rate at which project NPV = 0 --> accept project if IRR is greater than opportunity cost of capital

Payback Period- time until sum of project cash flows equals the initial investment--> accept if payback period is less than some specified number of years

Discounted Payback Period - Accept project if discounted payback period is less than some specified number of years

Chapter 9- Using Discounted Flow Analysis

Net Working Capital : current assets - current liabilities

Investments in working capital, just like investments in plant and equipment result in cash outflows

A project may OR MAY NOT generate extra overhead costs, Be cautious about assuming accountants allocation of overhead costs represents the incremental cash flow that would be incurred by accepting the project.

You cannot mix and match real and nominal quantities. Real cash flows must be discounted at real discount rate

Operating Cash Flow= revenues- costs-taxes

= revenues- cash expenses - taxes

= after-tax profit + depreciation

Depreciation Tax Shield (reduction in taxes attributable to the depreciation allowance) = depreciation x tax rate

Capital Cost Allowance (CCA): the amount of write-off on depreciable assets allowed by CRA against taxable income

Undepreciated Capital Cost (UCC): the balance remaining in an asset class that has not yet been depreciated that year

CCA tax shield : Tax savings arising from the capital cost allowance charge

Terminal Loss: the positive balance following the disposal of all assets in the class. The UCC of the asset class is set to zero after a terminal loss is recorded

Recaptured Depreciation: the negative balance that is caused in an asset class by the sale of an asset. Recaptured depreciation is added to taxable income

Chapter 14- Introduction to Corporate Governance

Issued Shares - Shares that have been issued by the company

Outstanding Shares- Shares that have been issued by the company and are held by investors

Par Value- value of security shown on certificate

Retained Earnings - Earnings not paid out as dividends

Book value is a backward-looking measure. It tells us how much capital the firm has raised from shareholders in the past. It does not measure the value that investors put on those shares today

Majority Voting: voting system in which each director is voted on separately

Cumulative Voting : voting system in which all the votes one shareholder is allowed to can be cast for one candidate for the board of directors

Proxy Contest: takeover attempt in which outsiders compete with management for shareholders' votes.

Preferred Stock : stock that takes priority over common stock in regard to dividends

Net Worth: Book value of common shareholders' equity plus preferred stock

Floating-rate preferred: Preferred stock paying dividends that vary with short-term interest rates

Prime rate: benchmark interest rate charged by banks