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Flashcard 1438317677836

Tags

#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Question

Although Externalities are difficult [...], they should be considered.

Answer

to quantify

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Externalities are the effects of a project on cash flows in other parts of a firm. Although they are difficult to quantify, they should be considered. Externalities can be either positive or negative: Positive externalities create benefits for other parts of the firm. For

Original toplevel document

Subject 2. Basic Principles of Capital Budgeting
d in the estimated cash flows since the effects of debt financing are reflected in the cost of capital used to discount the cash flows. The existence of a project depends on business factors, not financing. Important capital budgeting concepts: A sunk cost is a cash outlay that has already been incurred and which cannot be recovered regardless of whether a project is accepted or rejected. Since sunk costs are not increment costs, they should not be included in the capital budgeting analysis. For example, a small bookstore is considering opening a coffee shop within its store, which will generate an annual net cash outflow of $10,000 from selling coffee. That is, the coffee shop will always be losing money. In the previous year, the bookstore spent $5,000 to hire a consultant to perform an analysis. This $5,000 consulting fee is a sunk cost; whether the coffee shop is opened or not, the $5,000 is spent. Incremental cash flow is the net cash flow attributable to an investment project. It represents the change in the firm's total cash flow that occurs as a direct result of accepting the project. Forget sunk costs. Subtract opportunity costs. Consider side effects on other parts of the firm: externalities and cannibalization. Recognize the investment and recovery of net working capital. Opportunity cost is the return on the best alternative use of an asset or the highest return that will not be earned if funds are invested in a particular project. For example, to continue with the bookstore example, the space to be occupied by the coffee shop is an opportunity cost - it could be used to sell books and generate a $5,000 annual net cash inflow. Externalities are the effects of a project on cash flows in other parts of a firm. Although they are difficult to quantify, they should be considered. Externalities can be either positive or negative: Positive externalities create benefits for other parts of the firm. For example, the coffee shop may generate some additional customers for the bookstore (who otherwise may not buy books there). Future cash flows generated by positive externalities occur with the project and do not occur without the project, so they are incremental. Negative externalities create costs for other parts of the firm. For example, if the bookstore is considering opening a branch two blocks away, some customers who buy books at the old store will switch to the new branch. The customers lost by the old store are a negative externality. The primary type of negative externality is cannibalization, which occurs when the introduction of a new product causes sales of existing products to decline. Future cash flows represented by negative externalities occur regardless of the project, so they are non-incremental. Such cash flows represent a transfer from existing projects to new projects, and thus should be subtracted from the new projects' cash flows. Conventional versus non-conventional cash flows. A conventional cash flow pattern is one with an initial outflow followed by a series of inflows. In a non-conventional cash flow pattern, the initial outflow can be followed by inflows and/or outflows. Some project interactions: Indepe

Flashcard 1438446914828

Tags

#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Question

The decision about which projects to undertake in the future will depend purely on estimates of [...] This is a forward-looking exercise.

Answer

each project's NPV.

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Independent versus mutually exclusive projects. Mutually exclusive projects are investments that compete in some way for a company's resources - a firm can select one or another but not both. Independent projects, on the other hand, do not compete for the firm's resources. A company can select one or the other or both, so long

Original toplevel document

Subject 2. Basic Principles of Capital Budgeting
In a non-conventional cash flow pattern, the initial outflow can be followed by inflows and/or outflows. Some project interactions: Independent versus mutually exclusive projects. Mutually exclusive projects are investments that compete in some way for a company's resources - a firm can select one or another but not both. Independent projects, on the other hand, do not compete for the firm's resources. A company can select one or the other or both, so long as minimum profitability thresholds are met. Project sequencing. How does one sequence multiple projects over time, since investing in project B may depend on the result of investing in project A? Unlimited funds versus capital rationing. Capital rationing occurs when management places a constraint on the size of the firm's capital budget during a particular period. In such situations, capital is scarce and should be allocated to the projects most likely to maximize the firm's aggregate NPV. The firm's capital budget and cost of capital must be determined simultaneously to best allocate the firm's capital. On the other hand, a firm can raise the funds it wants for all profitable projects simply by paying the required rate of return. Learning Outcome Statements b. describe the basic principles of capital budgeting; c. explain how the evaluat

Flashcard 1438555704588

Tags

#analyst-notes #cfa-level-1 #corporate-finance #introduction #reading-35-capital-budgeting

Question

In monitoring and post-auditing decision-makers can:

Improve forecasts (based on which good [...]).

Answer

capital budgeting decisions can be made

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he post-audit is a follow-up of capital budgeting decisions. It is a key element of capital budgeting. By comparing actual results with predicted results and then determining why differences occurred, decision-makers can: Improve forecasts (based on which good capital budgeting decisions can be made). Otherwise, you will have the GIGO (garbage in, garbage out) problem. Improve operations, thus making capital decisions well-implemented. <body><html>

Original toplevel document

Subject 1. Capital Budgeting: Introduction
include in the capital budget. "Capital" refers to long-term assets. The "budget" is a plan which details projected cash inflows and outflows during a future period. The typical steps in the capital budgeting process: Generating good investment ideas to consider. Analyzing individual proposals (forecasting cash flows, evaluating profitability, etc.). Planning the capital budget. How does the project fit within the company's overall strategies? What's the timeline and priority? Monitoring and post-auditing. The post-audit is a follow-up of capital budgeting decisions. It is a key element of capital budgeting. By comparing actual results with predicted results and then determining why differences occurred, decision-makers can: Improve forecasts (based on which good capital budgeting decisions can be made). Otherwise, you will have the GIGO (garbage in, garbage out) problem. Improve operations, thus making capital decisions well-implemented. Project classifications: Replacement projects. There are two types of replacement d

Flashcard 1438609181964

Tags

#30-dic-2016 #el-financiero #financial-times #noticias

Question

¿Marine Le Pen ganará la presidencia francesa?

Answer

No. Aunque la probabilidad no es cero

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¿Marine Le Pen ganará la presidencia francesa? ___No. Aunque la probabilidad no es cero, por supuesto. Una victoria de Le Pen sigue siendo improbable por una razón: ella está defendiendo un retorno al franco y, para un país de los ahorradores, eso es demasiado arriesgado.

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Predicciones mundiales para 2017
historia no son las tendencias estables sino los repentinos choques sísmicos, recibió una poderosa confirmación de su punto de vista en 2016. Así es que los lectores pudieran mirar estos pronósticos para 2017 con cierto desdén. 1. ¿Marine Le Pen ganará la presidencia francesa? ___No. Aunque la probabilidad no es cero, por supuesto. Una victoria de Le Pen sigue siendo improbable por una razón: ella está defendiendo un retorno al franco y, para un país de los ahorradores, eso es demasiado arriesgado. (Anne-Sylvaine Chassany) 2. ¿Ganará Angela Merkel la reelección en Alemania? ___Sí. La Sra. Merkel ganará las elecciones parlamentarias de otoño en Alemania, pero con menos asientos para

Flashcard 1438611541260

Tags

#30-dic-2016 #el-financiero #financial-times #noticias

Question

¿Permitirá China que su moneda se devalúe más del 10 por ciento?

Answer

__No.

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¿Permitirá China que su moneda se devalúe más del 10 por ciento? ___No. Las presiones están aumentando para que el renminbi se deprecie frente al dólar estadounidense después de deslizarse en más del 6 por ciento durante 2016. El capital está saliendo de Ch

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Predicciones mundiales para 2017
internacionales. El Estado Islámico puede contar con los poderes externos para actuar como reclutadores: los regímenes respaldados por los chiitas en Damasco, Bagdad y Beirut mantendrán a los sunitas alienados. (David Gardner) 7. ¿Permitirá China que su moneda se devalúe más del 10 por ciento? ___No. Las presiones están aumentando para que el renminbi se deprecie frente al dólar estadounidense después de deslizarse en más del 6 por ciento durante 2016. El capital está saliendo de China, el mercado inmobiliario se está enfriando rápidamente y las tasas de interés de los dólares estadounidenses pueden subir de nuevo. Y, sin embargo, el renminbi apenas se depreciará en lo absoluto. (James Kynge) 8. ¿Incumplirá Venezuela su deuda? ___No. Un incumplimiento resultaría en que los acreedores se apoderaran de los cargamentos de petróleo, poniendo así fin a la a

Flashcard 1438613900556

Tags

#30-dic-2016 #el-financiero #financial-times #noticias

Question

¿La tasa de interés de los fondos federales será superior al 1.5 por ciento a finales de 2017?

Answer

No. La respuesta depende de si el plan fiscal de Donald Trump puede lograr el crecimiento prometido del 3-4 por ciento.

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¿La tasa de interés de los fondos federales será superior al 1.5 por ciento a finales de 2017? No. La respuesta depende de si el plan fiscal de Donald Trump puede lograr el crecimiento prometido del 3-4 por ciento. La Reserva Federal de EU proporcionará los tres incrementos que ha pronosticado, elevando la tasa al 1.5 por ciento, pero no necesitará elevarla más. (Michael MacKenzie)</

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Predicciones mundiales para 2017
leo, poniendo así fin a la afluencia de petrodólares y, por lo tanto, al ‘mecenazgo’ que le compra al gobierno corrupto su apoyo. Por lo tanto, la voluntad de Caracas de pagar sus deudas nunca está en duda. (John Paul Rathbone) 9. ¿La tasa de interés de los fondos federales será superior al 1.5 por ciento a finales de 2017? No. La respuesta depende de si el plan fiscal de Donald Trump puede lograr el crecimiento prometido del 3-4 por ciento. La Reserva Federal de EU proporcionará los tres incrementos que ha pronosticado, elevando la tasa al 1.5 por ciento, pero no necesitará elevarla más. (Michael MacKenzie) 10. ¿Finalizará el índice S&P 500 el año por encima de 2300 (aproximadamente su nivel actual)? ___No. Los inversionistas orientados hacia la valoración han sid

Flashcard 1438616259852

Tags

#3-ene-2017 #el-financiero #noticias

Question

Los principales bancos centrales en el mundo están dejando de [...] y algunos ya iniciaron las alzas en su tasa de referencia, como es el caso de la Reserva Federal de Estados Unidos.

Answer

inyectar liquidez

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Los principales bancos centrales en el mundo están dejando de inyectar liquidez y algunos ya iniciaron las alzas en su tasa de referencia, como es el caso de la Reserva Federal de Estados Unidos.

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Deuda externa de México frena su crecimiento
exterior fue posible debido a la fuerte liquidez y a las bajas tasas de interés que se presentaron después de la pasada crisis mundial, cuya parte más álgida se alcanzó a finales del 2008. Sin embargo, lo vientos están cambiando. Los principales bancos centrales en el mundo están dejando de inyectar liquidez y algunos ya iniciaron las alzas en su tasa de referencia, como es el caso de la Reserva Federal de Estados Unidos. EL MENSAJE DE LAS CALIFICADORAS El freno al crecimiento de la deuda del exterior en México reportado a finales del 2016, resulta una buena señal dado que ha sido uno de

Article 1438617832716

1. INTRODUCTION
#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Capital budgeting is the process that companies use for decision making on capital projects—those projects with a life of a year or more. This is a fundamental area of knowledge for financial analysts for many reasons. First, capital budgeting is very important for corporations. Capital projects, which make up the long-term asset portion of the balance sheet, can be so large that sound capital budgeting decisions ultimately decide the future of many corporations. Capital decisions cannot be reversed at a low cost, so mistakes are very costly. Indeed, the real capital investments of a company describe a company better than its working capital or capital structures, which are intangible and tend to be similar for many corporations. Second, the principles of capital budgeting have been adapted for many other corporate decisions, such as investments in working capital, leasing, mergers and acquisitions, and bond refunding. Third, the valuation principles used in capital budgetin

Flashcard 1438619143436

Tags

#vocabulary

Question

Sound

Capital projects can be so large that sound capital budgeting decisions decide the future of many corporations.

Answer

showing good judgment; able to be trusted:

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Annotation 1438620978444

#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Capital projects, which make up the long-term asset portion of the balance sheet, can be so large that sound capital budgeting decisions ultimately decide the future of many corporations.

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1. INTRODUCTION
cision making on capital projects—those projects with a life of a year or more. This is a fundamental area of knowledge for financial analysts for many reasons. First, capital budgeting is very important for corporations. Capital projects, which make up the long-term asset portion of the balance sheet, can be so large that sound capital budgeting decisions ultimately decide the future of many corporations. Capital decisions cannot be reversed at a low cost, so mistakes are very costly. Indeed, the real capital investments of a company describe a company better than its working capital or

Flashcard 1438622027020

Tags

#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Question

Capital projects make up [...] portion of the balance sheet.

Answer

the long-term asset

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Capital projects, which make up the long-term asset portion of the balance sheet, can be so large that sound capital budgeting decisions ultimately decide the future of many corporations.

Original toplevel document

Flashcard 1438624386316

Tags

#vocabulary

Question

Vantage

Answer

superiority in a contest

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Annotation 1438626221324

#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

although analysts have a vantage point outside the company, their interest in valuation coincides with the capital budgeting focus of maximizing shareholder value. Because capital budgeting information is not ordinarily available outside the company, the analyst may attempt to estimate the process, within reason, at least for companies that are not too complex. Further, analysts may be able to appraise the quality of the company’s capital budgeting process—for example, on the basis of whether the company has an accounting focus or an economic focus.

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1. INTRODUCTION
security analysts and portfolio managers are based on capital budgeting methods. Conversely, there have been innovations in security analysis and portfolio management that have also been adapted to capital budgeting. Finally, although analysts have a vantage point outside the company, their interest in valuation coincides with the capital budgeting focus of maximizing shareholder value. Because capital budgeting information is not ordinarily available outside the company, the analyst may attempt to estimate the process, within reason, at least for companies that are not too complex. Further, analysts may be able to appraise the quality of the company’s capital budgeting process—for example, on the basis of whether the company has an accounting focus or an economic focus. This reading is organized as follows: Section 2 presents the steps in a typical capital budgeting process. After introducing the basic principles of capital budgeti

Article 1438627794188

2. THE CAPITAL BUDGETING PROCESS
#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

The specific capital budgeting procedures that a manager uses depend on the manager’s level in the organization, the size and complexity of the project being evaluated, and the size of the organization. The typical steps in the capital budgeting process are as follows: Step One: Generating Ideas—Investment ideas can come from anywhere, from the top or the bottom of the organization, from any department or functional area, or from outside the company. Generating good investment ideas to consider is the most important step in the process. Step Two: Analyzing Individual Proposals—This step involves gathering the information to forecast cash flows for each project and then evaluating the project’s profitability. Step Three: Planning the Capital Budget—The company must organize the profitable proposals into a coordinated whole that fits within the company’s overall strategies, and it also must consider the projects’ timing. Some projects that look good when considered in isolatio

Annotation 1438629104908

#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

The specific capital budgeting procedures that a manager uses depend on the manager’s level in the organization, the size and complexity of the project being evaluated, and the size of the organization.

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2. THE CAPITAL BUDGETING PROCESS
The specific capital budgeting procedures that a manager uses depend on the manager’s level in the organization, the size and complexity of the project being evaluated, and the size of the organization. The typical steps in the capital budgeting process are as follows: Step One: Generating Ideas—Investment ideas can come from anywhere, from the top or the bottom of

Flashcard 1438632512780

Tags

#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Question

What is the most important step in the capital budgeting process?

Answer

Generating good investment ideas to consider

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2. THE CAPITAL BUDGETING PROCESS
al budgeting process are as follows: Step One: Generating Ideas—Investment ideas can come from anywhere, from the top or the bottom of the organization, from any department or functional area, or from outside the company. Generating good investment ideas to consider is the most important step in the process. Step Two: Analyzing Individual Proposals—This step involves gathering the information to forecast cash flows for each project and then evaluating the project’s profitabi

Flashcard 1438634872076

Tags

#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Question

This step involves gathering the information to forecast cash flows for each project and then evaluating the project’s profitability...

Answer

Analyzing Individual Proposals

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2. THE CAPITAL BUDGETING PROCESS
bottom of the organization, from any department or functional area, or from outside the company. Generating good investment ideas to consider is the most important step in the process. Step Two: Analyzing Individual Proposals—This step involves gathering the information to forecast cash flows for each project and then evaluating the project’s profitability. Step Three: Planning the Capital Budget—The company must organize the profitable proposals into a coordinated whole that fits within the company’s overall strategies, an

Annotation 1438637231372

Regulatory, safety, and environmental projects.

#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Regulatory, safety, and environmental projects are often required by a governmental agency, an insurance company, or some other external party.

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2. THE CAPITAL BUDGETING PROCESS
New products and services. These investments expose the company to even more uncertainties than expansion projects. These decisions are more complex and will involve more people in the decision-making process. Regulatory, safety, and environmental projects. These projects are frequently required by a governmental agency, an insurance company, or some other external party. They may generate no revenue and might not be undertaken by a company maximizing its own private interests. Often, the company will accept the required investment and continue to operate. Occasionally, however, the cost of the regulatory/safety/environmental project is sufficiently high that the company would do better to cease operating altogether or to shut down any part of the business that is related to the project. Other. The projects above are all susceptible to capital budgeting analysis, and they can be accepted or rejected using the net present value (NPV) or some other criteri

Article 1438638804236

3. BASIC PRINCIPLES OF CAPITAL BUDGETING
#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Capital budgeting has a rich history and sometimes employs some pretty sophisticated procedures. Fortunately, capital budgeting relies on just a few basic principles. Capital budgeting usually uses the following assumptions: Decisions are based on cash flows. The decisions are not based on accounting concepts, such as net income. Furthermore, intangible costs and benefits are often ignored because, if they are real, they should result in cash flows at some other time. Timing of cash flows is crucial. Analysts make an extraordinary effort to detail precisely when cash flows occur. Cash flows are based on opportunity costs. What are the incremental cash flows that occur with an investment compared to what they would have been without the investment? Cash flows are analyzed on an after-tax basis. Taxes must be fully reflected in all capital budgeting decisions. Financing costs are ignored. This may seem unrealistic, but it is not. Most of the time, analysts want to

Annotation 1438640114956

#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Cash flows are based on opportunity costs. What are the incremental cash flows that occur with an investment compared to what they would have been without the investment?

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
re often ignored because, if they are real, they should result in cash flows at some other time. Timing of cash flows is crucial. Analysts make an extraordinary effort to detail precisely when cash flows occur. Cash flows are based on opportunity costs. What are the incremental cash flows that occur with an investment compared to what they would have been without the investment? Cash flows are analyzed on an after-tax basis. Taxes must be fully reflected in all capital budgeting decisions. Financing costs are ignored. This may se

Annotation 1438641687820

#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

intangible costs and benefits are often ignored because, if they are real, they should result in cash flows at some other time.

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
ting relies on just a few basic principles. Capital budgeting usually uses the following assumptions: Decisions are based on cash flows. The decisions are not based on accounting concepts, such as net income. Furthermore, intangible costs and benefits are often ignored because, if they are real, they should result in cash flows at some other time. Timing of cash flows is crucial. Analysts make an extraordinary effort to detail precisely when cash flows occur. Cash flows are based on opportunity cos

Flashcard 1438643260684

Tags

#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Question

Taxes must be fully reflected in all [...]

Answer

capital budgeting decisions.

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
rtunity costs. What are the incremental cash flows that occur with an investment compared to what they would have been without the investment? Cash flows are analyzed on an after-tax basis. Taxes must be fully reflected in all capital budgeting decisions. Financing costs are ignored. This may seem unrealistic, but it is not. Most of the time, analysts want to know the after-tax operating cash flows that result from a capi

Annotation 1438645619980

#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Financing costs are reflected in the required rate of return

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
, analysts want to know the after-tax operating cash flows that result from a capital investment. Then, these after-tax cash flows and the investment outlays are discounted at the “required rate of return” to find the net present value (NPV). Financing costs are reflected in the required rate of return. If we included financing costs in the cash flows and in the discount rate, we would be double-counting the financing costs. So even though a project may be financed with some combinati

Flashcard 1438646668556

Tags

#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Question

[...] are reflected in the required rate of return

Answer

Financing costs

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Financing costs are reflected in the required rate of return

Original toplevel document

Flashcard 1438647717132

Tags

#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Question

Financing costs are reflected in the [...]

Answer

required rate of return

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Open it
Financing costs are reflected in the required rate of return

Original toplevel document

Annotation 1438649289996

#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

If we included financing costs in the cash flows and in the discount rate, we would be double-counting the financing costs.

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
t result from a capital investment. Then, these after-tax cash flows and the investment outlays are discounted at the “required rate of return” to find the net present value (NPV). Financing costs are reflected in the required rate of return. If we included financing costs in the cash flows and in the discount rate, we would be double-counting the financing costs. So even though a project may be financed with some combination of debt and equity, we ignore these costs, focusing on the operating cash flows and capturing the costs of debt (and other

Flashcard 1438650338572

Tags

#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Question

If we included financing costs in the cash flows we would be [...] the financing costs.

Answer

double-counting

cause thy're included in the discount rate,

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Open it
If we included financing costs in the cash flows and in the discount rate, we would be double-counting the financing costs.

Original toplevel document

Annotation 1438652697868

#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Accounting net income also differs from economic income, which is the cash inflow plus the change in the market value of the company.

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
as accounting depreciation. Furthermore, to reflect the cost of debt financing, interest expenses are also subtracted from accounting net income. (No subtraction is made for the cost of equity financing in arriving at accounting net income.) Accounting net income also differs from economic income, which is the cash inflow plus the change in the market value of the company. Economic income does not subtract the cost of debt financing, and it is based on the changes in the market value of the company, not changes in its book value (accounting depreciation

Flashcard 1438653746444

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Question

Accounting net income also differs from [...], which is the cash inflow plus the change in the market value of the company.

Answer

economic income

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Accounting net income also differs from economic income, which is the cash inflow plus the change in the market value of the company.

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Annotation 1438655319308

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Economic income does not subtract the cost of debt financing, and it is based on the changes in the market value of the company, not changes in its book value (accounting depreciation).

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
net income. (No subtraction is made for the cost of equity financing in arriving at accounting net income.) Accounting net income also differs from economic income, which is the cash inflow plus the change in the market value of the company. Economic income does not subtract the cost of debt financing, and it is based on the changes in the market value of the company, not changes in its book value (accounting depreciation). In assumption 5 above, we referred to the rate used in discounting the cash flows as the “required rate of return.” The required rate of return is the discount rate

Annotation 1438656892172

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The required rate of return is the discount rate that investors should require given the riskiness of the project.

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
the changes in the market value of the company, not changes in its book value (accounting depreciation). In assumption 5 above, we referred to the rate used in discounting the cash flows as the “required rate of return.” The required rate of return is the discount rate that investors should require given the riskiness of the project. This discount rate is frequently called the “opportunity cost of funds” or the “cost of capital.” If the company can invest elsewhere and earn a return of r, or if the company can repay

Flashcard 1438657940748

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Question

The required rate of return is the discount rate that investors should require given the [...] of the project.

Answer

riskiness

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The required rate of return is the discount rate that investors should require given the riskiness of the project.

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Annotation 1438659513612

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The discount rate (RRR) is frequently called the “opportunity cost of funds” or the “cost of capital.

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
#13; In assumption 5 above, we referred to the rate used in discounting the cash flows as the “required rate of return.” The required rate of return is the discount rate that investors should require given the riskiness of the project. This discount rate is frequently called the “opportunity cost of funds” or the “cost of capital.” If the company can invest elsewhere and earn a return of r, or if the company can repay its sources of capital and save a cost of r, then r is the company’s opportunity cost of funds.

Flashcard 1438661348620

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Question

The discount rate (RRR) is frequently called the “[...]” or the “ [...] ".

Answer

opportunity cost of funds

cost of capital

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The discount rate (RRR) is frequently called the “opportunity cost of funds” or the “cost of capital.

Original toplevel document

Annotation 1438663707916

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If the company can invest elsewhere and earn a return of r, or if the company can repay its sources of capital and save a cost of r, then r is the company’s opportunity cost of funds.

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
he “required rate of return.” The required rate of return is the discount rate that investors should require given the riskiness of the project. This discount rate is frequently called the “opportunity cost of funds” or the “cost of capital.” If the company can invest elsewhere and earn a return of r, or if the company can repay its sources of capital and save a cost of r, then r is the company’s opportunity cost of funds. If the company cannot earn more than its opportunity cost of funds on an investment, it should not undertake that investment. Unless an investment earns more than the cost of funds from

Annotation 1438665280780

#cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Regardless of what it is called, an economically sound discount rate is essential for making capital budgeting decisions.

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
ment, it should not undertake that investment. Unless an investment earns more than the cost of funds from its suppliers of capital, the investment should not be undertaken. The cost-of-capital concept is discussed more extensively elsewhere. Regardless of what it is called, an economically sound discount rate is essential for making capital budgeting decisions. Although the principles of capital budgeting are simple, they are easily confused in practice, leading to unfortunate decisions. Some important capital budgeting concepts t

Flashcard 1438666853644

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Question

opportunity cost.

If a company uses some idle property, what should it record as the investment outlay: the purchase price several years ago, the current market value, or nothing?

Answer

Market Value

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
A sunk cost is one that has already been incurred. You cannot change a sunk cost. Today’s decisions, on the other hand, should be based on current and future cash flows and should not be affected by prior, or sunk, costs. An opportunity cost is what a resource is worth in its next-best use. For example, if a company uses some idle property, what should it record as the investment outlay: the purchase price several years ago, the current market value, or nothing? If you replace an old machine with a new one, what is the opportunity cost? If you invest $10 million, what is the opportunity cost? The answers to these three questions are, respective

Flashcard 1438669212940

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Question

If you replace an old machine with a new one, what is the opportunity cost?

Answer

the cash flows the old machine would generate

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
opportunity cost is what a resource is worth in its next-best use. For example, if a company uses some idle property, what should it record as the investment outlay: the purchase price several years ago, the current market value, or nothing? If you replace an old machine with a new one, what is the opportunity cost? If you invest $10 million, what is the opportunity cost? The answers to these three questions are, respectively: the current market value, the cash flows the old machine would generate, and $10 million (which you could invest elsewhere). &#13

Annotation 1438671572236

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An incremental cash flow is the cash flow that is realized because of a decision: the cash flow with a decision minus the cash flow without that decision. If opportunity costs are correctly assessed, the incremental cash flows provide a sound basis for capital budgeting.

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
st $10 million, what is the opportunity cost? The answers to these three questions are, respectively: the current market value, the cash flows the old machine would generate, and $10 million (which you could invest elsewhere). An incremental cash flow is the cash flow that is realized because of a decision: the cash flow with a decision minus the cash flow without that decision. If opportunity costs are correctly assessed, the incremental cash flows provide a sound basis for capital budgeting. An externality is the effect of an investment on other things besides the investment itself. Frequently, an investment affects the cash flows of other parts of the com

Annotation 1438673145100

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An investment that involved outlays (negative cash flows) for the first couple of years that were then followed by positive cash flows would be considered to have a conventional pattern

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
an initial outflow followed by a series of inflows. In a nonconventional cash flow pattern, the initial outflow is not followed by inflows only, but the cash flows can flip from positive to negative again (or even change signs several times). An investment that involved outlays (negative cash flows) for the first couple of years that were then followed by positive cash flows would be considered to have a conventional pattern. If cash flows change signs once, the pattern is conventional. If cash flows change signs two or more times, the pattern is nonconventional. Several types of projec

Annotation 1438674717964

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If cash flows change signs once, the pattern is conventional. If cash flows change signs two or more times, the pattern is nonconventional.

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
to negative again (or even change signs several times). An investment that involved outlays (negative cash flows) for the first couple of years that were then followed by positive cash flows would be considered to have a conventional pattern. If cash flows change signs once, the pattern is conventional. If cash flows change signs two or more times, the pattern is nonconventional. Several types of project interactions make the incremental cash flow analysis challenging. The following are some of these interactions: Indepe

Annotation 1438676290828

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An unlimited funds environment assumes that the company can raise the funds it wants for all profitable projects simply by paying the required rate of return.

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
the first project or new economic conditions are favorable. If the results of the first project or new economic conditions are not favorable, you do not invest in the second project. Unlimited funds versus capital rationing —An unlimited funds environment assumes that the company can raise the funds it wants for all profitable projects simply by paying the required rate of return. Capital rationing exists when the company has a fixed amount of funds to invest. If the company has more profitable projects than it has funds for, it must allocate the funds to achieve

Annotation 1438677863692

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Capital rationing exists when the company has a fixed amount of funds to invest. If the company has more profitable projects than it has funds for, it must allocate the funds to achieve the maximum shareholder value subject to the funding constraints.

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3. BASIC PRINCIPLES OF CAPITAL BUDGETING
in the second project. Unlimited funds versus capital rationing —An unlimited funds environment assumes that the company can raise the funds it wants for all profitable projects simply by paying the required rate of return. Capital rationing exists when the company has a fixed amount of funds to invest. If the company has more profitable projects than it has funds for, it must allocate the funds to achieve the maximum shareholder value subject to the funding constraints. <body><html>

Annotation 1438679436556

EBITDA Margin

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EBITDA margin is a measurement of a company's operating profitability as a percentage of its total revenue. It is equal to earnings before interest, tax, depreciation and amortization (EBITDA) divided by total revenue. Because EBITDA excludes interest, depreciation, amortization and taxes, EBITDA margin can provide an investor, business owner or financial professional with a clear view of a company's operating profitability and cash flow.

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Edited, memorised or added to reading list

on 05-Jan-2017 (Thu)

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