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Plan for Today. Hand in case Administration & Questions Review of last class Case: Tartempion: The incremental approach Tax shields -- Capital Cost Allowance (CCA) Case: Fonderia Di Torino S.P.A. Conclusion and preparation for next week. Review of Last Week.

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Plan for Today

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Plan for Today

  • Hand in case

  • Administration & Questions

  • Review of last class

  • Case: Tartempion: The incremental approach

  • Tax shields -- Capital Cost Allowance (CCA)

  • Case: Fonderia Di Torino S.P.A.

  • Conclusion and preparation for next week


Review of Last Week

  • We study the long-term decisions of a financial manager:

    • How to use funds:

      • What projects to undertake to maximize firm value

      • How much dividends to pay

    • Where to get funds: equity and debt

  • Key concepts in financial decision making:

    • Time value of money

    • Risk and return

  • Use NPV to value investments:

    • Use cash flows, not accounting numbers

    • Focus on incremental cash flows


Course in a Nutshell

The Market

Capital Structure

The Firm

Capital Budgeting

Stockholders

Dividends

Cash flow

Equity

Financial

Manager

Projects

Debt

Bondholders

Investments

Interest

Corporate

Taxes

Personal

Taxes

Government


What we know now

  • Capital investments generate tax effects over time

    • Use PVCCATS formula to account for tax shields

  • Challenges in NPV analysis

    • Finding the relevant incremental cash flows

      • Include all effects of a project and compare with the status quo

    • Dealing with inflation

      • Match real CFs with real rates and nominal CFs with nominal rates

    • Comparing equipment with different lives

      • Use Equivalent Annual Cost or extend to same life

  • NPV analysis incorporates most of Buffet’s investment principals


Next Week

  • Quiz

    • Start of class

    • Material from weeks 1 and 2

  • Readings: Chapters 9 and 11

  • Case: The Investment Detective

    • Read through only


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