1 / 16

WHAT TO COME

WHAT TO COME. The results of Test 1 will be posted on the class Website sometime next week. Tomorrow, Dr. Glenn Hubbard’s Talk 1:15 PM at Rm107 Next Week – Chapter 11 (Solver Function). Note 1. Fama-French Model: its test

oleg-rowland
Download Presentation

WHAT TO COME

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. WHAT TO COME • The results of Test 1 will be posted on the class Website sometime next week. • Tomorrow, Dr. Glenn Hubbard’s Talk 1:15 PM at Rm107 • Next Week – Chapter 11 (Solver Function)

  2. Note 1 • Fama-French Model: its test • Regress Excess return on any asset (stock, e.g.) against three factors and check if the intercept estimate is close to zero. • Ri – Rf = a + b1(Rm-Rf) + b2(SMB) + b3(HML) • Refer to the examples on the web to familiarize yourself in obtaining the actual data. Data: Russell; Federal Reserve Bank; Yahoo links.

  3. Chapter 11 Capital Budgeting(Practice on Exh. 11-3, 11-4, 11-6, and 11-9 thru 11-11 with NPV and IRR techniques; Solver function) Traditional approaches vs. New approach – options, Monte-carlo simulation (Chapter 12)

  4. Capital Budgeting • Simply put, it is to compare benefits and costs of projects • Benefit = PV (present Value) = Future Cash Flow discounted at a Discount rate

  5. NPV vs. IRR 1. Accept (Reject) the project if NPV > (<) 0. • Accept if IRR exceeds the required rate of return for a Project. • Potential problem: Multiple IRRs occur when there is more than one sign change in the cash flow. Do not use IRR in this case.

  6. Topics: 1.Identify the relevant cash flows 2.Excel functions in calculating the after-tax cash flows 3.Various techniques (NPV and IRR ); Do not consider other methods. 4.Scenario analysis in Excel 5.Excel’s “Solver” function (MBA’s favorite)

  7. Examples: • Mergers and acquisitions (e.g., Target firm valuation) • Corporate restructuring • Mortgage refinancing • Stock or Firm valuation (e.g., CoCa-Cola, Yahoo-Microsoft) • Lease or Buy analysis

  8. Estimating the Cash Flows The cash flows must be: 1.Incremental – The cash flows must be in addition tothose that the firm already has. 2.After-tax

  9. But disregard cash flows which are: • Sunk costs • Financing costs (interest payments) * To be considered in WACC

  10. IO (Initial Outlay) Price of project + shipping + installation + training – (salvage – additional tax) + increase in net working capital (WC) Coca-Cola example – Owner’s equity = NI + Dep –Cap Exp. + adj. in WC Adjusting cash flow based on the change in WC. + Asset => - Cash flow + Liability => + Cash flow

  11. After-Tax Cash Flow = (Revenue + Savings – Expenses) * (1 – tax rate) + (Change in depreciation * tax rate)

  12. The Terminal Cash Flow: normally, occurs in the final time period of the project TCF = (Recovery of NWC – Shut-down expenses)+ Salvage – Salvage taxes

  13. Depreciation Methods: Depreciation in Straight Line method Depreciable Base - Salvage Value = ---------------------------------------------------- Useful Life Excel functions : Straight-line (SLN), double-declining balance (DDB), fixed-declining balance (DB), sum of the years’ digits (SYD), and variably-declining balance (VDB).

  14. Alternative Valuation Methods Accounting for flexible decisions under uncertainties. • Real Option (Merck’s example) • Monte-Carlo Simulation (Chapter 12)

  15. Scenario Manager and Solver Function • Supreme Shoe Example (Exh. 11-1 thru 11-6, except 11-2 and 11-5) • NPV, IRR functions • Scenario Manager • Constrained Optimization (Exh. 11-9 thru 11-11; Capital Budget with some constraints) • “Include” variables • Array Sum • Solver Function

  16. Structure of the Solver • Max or Min Target (Objective) • Changing or choosing choice variables (Cells) • Subject to constraints.

More Related