FINC3015 Lecture Notes - Lecture 5: Net Income, Fixed Capital, Market Power

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peachcoyote549

30 Jul 2018

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Intrinsic value of a firm = pv of expected cash flows (cid:1848)(cid:1853)(cid:1864)(cid:1873)(cid:1857)= (cid:1829)(cid:1832)(cid:2869) (cid:4666)1+(cid:1870)(cid:4667)(cid:2869)+ (cid:1829)(cid:1832)(cid:2870) (cid:4666)1+(cid:1870)(cid:4667)(cid:2870)+ (cid:1829)(cid:1832)(cid:2871) (cid:4666)1+(cid:1870)(cid:4667)(cid:2871)+ + (cid:1829)(cid:1832)(cid:3041) (cid:4666)1+(cid:1870)(cid:4667)(cid:3041) Dcf relies on positive cash flows over the life of the asset and value is determined by the magnitude and timing of cash flows. In finance: (cid:1849)(cid:1829)=(cid:1840)(cid:1867)(cid:1866) (cid:1829)(cid:1853)(cid:1871) (cid:1829)(cid:1873)(cid:1870)(cid:1870)(cid:1857)(cid:1866)(cid:1872) (cid:1827)(cid:1871)(cid:1871)(cid:1857)(cid:1872)(cid:1871) (cid:1840)(cid:1867)(cid:1866) (cid:1830)(cid:1857)(cid:1854)(cid:1872) (cid:1829)(cid:1873)(cid:1870)(cid:1870)(cid:1857)(cid:1866)(cid:1872) (cid:1838)(cid:1853)(cid:1854)(cid:1864)(cid:1872)(cid:1857)(cid:1871) (cid:4666)(cid:1829)(cid:1873)(cid:1870)(cid:1870)(cid:1857)(cid:1866)(cid:1872) (cid:1842)(cid:1867)(cid:1870)(cid:1872)(cid:1867)(cid:1866) (cid:1867)(cid:1858) (cid:1866)(cid:1872)(cid:1857)(cid:1870)(cid:1857)(cid:1871)(cid:1872) (cid:1828)(cid:1857)(cid:1853)(cid:1870)(cid:1866)(cid:1859) (cid:1830)(cid:1857)(cid:1854)(cid:1872) (cid:1853)(cid:1866)(cid:1856) (cid:1840)(cid:1867)(cid:1872)(cid:1857)(cid:1871)(cid:4667)] (cid:1829) (cid:1853)(cid:1866)(cid:1859)(cid:1857) (cid:1866) (cid:1841)(cid:1868)(cid:1857)(cid:1870)(cid:1853)(cid:1872)(cid:1866)(cid:1859) (cid:1840)(cid:1857)(cid:1872) (cid:1849)(cid:1867)(cid:1870)(cid:1863)(cid:1866)(cid:1859) (cid:1829)(cid:1853)(cid:1868)(cid:1872)(cid:1853)(cid:1864) =(cid:1841)(cid:1868)(cid:1857)(cid:1870)(cid:1853)(cid:1872)(cid:1866)(cid:1859) (cid:1840)(cid:1857)(cid:1872) (cid:1849)(cid:1867)(cid:1870)(cid:1863)(cid:1866)(cid:1859) (cid:1829)(cid:1853)(cid:1868)(cid:1872)(cid:1853)(cid:1864) (cid:1841)(cid:1868)(cid:1857)(cid:1870)(cid:1853)(cid:1872)(cid:1866)(cid:1859) (cid:1840)(cid:1857)(cid:1872) (cid:1849)(cid:1867)(cid:1870)(cid:1863)(cid:1866)(cid:1859) (cid:1829)(cid:1853)(cid:1868)(cid:1872)(cid:1853)(cid:1864) (cid:2869: capex: capital expenditures for property, plant and equipment. In summary, you can continue to borrow (hence increase leverage) which will pump up your. Fcfe but at the other end of the ledger, your levered beta will increase, thereby generating a higher discount rate: dividends and share repurchases are uses of these cash flows so do not affect free cash flow. Combines the cash flow availa(cid:271)le for distri(cid:271)utio(cid:374) to all the fir(cid:373)"s sour(cid:272)es of (cid:272)apital. (cid:1832)(cid:1829)(cid:1832)(cid:1832)=(cid:1831)(cid:1828)(cid:1846)(cid:4666)1 (cid:1846)(cid:4667)+(cid:1830)(cid:1827) (cid:1849)(cid:1829) (cid:1829)(cid:1827)(cid:1842)(cid:1831)(cid:1850)=(cid:1840)+(cid:1830)(cid:1827)+(cid:1866)(cid:1872)(cid:1857)(cid:1870)(cid:1857)(cid:1871)(cid:1872)(cid:4666)1 (cid:1846)(cid:4667) (cid:1849)(cid:1829) (cid:1829)(cid:1827)(cid:1842)(cid:1831)(cid:1850)

Related Questions

Amarindo, Inc is a newly public firm with 8.0 million sharesoutstanding. You are doing a valuation analysis of AMR. Youestimate its free cash flow in the coming year to be 15.4 million,and you expect the firms free cash flows only to grow by 4.2% peryear in subsequent years. Because the firm has only been listed onthe stock exchange for a short time, you do not have an accurateassessment of AMR's equity beta. However, you do have beta data forUAL, another firm in the same industry. AMR has a much lowerdebt-equity ratio of 0.42, which is expected to remain stable, andits debt is risk-free, AMR's corporate tax is 30%, the risk-freerate is 5.2% and the expected return on the market portfolio is11.2%

Debt Equity Ratio \= 1.4 Equity Beta= 2.10 Debt Beta=0.42

a. Estimate AMR's equity cost of capital

b, Estimate AMR's share price

yellowswan447

Which of the following statements is CORRECT?
a. Retained earnings as reported on the balance sheet represent cash and, therefore, are available to distribute to stockholders as dividends or any other required cash payments to creditors and suppliers.
b. After-tax operating income is calculated as EBIT(1 - T) + Depreciation.
c. Two firms with identical sales and operating costs but with different amounts of debt and tax rates will have different operating incomes by definition.
d. Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.
e. If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow.

please give me why

jadezebra683

Using the following information, write a one page narrative of what is found in the information below:

Please include answers to these two questions in the narrative.

Which firm would have the higher expected return between the unlevered equity holder and the levered equity holder? (show all the team calculations in arriving at the final answer).

2. How does the risk and cost of capital of levered equity compare to that of unlevered equity? Which is the superior capital structure choice for a perfect capital market, and why?

Expected CashFlow	=.50(Weak Cash Flows)+.50(strong Cash Flows)
Expected CashFlow	103,500.00
		NPV	$ 9,224.14	=-B6+(B2/(1+B7+B8))
			The investment has a positive NPV
		PV	$ 89,224.14	=+B2/(1+B9)
Cash Flow-weak economy	90,000.00
Cash Flow-strong economy	117,000.00
Initial Investment	80,000.00
Cost of Capital	16.00%
Risk-free Rate	5.00%

Cash Flows and Returns for Unlevered Equity
		Date 1: Cash Flow		Date 1: Return
		Strong	Weak	Strong	Weak
NPV	$ 9,224.14
PV	$ 89,224.14	117,000.00	90,000.00	31.13%	0.87%


Values & Cash Flows for Debt & Equity of the Levered Firm (Table 14.3)
	Date 0	Date 1: Cash Flow
	Initial Value	Strong Economy	Weak Economy
Debt	45,000	47,250	47,250
Levered equity		69,750	42,750
Firm	89,224	117,000	90,000


Returns to Equity with and without Leverage (Table 14.4)
	Date 0	Date 1: Cash Flow		Date 1: Returns
	Initial Value	Strong Economy	Weak Economy	Strong Economy	Weak Economy	Expected Return
Debt	45,000	47,250	47,250	5.00%	5.00%	5.00%
Levered Equity	44,224	69,750	42,750	57.72%	-3.33%	27.19%
Unlevered equity	89,224	117,000	90,000	31.13%	0.87%	16.00%


Systematic Risk and Risk Premiums for Debt, Unlevered Equity, and Levered Equity (Table 14.5)
	Return Sensitivity (Systematic Risk)	Risk Premium

Debt	0.00%	0.00%
Levered Equity	61.05%	0.00%	11.00%
Unlevered Equity	30.26%	-15.13%	22.19%

FINC3015 Lecture Notes - Lecture 5: Net Income, Fixed Capital, Market Power

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