FIN 432 Final

the proportion of debt, PS, and common equity in the optimal or target capital structure after tax

a cash flow that a firm must forgo in order to accept a project; the return stockholders could earn on alternative investments of equal risk

those occuring when a company issues a new security, including fees to an investment banker and legal fees

risk an investor takes by holding only one asset; variability of a project's expected returns; standard deviation

that part of a security's total risk that CAN'T be eliminated by diversification; measured by the beta coefficient;

that part of a security's total risk associated with random events not affect the market as a whole; CAN be eliminated by proper diversification; a.k.a company-specific risk

the total value of a company as the value of operations plus the nonoperating assets plus the value of growth options; the PV of expected cash flows discounted at the WACC

occurs if an investment creates the opportunity to make other potentially profitable investments that would not otherwise be possible; ex. options to expand output, to enter a new geographical market, & to introduce complementary products or successive generations of products

land, building, machines, & inventory that the firm uses in its operations to produce its products & services & intangible= patents, customer lists, reputation, general know-how; a.k.a operating assets; they generste FCF

the value of operations at the end of the explicit forecast period; equals PV of FCFs beyond the forecast period discounted back to the end of the forecast period at the WACC; firm can expect to recieve this much if it decided to sell it operating assets on this date

the whole process of analyzing projects & deciding whether they should be included; a summary of planned investments of assets (used in production) that will last for more than 1 year; very important to the firm's future

used to assess the PV of the project's expected future cash flows (inflow - costs), discounted at the appropriate cost of capital; a direct measure of the value of the project to shareholders; tells how much the project contributes to their wealth; large=more value=higher stock price

projects that CAN'T be performed at the same time; a company can chose 1 or the other or it can reject both; if the cash flows of 1 can be adversely impacted by the acceptance of the other

the discount rate that equates the PV of all the expected future cash inflows & outflows=costs; measures the rate of return on a project, but it assumes that all cash flows can be reinvested at this rate; forcing the NPV to equal 0

the cost of capital at which the NPV profiles of 2 projects intersect

assumes that cash flows from all projects are reinvested at the cost of capital, not the project's own IRR; this makes it a better indicator of a project's true profitability; causes the PV of the terminal value to equal the PV of the costs

found by dividing the project's PV of future cash flows by its initial cost; greater than 1 is equivalent to a project having a positive NPV; measures the bang for buck

the # of years it takes a firm to recover its project investment; measures a project's liquity=used as a risk measure; ignores the time value of money, ignores cash flows after this, & doesn't specify an acceptable time

the # of years it takes a firm to recover its project investment based on discounted cash flows; indicates risk because cash flows expected in distant future are generally riskier=short better

the # of years the project should be operated to maximize its NPV & shareholder wealth; often less than the maximum potential life

occurs when management places a constraint on the size of a firm's capital budget during a particular period; limits capital expenditures to an amount less than would be required to fund the optimal capital budget; chooses not to fund all positive NPV projects