Finance
Tuesday, 2 June 2026
1:47 PM
Session 2: Investment Decision Analysis: Free Cash
Flows and Capital Budgeting
Incremental Earnings = (Revenue − Costs − Depreciation) × (1 − Tax Rate)
Incremental EBIT = Revenue − COGS − SG&A − Depreciation
Initial Investment - What and what not to consider
Scenario Analysis vs Sensitivity Analysis
Operating Cash Flow vs Terminal Cash Flow
Undersupplied (less often undertaken) because managers may not see incremental
impact outside their division. Oversupplied (more often undertaken) because the
managers may not see decremental impact outside their division.
"How much better or worse is the entire firm because of this project?"
Not: "How much money does this project itself make?"
Capitalising is essentially treat an spending as an asset and spread the expense over future years. This is
because of expense matching principle in accounting.
Net working capital is your cash that is tied up.
We subtract liabilities because they represent financing provided by someone else, so they reduce the
amount of your own cash tied up in operations.
Session 3: Investment Rules
Session 3: Investment Rules
Time Value of Money: A rupee today is worth more than a rupee tomorrow.
Interest Rate (r): Rate at which money is borrowed or lent.
Interest Rate Factor (1+r)ⁿ: This is the multiplier that converts today's money into money n years from now.
Discount Rate: The appropriate rate used to bring a future cash flow back to today.
Discount Factor = 1/(1+r)ⁿ
Critical nuance: The higher the discount rate, the smaller the discount factor, and the less future cash flows
are worth in today's terms. This inverse relationship between discount rate and present value is one of the
most important ideas in all of finance.
PV of Growing Annuity: PVGA = C/(r − g) × [1 − (1+g)ⁿ/(1+r)ⁿ]
Investment Rules
FCFF = Free Cash Flow to Firm
Assuming same cash flows in the future, a higher return can make NPV negative.
Cost of Capital: The return investors require for providing capital to the project.
IRR cares about the relative timing of cash flows, not the absolute calendar
dates.
Session 4: Risk, Cost of Equity, Debt and Capital
Variance is how much a stock moves by itself; covariance is how much it moves with other stocks.
Diversification kills variance but cannot kill covariance, which is why systematic risk remains.
Why does systematic risk earn a premium?
Because: Nobody can diversify it away.
Every investor is stuck with it.
Therefore investors demand compensation.
Markets only reward you for risks you cannot avoid. Since
company-specific risk can be eliminated through
diversification, it earns no risk premium. Only market-wide
(systematic) risk earns a premium.
Investors don't care about total risk, they care about market risk. Market risk is captured by beta.
Beta is NOT asking: "How risky is this stock?"
Beta is asking: "How much of this stock's movement is tied to market movement?"
That's why a stock can have:
• Huge volatility
• Huge company-specific risk
but still have a modest beta.
Example:
A biotech company might:
• Jump 50% after a drug approval
• Fall 40% after a failed trial
Very risky.
But these events have nothing to do with the overall market.
Therefore beta may not be very high.
• Jump 50% after a drug approval
• Fall 40% after a failed trial
Very risky.
But these events have nothing to do with the overall market.
Therefore beta may not be very high.
Cost of Equity is:
The minimum return shareholders require for investing in a company's stock.
Or from the company's perspective:
The return the company must generate to justify using shareholders' money.
Think of cost of equity as:
The hurdle rate that a company must beat to create value for shareholders.
If Infosys earns:
• More than 19.17% → creates shareholder value.
• Less than 19.17% → destroys shareholder value.
That's why cost of equity is one of the key inputs in valuation, DCF models, and WACC.
If Infosys earns:
• More than 19.17% → creates shareholder value.
• Less than 19.17% → destroys shareholder value.
That's why cost of equity is one of the key inputs in valuation, DCF models, and WACC.
Session 5: Financing Decisions