Plan for Today
1.
2.
3.
4.
5.
6.
7.
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
The Firm
Capital Structure
Capital Budgeting
Stockholders
Dividends
Equity
Debt
Bondholders
Personal
Taxes
Cash flow
Financial
Manager
Projects
Investments
Interest
Corporate
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