MGMT332 Financee

alfonso canella: The perpetuity formula is the present value of all cash flows from years 7 and on. It is a significant portion of the firm's value and the assumed growth rate should be carefully considered.

alfonso canella: This calculation is the value of the firm. To get the value of the equity, add cash and subtract interest bearing debt. The equity value is then divided by the number of shares outstanding to get the price per share. Note that many firms buy back their shares to boost their stock price!

alfonso canella: This is the long term or steady state growth rate for the firm. It is crucial for the firm' stock price. The higher it is, the more valuable the firm is.

alfonso canella: The discount rate is the firm's weighed average cost of capital - that is, the weighed cost of debt and equity. To invest, the firm should get a return higher than the discount rate. This number can go up or down depending on the perceived risk of each investment - up for higher risk and and down for lower risk.

alfonso canella: The NPV function of Excel makes quick work of the yearly cash flows by present valuing them according to when they happen. The terminal value must also be included. It can be put in as a year 16 and included in the NPV function or as a year 15 cash flow, as done here.

alfonso canella: The largest cash outflows in the project are considered to be the cost of doing the project. The smaller cash outflows are seen to be operating costs. So, the two large Cap Ex are discounted using the risk free rate as these investments will be made no matter what. Because they will be made no matter what, they are not risky, so the risk free rate is used.

alfonso canella: This is the option pricing formula. It is called the Black-Scholes formula as it was devised by Fisher Black and Myron Scholes. It has five inputs: time to maturity (in years), risk free rate (the alternative investment), the volatility of prices for the specific project (so if this were an oil industry project, the volatility would be the price volatility of crude oil), the strike price (that is, the PV of the Cap Ex necessary to do the project), and the present value of the cash flows that accrue from doing the project.

alfonso canella: The NPV function of Excel makes quick work of the yearly cash flows by present valuing them according to when they happen. The terminal value must also be included. It can be put in as a year 16 and included in the NPV function or as a year 15 cash flow, as done here.