Chapter 02 - Financial Valuation Model

Question 1

Equipment replacement decision factors

Answer 1

Current disposal price
cost of new equipment
operating cost of new equipment

Sunk cost - FMV old equipment

Question 2

Depreciation tax shield

Answer 2

The depreciation times the tax rate

Question 3

What is capital budgeting

Answer 3

Evlauting and selecting the LT investment project.

Question 4

Pre tax CF - Calculation of NPV

Answer 4

Estimated the Net op CF
Subtract Non cash tax deductible expense
Compute I.T
Subtract tax expense

Question 5

After tax CF - Calculation of NPV

Answer 5

Pretax CF ( 1-t) + Dep * Tax rate

Question 6

Calculate the NPV

Answer 6

Calculate the after-tax cash flow.
Add depreciation benefit
Add salvage value
Multiply result by appropriate PV of an annuity
Subtract initial CF - the purchase
=NPV

Question 7

Profitability Index

Answer 7

PV of Net future Cash inflow/PV on net initial investment

Question 8

Internal Rate of return

Answer 8

rate of interest that equates the PV of cash out flow and the PV of cash inflow. Is the rate of interest where the PV = 0

Question 9

Payback period

Answer 9

Net Initial Investment/ Avg Incremental CF (After tax)

Question 10

payback period fact

Answer 10

does not consider the time value of money. It provides the years needed to recuperate the investment. It neglect profit and looks at time to recover the investment.

Question 11

The discount rate is determined in advance for

Answer 11

NPV

Question 12

The NPV of a proposed investment is negative therefore the discount rate used must be

Answer 12

greater than the projected internal rate of return

Question 13

Calculate the net cf

Answer 13

Purchase price
transportation cost
installation cost

Question 14

Assumption of constant growth rate

Answer 14

Is that the idea that the stock price will grow at the same rate as the dividend, thereby producing constant growth rate

Question 15

Per share valuation

Answer 15

Dividend/ required return

Question 16

Constant Growth discount Model

Answer 16

D (T+1)/(r-g)

P= current price
D (T+1) = Dividend one year after period
R= required return
g = growth

Question 17

P/E Ratio measures what

Answer 17

measures the amount that investors are willing to pay each dollar of earnings per share. Higher P/E ratios generally indicate that investors are willing to pay more

Question 18

P/E Ratio - PEG

Answer 18

(Stock price per value/ expected EPS)/ (G)

Question 19

Free CF

Answer 19

Net Income + Depreciation expense - Increase in Working Cap- Capital Expenditure