Chapter 11 Flashcards
What is capital allocation or (capital budegting)
How to use a shareholder investment to maximize its value
What does a company do before ‘capital allocating’?
It has to see if they have sufficient cash to manage day to day operations
+ Make investments in the future
+ Return money to shareholders (dividends)
WHat if they do not have this sufficient cash?
They have to do external financing
After they know they have sufficent cash what can they do?
They invest in the projects that maximizm their shareholders investment
What are some projects they can invest in?
- Investing in new assets
- Purchasing a company
- Repurchase shares
What are investing decisions
when a company decides to invest money today to purchase future years’ cash flow
Examples of investing decisions
R&D
Expanding capacity
Replacing an asset
When a company does a qualitative anlysis before they do an investing decision what should they do?
Weigh the pros and cons of the investment to the company and if it helps meet the company’s goals and objectives they will go with it.
How do we understand if an investment will generate future cash flow?
We consider the net present value of future cash flow
Net present value?
Its the difference in the presentvalue of cash inflow and outflow over a period of time
WHat is TVM?
Receiving a dollar today is worth more than receiving a dollar a year from now
WHat is discount rate?
ITS our ‘weight average cost of capital
WACC?
Its the cost of company obtaiin cash from lenders and shareholders expressed as a %
What is an uprfront invetsment
Its inital cash requid to purchase equipemnt or assets to generate cash
All cash flows to deliver and install the upfront investment
One time upfront costs such as marketing expenses
What are future cash flows
These are recurring cash inflow and outflow that might occur after an investment might be made.
