BUS 295 Lecture Notes - Lecture 21: Allied Domecq, Stock Valuation, Cash Flow
Document Summary
Of the four stages, estimation of cash flows is the most difficult and this is where the most time is spent. The capital budgeting decision is essentially a valuation problem (just like stock valuation). So, we have to: estimate future cash flows, estimate a discount rate, apply a decision rule. Issues in estimating cash flows: the stand-alone principle. Identify the effect of undertaking the project on the firm"s cash flows, we only need to focus on the incremental cash flows: minifirm, value additivity. Project has its own future revenues and costs, assets etc. The firm is a portfolio of minifirms. The value of the firm is the combined value of its components: what about m&a and conglomerates (allied domecq, aol/tw) Incremental cash flows: any and all changes in the firm"s future cash flows that are a direct consequence of taking the project. For expansion projects, these are cash flows associated with the project.
