FIN 401 Study Guide - Midterm Guide: Capital Cost Allowance, Cash Flow, Net Present Value
17 May 2018
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Chapter 4: NPV & Time Value of Money
C: Constant Cash Flow, r: Discount Rate
Ex. How much must you donate or what is the
value of bond after a payment is made. (What is the value of bond before
payment is made?
+ C)
Present Value of an n-period annuity w/ constant cash flows
Present Value of Cash flow that occurs in n periods
Ex. Cost of uni is 100 000/year 18 years from today if your discount rate is
9% compounded annually, what is the present value today of 4 years of
university starting 18 years from today?
1. Find PV of 4 years of Uni 18 years from now (n:4, I:9%, PMT: 100000):
PV=323971.98
2. Find PV of uni in todays value
3. Chapter 6: Bond: CPN=Coupon Payment
4.
- k will be after tax during leasing
Annual Tax Shield: CCA = d = 20% tc=40%
UCC
CCA=UCC x d
CCA x Tc
1
10 000 x .5 = 5000
5000 x .2 = 1000
1000 x .4=400
2
(5000-1000) + 10000*5
9000 x .2 = 1800
1800 x .4=720
3
9000-1800=
7200 x .2 = 1440
1440 x .4=576
4
7200-1440=
5706 x.2
461
PV/Used Resource:
1. IRR < R
Cost of Equity: Dividend Growth Model
or
Chapter 8:
Chapter 16: Capital Structure :
M&M Proposition 1: In a perfect capital market, the total value f a firm is equal to the
market value of the free cash flows generated by its assets and its not affected by its
choice of capital structure:
M&M proposition 2: The cost of capital of a levered equity is equal to the cost of
capital of unlevered equity plus a premium that is proportional to the debt-equity
ratio (measures using market values)
Expected return
→ High return = High Risk
Debt and Taxes
MM Proposition 1 With taxes: Total Value of the levered firm exceeds the value of
the firm without leverage due to the present value of the tax savings from debt:
= Tc x D
Chapter 9: Capital Budgeting Process
CCA: Capital Cost Allowance; method of depreciation for income tax purposes. CCA% is the proportion of UCC that can be
claimed as CCA in a given tax year UCC: Undepreciated Capital Cost: A balance at a point in time, calculated by deducting the
asset’s curret ad prior CCA aouts fro the origial cost of the assets CapEx;. (d=rate)
Year T Incremental UCC used for calculating the CCA for tax year t
t = 1
t 2
(
)
{tax collected on the profit (sale price exceeds purchase price)
Chapter 12: Cost of Capital : g: Growth rate
)(D%)
Tradeoff Theory:
+Tc*D
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Document Summary
Year t t = 1 t 2. Chapter 4: npv & time value of money. Incremental ucc used for calculating the cca for tax year t value of bond after a payment is made. (what is the value of bond before (cid:3004)(cid:3042)(cid:3048)(cid:3043)(cid:3042)(cid:3041) % (cid:3051) (cid:3007)(cid:3030)(cid:3032) (cid:3023)(cid:3039)(cid:3048)(cid:3032) Find pv of 4 years of uni 18 years from now (n:4, i:9%, pmt: 100000): Cost of uni is 100 000/year 18 years from today if your discount rate is. Cost of equity: dividend growth model (cid:2172)(cid:2777)= (cid:2160)(cid:2778)(cid:2174)(cid:2161) (cid:2189) or (cid:2174)(cid:2161)=(cid:2160)(cid:2778)(cid:2172)(cid:2777)+(cid:2189) Cca: capital cost allowance; method of depreciation for income tax purposes. How much must you donate or what is the payment is made? (cid:2159)(cid:2200) + c) Present value of an n-period annuity w/ constant cash flows (cid:2172)(cid:2178)(cid:2196)= (cid:2159) (cid:2206)(cid:2778)(cid:2200)(cid:4672) (cid:2778)(cid:4666)(cid:2778)+(cid:2200)(cid:4667)(cid:2196)(cid:4673) Present value of cash flow (cid:2159)(cid:2196) that occurs in n periods (cid:2172)(cid:2178)(cid:2777)= (cid:2159)(cid:2196) (cid:4666)(cid:2778)+(cid:2200)(cid:4667)(cid:2196)
