FIN 302 Final: FIN 302: SUMMARIES

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FIN 302
Denis Sosyura

FIN 302: SUMMARIES SESSION 4: VALUATION OF CASH FLOWS - PART 1 We are currently at the end of year 0, so in five years we will have to set t = 5 - Sign convention - opposite - SESSION 5: VALUATION OF CASH FLOWS - PART 2 LECTURE 6: INTEREST RATE QUOTES SESSION 7: CAPITAL BUDGETING CRITERIA - PART 1 - Net Present Value (NPV) - NPV = PV cash inflows – PV cash outflows - Quantifies total value created for the firm - The most common criterion with broad applications - Profitability Index (PI) - Measures total percentage return over the project’s life - Connection between NPV and PI - If NPV > 0, then PI > 1 LECTURE 9: ESTIMATING CASH FLOWS - PART 1 - Only incremental cash flows matter - only if the project is implemented - Ignore - overhead, sunk costs, and financing costs - Include - opportunity costs, side effects, changes in NWC, capital expenditures and asset sales, and their tax effects SESSION 10: ESTIMATING CASH FLOWS - PART 2 - Only incremental cash flows matter - Steps to value an investment project: - Forecast cash flow drivers (sales, costs, and investments) - Derive individual cash flows for each years of project life - FCFs - Compute the NPV and make an investment decision SESSION 11: INFLATION AND CASH FLOW ANALYSIS - Nominal and real rates - - Incorporating inflation into cash flow analysis: - Nominal cash flows discounted at the nominal discount rate - Real cash flows discounted at the real rate - Both approaches yield the same NPV, but the first one is more common since most information is in nominal terms, but the IRRs will differ SESSION 12: MID-COURSE REVIEW AND FIRST FEEDBACK None SESSION 13: BOND VALUATION - PART 1 Key Bond Characteristics - Maturity - Coupon or zero-coupon - Rating and risk Yield to Maturity - Average compounded annual return from buying a bond at its current price and holding it till maturity - Prices and yields move in opposite directions - Prices adjust in order to make the yield equal to the current market rate of return for bonds of this level of risk SESSION 14: BOND VALUATION - PART 2 Bond Valuation - Bond price = PV (coupons) + PV (face value) - YTM is the discount rate that makes the PV of the remaining bond cash flows equal to the bond price Drivers of
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