AFM273 Chapter Notes - Chapter 7: Tax Shield, Externality, Capital Budgeting
17 Feb 2015
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Forecasting earnings: capital budget lists the investments that a company plans to undertake, capital budgeting process used to alternate investments and decide which ones to accept. Incremental earnings amount firm"s earning expected to change as result of investment decision. Interest expense: is typically not included in capital budgeting decisions. Rationale is that project should be judged on its own and not on how it will be financed. Marginal corporate tax rate: is the tax rate on marginal or incremental dollar of pre-tax income. A negative tax is equal to a tax credit. Income tax = ebit x: ebit = revenues costs - depreciation. R&d is a sunk cost and is irrelevant: decision to continue or abandon project based only on incremental costs and benefits of product going forward. + inventory + receivables payables: most projects require an investment in net working capital. Trade credit is difference b/w receivables and payables: increase in net working capital is defined as:
