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FE 6003 CORPORATEFINANCE

Asst.Prof.Dr. Pariyada Sukcharoensin

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Overview of Corporate Finance

Theory of The Firm

Time Value of Money

Capital Budgeting Process and Techniques

Cost of Capital

Capital Structure: Part I

Capital Structure: Part II

1

2

3

4

5

6

7

Asst.Prof.Dr. Pariyada Sukcharoensin 2

Theory of the Firm2

Dividend Policy8

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Mergers and Acquisitions

Mid-term Report Presentation

Company Visit

Special Issues in Capital Budgeting

Risk Analysis in Capital Budgeting

Case Study Analysis

9

11

12

13

14

15


Growth Strategy10

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1 Wed. 13/1/2016 9.00-12.00 Overview of Corporate Finance

2 Wed. 20/1/2016 9.00-12.00 Theory of the Firm

3 Wed. 27/1/2016 9.00-12.00 Time Value of Money

4 Wed. 3/2/2016 9.00-12.00 Capital Budgeting Process and Techniques5 Wed. 3/2/2016 13.00-16.00 Cost of Capital

6 Wed. 10/2/2016 9.00-12.00 Capital Structure: Part I

7 Wed. 10/2/2016 13.00-16.00 Capital Structure: Part II

8 Wed. 17/2/2016 9.00-12.00 Dividend Policy

9 Wed. 24/2/2016 9.00-12.00 Mergers and Acquisitions

10 Wed. 2/3/2016 9.00-12.00 Growth Strategy

11 Wed. 23/3/2016 9.00-12.00 Mid-term Report Presentation

12 Wed. 30/3/2016 13.00-16.00 Company Visit

13 Wed. 20/4/2016 9.00-12.00 Special Issues in Capital Budgeting

14 Wed. 27/4/2016 13.00-16.00 Risk Analysis in Capital Budgeting

15 Wed. 11/5/2016 9.00-12.00 Case Study Analysis

Final Exam

4Asst.Prof.Dr. Pariyada Sukcharoensin

COURSESCHEDULE

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CAPITALBUDGETING

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(CAPITALBUDGETING)


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CAPITALBUDGETINGDECISION


Identifying potentialinvestments

Reviewing, analyzing, andselecting from the proposals

that have been generated

Implementing andmonitoring the proposalsthat have been selected

Managers

should separate

investment and

financing

decisions

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CapitalBudgeting

Account for thetime value of

money

Account for risk

Focus on cashflow

Rank competingprojectsappropriately

Lead toinvestment

decisions thatmaximize

shareholderswealth


CAPITALBUDGETING

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CAPITALBUDGETINGPROCESSFE

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Asst.Prof.Dr. Pariyada Sukcharoensin

TYPEOFPROJECTS

(Mutually exclusive project) 1

(Independent project)

2

(Dependent project)

Complementary Substitute

10

CAPITALBUDGETINGDECISIONTECHNIQUES

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CAPITALBUDGETINGDECISIONTECHNIQUES

Capital

Budgeting

Decision

Techniques

PB

DPB

NPV

IRR

MIRR

PI


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PAYBACKPERIOD: PB

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(PAYBACKPERIOD: PB)


PB = (t)

+ t

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PROJECTB

PROJECTA

PBA =

CFt -100 10 60 80

Cumulative

0 1 2 3

CFt -100 70 50 20

Cumulative

0 1 2 3

PBB =

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(PB RULE)

(PB < cutoff period)

(PB > cutoff period)


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PROSANDCONSOFPAYBACKPERIOD


PROS

CONS

DISCOUNTEDPAYBACKPERIOD: DPB

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(DISCOUNTEDPAYBACKPERIOD: DPB)

PB


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PROJECTB

PROJECTA

DPBA =

CFt -100 10 60 80

Cumulative

0 1 2 3

CFt -100 70 50 20

Cumulative

0 1 2 3

DPBB =

PV of CFt

10%

10%

PV of CFt

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(DPB RULE)

(DPB < cutoff period)

(DPB > cutoff period)


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PROSANDCONSOFDISCOUNTEDPAYBACKPERIOD


PROS

CONS

NETPRESENTVALUE: NPV

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(NETPRESENTVALUE: NPV)


Choosingthe

appropriatediscount

rateaccounted

for risk

Discountingcash flowsaccountedfor the time

value ofmoney

The presentvalue of aprojects

cashinflows and

outflows

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(NETPRESENTVALUE: NPV)

CFi = period ik =


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PROJECTB

PROJECTA

NPVA=

CFt -100 10 60 80

PV of CFt

0 1 2 3

CFt

-100 70 50 20

PV of CFt

0 1 2 3

NPVB=

10%

10%

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DISCOUNTRATE


is a key input in NPV analysis

represents the minimum return that the projectmust earn to satisfy investors

varies with the risk of the firm and/or the risk ofthe project

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(NPV RULE)

(NPV > 0)

(NPV < 0)


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PROSANDCONSOFNETPRESENTVALUE


PROS

CONS

INTERNALRATEOFRETURN: IRR

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(INTERNALRATEOFRETURN: IRR)

NPV


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PROJECTB

PROJECTA

IRRA=

CFt -100 10 60 80

0 1 2 3

CFt -100 70 50 20

0 1 2 3

IRRB=

IRR

IRR

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NPV PROFILES


NPV Profiles NPV

IRR NPV ProfilesIRR NPV 0

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C


EXAMPLE: FINDIRR FROMNPV PROFILES

0

300

1

350

2

400

310%

320

4

PV0=

-1,000

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C

0%

2%

4%

6%

8%

10%

12%

14%

16%

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IRRC = 13.61%

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(IRR RULE)

(IRR > WACC)

(IRR < WACC)


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PROSANDCONSOFINTERNALRATEOFRETURN


PROS

CONS

Lending vs.Borrowing

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IRR Criteria

Invest when IRR > WACC

IRR Criteria

Invest when IRR < WACC

Lending Borrowing


Discount

rate

IRR

NPV

Discount

rate

IRR

NPV

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EXAMPLE: LENDINGVSBORROWING

Year 0 1 2 3 4 5 IRR

Project 1 -1,000 200 200 300 350 500

Project 2 1,000 -200 -200 -300 -350 -500

Investment project.

The cash flow is negative in period 0, and positive in futureperiods.

Project 1

Borrowing project.

The initial cash flow is positive (the amount borrowed), and thesucceeding cash flows are negative (the repayment schedule).

Project 2

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EXAMPLE: LENDINGVSBORROWINGFE

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NON-NORMALCASHFLOWS& MULTIPLEIRRS

If a project has more than one change in the

sign of cash flows (non-normal cash flows),

there may be multiple IRRs. i.e. four changes in sign of CFs then have

four different IRRs

Though odd pattern, can be observed in high-

tech and other industries.


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EXAMPLE: NON-NORMALCASHFLOWS

0

800

1

350

2

400

3

-620

4

-1,000

0

800

1

-350

2

400

3

620

4

-1,000

0

800

1

-350

2

400

3

-620

4

-1,000

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EXAMPLE: MULTIPLEIRRS


When project cash flows have multiple sign changes,

there can be multiple IRRs With multiple IRRs, which do we compare with the

cost of capital to accept/reject the project?

NPV

NPV0

NPV>0

Discount

rateNPV

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EXAMPLE: NON-NORMALCASHFLOWS

Year 0 1 2 3 4 5 IRR

Project 3 400 0 11,000 -8,800 -26,250 24,200

NPV

Discount

rate

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EXAMPLE: MUTUALLYEXCLUSIVEPROJECTS

A

B

0%

5%

10% 18.78 19.99

15%

20%

25%

Asst.Prof.Dr. Pariyada Sukcharoensin46

NPV profile IRR A B

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IRR VS. NPV


-10

0

10

20

30

40

50

60

5 10 15 20

NPV

Discount Rate (%)

IRRA=

IRRB=

Crossover Point

BA

..

...

.

.

..

.

25

IRRA< IRRB

NPVA= NPVB

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EXAMPLE: CROSSOVERPOINT

Project A: CFt -100 10 60 80

0 1 2 3

Project B: CFt -100 70 50 20

IRRDiff=

Diff: CFt

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CONFLICTSBETWEENNPVANDIRR

NPV and IRRdo not alwaysagree when

rankingcompeting

projects


MODIFIEDINTERNALRATEOFRETURN: MIRR

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MIRR is the discount rate which causes the

NPV of a project to equal zero.

MIRR is designed to deal with the non-normal

cash flows.


(MIRR)FE

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PROJECTA


-100.0 10.0 60.0 80.0

0 1 2 310%

-100.0MIRR

MIRRA=

0 = -100 +(1 + MIRRA)

3

10%

10%

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PROJECTB


-100.0 70.0 50.0 20.0

0 1 2 310%

-100.0MIRR

MIRRB=

10%

10%

(1 + MIRRB)3

0 = -100 +

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(MIRR RULE)

(MIRR > WACC)

(MIRR < WACC)


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PROSANDCONSOFMODIFIEDINTERNALRATEOFRETURN


PROS

CONS

PROFITABILITYINDEX: PI

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(PROFITABILITYINDEX: PI)


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PROJECTB

PROJECTA

NPVA=

CFt -100 10 60 80

0 1 2 3

CFt -100 70 50 20

0 1 2 3

NPVB=

10%

10%

PIA=

PIB=

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(PI RULE)

1.0 (PI > 1.0)

1.0 (PI < 1.0)


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PROSANDCONSOFPROFITABILITYINDEX


PROS

CONS

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PROJECTAPB =

DPB =

NPV =

IRR =

MIRR =

PI =

PROJECTBPB =

DPB =

NPV =

IRR =

MIRR =

PI =


CAPITALBUDGETINGDECISION: PI

THEEND

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FE6003 04 Handout