Summary: Strategic Financial Decision Making

Read the summary and the most important questions on Strategic Financial Decision Making

• 1 Week 1 - intro & key concepts

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•  What is a a capital budget list

  A list of all investments that a firm plans to make during the next period

• What are common methods to decide which projects to select

  NPV
  IRR
  payback period
  profitability index

• When may the IRR and NPV be in conflict?

  Delayed investments
  Multiple IRRs
  Nonexistent IRR

• What are the biggest differences between NPV and IRR

  Outcome --> NPV = dollar ; IRR = %
  Purpose --> NPV = project surplus ; IRR = breakeven cashflow
  Decision support --> NPV = foundation ; IRR = not much (% does not tell investor how much will be made)

• What are the issues with payback period?

  Ignores cost of capital & time value of money
  ignores CF after Payback period

• 2 Week 2 - advanced valuation

• Explain the WACC valuation method

  Determine the FCF of a project
  Compute the WACC
  Discount the FCF at WACC rate

• Explain the Adjusted Present Value Method

  A valuation method to determine the levered value of an investment by first calculating its unlevered value and then adding the value of the interest tax shield
  
  (APV method incorporates the value of the tax shield directly unlike the WACC method)

• Explain the Compressed APV method

  Both unlevered project value and interest tax shield present valued are discounted at the same rate, thus, allowing us to combined them first and discount them together

• Explain the Free cash flow to equity method

  A valuation method that explicitely calculates the free cash flow available to equity holders after taking into account all payments to and from debt holders/
  
  1 determine the FCFE of the investment
  2 determine the equity cost of capital
  3 compute the equity value by discounting the 1)FCFE using the 2)equity cost of capital
  
  eg takes into account the made interest and debt payments

• 4 Week 4 - agency conflicts

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• 4 agency costs / consequences of too little leverage

  Lost tax benefits
  excessive perks
  wasteful investment
  empire building