In this case, the answer is First, we calculate the present value of the negative cash flows discounted at the finance rate :. Second, we calculate the future value of the positive cash flows reinvested at the reinvestment rate :. Like the internal rate of return, the modified internal rate of return is not valid for ranking projects of different sizes, because a larger project with a smaller modified internal rate of return may have a higher net present value. However, there exist variants of the modified internal rate of return which can be used for such comparisons.
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Analyze a firm using ratio analysis. Calculate the intrinsic value of a stock and a bond.
Calculate the cost of capital for a firm. Analyze a project's cash flows using five capital budgeting tools and identify the strengths and weaknesses of each tool. Estimate the cash flows associated with a new project. Estimate the amount of external funds required given a sales growth forecast. Unit Descriptions Course Organization and Assignment Descriptions Unit 1 Overview Financial management involves the acquisition and utilization of funds and assets such that long-term shareholder wealth is maximized.
Outcomes Upon completion of this unit, you should be able to Differentiate between financial managers' appropriate and inappropriate goals. Identify the firm's primary agency relationship and discuss why agency relationships can create conflicts. Identify the different types of financial markets and financial institutions, and explain how these markets and institutions enhance capital allocation.
Explain how the stock market operates, and list the distinctions between the different types of stock markets.
Distinguish between a capital market and a money market instrument. Distinguish between a primary market and a secondary market instrument. Calculate and interpret major liquidity ratios. Calculate and interpret major asset management ratios. Calculate and interpret major debt ratios. Calculate and interpret major profitability ratios. Calculate and interpret major market value ratios. Appreciate how various ratios relate to one another.
Explain how ratios can be influenced by accounting practices as well as other factors and why they should be used with care.
Explain how the time value of money works and discuss why it is such an important concept in finance. Calculate the present value and future value of lump sums. Identify the different types of annuities; calculate the present value and future value of ordinary annuities. Note: you are not responsible for annuities due. Calculate the present value and future of an uneven cash flow stream.
enter Explain and calculate the effective interest rate. Develop a loan amortization schedule.
Explain what the yield curve is and what determines its shape. Compare and contrast interest rate risk and reinvestment rate risk Identify the different features of corporate and government bonds. Explain what a callable bond is and under what conditions the bond issuer would call the bonds. Explain the different types of risk that bond investors and issuers face. Compute bond prices and yield to maturities using present value concepts.
Explain the relationship between bond prices and interest rates. Understand the rights and returns that come with common stock ownership.
Compute stock values. Differentiate between market risk and diversifiable risk. Explain the difference between stand-alone risk and risk in a portfolio context.
Discuss the difference between diversifiable risk and market risk, and explain how each type of risk affects well-diversified investors. Estimate the intrinsic value of a stock utilizing the dividend discount model constant growth model.
This article further explains and illustrates internal rate of return in context with related terms and concepts, emphasizing four themes:. Lecture Suggestions. WACC is the average composite cost of capital for all the projects that a firm may have undertaken. Notice that the IRR is now For example, a forklift truck versus a conveyor system to move materials, or a bridge versus a ferry boat. Multiple IRRs: In certain cases there is a possibility of having multiple IRRs, particularly for cases when there are non-normal cash flows.
Estimate the value for preferred stock. Outcomes Upon completion of this unit, you should be able to Explain why the weighted average cost of capital WACC is used in capital budgeting. Estimate the costs of different capital components — debt, preferred stock, and retained earnings, and common stock. Incorporate risk in the capital budgeting process.
Explain why NPV is the best criterion. Explain why we use pro forma statements to analyze project cash flows. Identify which cash flows we can incrementally attribute to a proposed project and which ones we can't. Calculate a project's expected cash flows using the free cash flow approach. Explain how accelerated depreciation affects project cash flows.