Dit document is een ruime samenvatting van het vak Strategic Financial Decision Making van de Master Handelswetenschappen, gegeven door James Thewissen. Het document bevat ook de oplossingen van alle oefeningen.
That's right, as can be found in the description, this summary was written in 2017 and is now fully taught by James Thewissen while this was previously taught by two professors, data can be found via the corresponding bundle.
Strategic Financial Decision Making:
James
Hoofdstuk 1 - CAPITA SELECTA - Fundamental NPV Analysis
• First chapter to read: Fundamentals of Capital Budgeting, Berk and DeMarzo (2013,
Chapter 13)
• Making capital investment decisions, Ross et al. (2009, Chapter 8)
1.1. Motivation, Key Ideas, Example and Definitions
1.1.1. McDonalds’ capital budgeting decision
“Biggest endeavor for McDonalds since our introduction of breakfast 35 years ago” (John
Betts, CEO)
• In 2008, McDo added cappuccinos, lattes and mochas to its 14,000 U.S. locations
• Important strategic decision
• How do they make such a decision? Important to justify to shareholders!
• Net present value (NPV) of future free cash flows (FCF)
1.1.2. McDonald has the following opportunity
• Invest now in coffee machine at the cost of $50,000
• The coffee machine will generate cash flows as follows
o $25,000 one year from now
o $20,000 two years from now
o $15,000 three years from now
o Appropriate discount rate = 7%
• Question: should McDonalds make this investment? What is the NPV of the project?
Samenvatting Strategic Financial Decision Making 1
,1.1.3. Example – Investment opportunity
1.1.4. A method to select investment opportunities
1.1.5. Capital budgeting, Capital budget list, FCF and Earnings
• Capital budgeting is the process of analyzing investment opportunities and deciding
which ones to accept.
• A capital budget list is a list of all projects that a firm plans to undertake during the next
period
• FCF is the incremental effect of a project on the firm’s available cash
o Amount by which the project is expected to change the firm’s earnings
o i.e., after taking into account all incremental cash flow effects of the project
o Cash flow that can be distributed to the investors of the firm (creditors and
stockholders)
• ! There is a difference with earnings
o = accounting measure of the firm’s performance
o Earnings do not represent real money, cash flows do
Samenvatting Strategic Financial Decision Making 2
,1.1.6. Focus of FCF = CASH inflows & outflows
1.2. Free Cash Flows – Forecast and adjust earnings
1.2.1. Earnings measure
1. Revenue and cost estimates
a. How many units incrementally sold
& at what price?
b. How many units incrementally
produced & at what cost?
2. Capital expenditures and depreciation
3. Interest expenses not considered
4. Taxes
→ Expected unlevered net income between years 1 and N
→ Basis for future cash flows
1.2.2. Adjust earnings to get cash flows
• Earnings (or unlevered net income) = accounting measure
• What we need? Incremental effect of a project on a firm’s cash!
• Adjust earnings for non-cash inflows/outflows
• Three main adjustments:
1. Capital expenditures
2. Depreciation
3. Net working capital
Capital expenditures
1) Only when incremental to the project
2) Immediate cash flow effect upon the
acquisition of the asset
3) Include the actual cost of the asset when
purchased at time 0
Samenvatting Strategic Financial Decision Making 3
, Depreciation
1 ! Not a cash expense
2 Accounting method to allocate the original purchase
cost over its life
3 Not to include in the cash flow forecast
Net Working Capital
• Net working capital = het geld dat je nodig hebt om de business running te houden -> KT
kapitaal dat je aanhoudt om je rekeningen te betalen enzo. Het zijn geen grote
investeringen maar is wel nodig.
• Resources necessary to be able to operate the
project
• Difference between current assets and current
liabilities
o Cash outflow at the start
o Cash inflow at the end
o Often no incremental cash flow during
the length of the project
• NWC
o Current assets – Current liabilities
o Cash + Inventory + Receivables -
Payables
• ∆NWCt = NWCt − NWCt−1
1.2.3. Calculate FCF directly
• FCF = (Revenues − Costs − Depreciation) · (1 − τc) + Depreciation − CapEx − ∆NWC
à Formule op formularium
First deduct depreciation then add it back as it is a non-cash expense
• FCF = (Revenues−Costs)·(1−Tc) − CapEx − ∆NWC + τc·Depreciation
where τc · Depreciation is the depreciation tax shield: savings from depreciation
deduction
Samenvatting Strategic Financial Decision Making 4
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