Plan for Today

1. Hand in case

2. Administration & Questions

3. Review of last class

4. Case: Tartempion: The incremental approach

5. Tax shields -- Capital Cost Allowance (CCA)

6. Case: Fonderia Di Torino S.P.A.

7. Conclusion and preparation for next week

Review of Last Week

• We study the long-term decisions of a financial manager:– How to use funds:

• What projects to undertake to maximize firm value• How much dividends to pay

– Where to get funds: equity and debt• Key concepts in financial decision making:

– Time value of money– Risk and return

• Use NPV to value investments:– Use cash flows, not accounting numbers– Focus on incremental cash flows

Course in a Nutshell

Stockholders

Bondholders

FinancialManager

Projects

Investments

Cash flow

Interest

Dividends

The FirmCapital Budgeting

The MarketCapital Structure

Equity

Debt

Government

CorporateTaxesPersonal

Taxes

What we know now

• Capital investments generate tax effects over time– Use PVCCATS formula to account for tax shields

• Challenges in NPV analysis– Finding the relevant incremental cash flows

• Include all effects of a project and compare with the status quo

– Dealing with inflation• Match real CFs with real rates and nominal CFs with nominal rates

– Comparing equipment with different lives• Use Equivalent Annual Cost or extend to same life

• NPV analysis incorporates most of Buffet’s investment principals

Next Week

• Quiz– Start of class– Material from weeks 1 and 2

• Readings: Chapters 9 and 11• Case: The Investment Detective

– Read through only