1. WACC. Hurdle rate The capital funding of company consists of: debt and equity.

Lenders and equity holders expect a certain return on capital they have provided. WACC is the weighted average of the cost of equity and the cost of debt based on the proportion of debt and equity in the company's capital structure . WACC= wdrd(1 T) + wsrs WACC = 0.3(10%)(1 0.4) + 0.7(12.8%) WACC = 10.8% WACC as a Hurdle rate The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, the riskier the project, the higher the hurdle rate. Different projects may have different risks, i.e., the projects WACC should be adjusted to reflect the projects risk 2. Corporate Valuationg Model Model can be applied to a company that does not pay dividends, a privately held company, or a division of a company. Forecast the financial statements. Calculate the projected free cash flows. Calculate companys Intrinsic Value 3. Corporate budgeting methods Capital budgeting involves choosing projects that add value to the firm. Companies are interested to undertake those projects which will increase profitability and thus enhance shareholders' wealth. The net present value (NPV), internal rate of return (IRR) and payback period (PB) methods are the most common approaches to project selection. Payback period - The number of years required to recover a projects cost, or how long it takes to get the businesss initial investment back. Net present value method is the most accurate. Discounting the after tax cash flows by the weighted average cost of capital allows managers to determine whether a project will be profitable or not NPV = NPV of FCFs () Cost = Net gain (loss) in wealth Accept project if NPV > 0. The internal rate of return (IRR) is the discount rate that would result in a net present value of zero. If IRR > Hurdle Rate, then the projects rate of return is greater than its cost Modified Internal Rate of Return (MIRR) MIRR is the discount rate which causes the PV of a projects Terminal Value (TV) of FCFs to equal the Cost. TV is found by compounding inflows at the Hurdle Rate.

Thus, MIRR assumes future cash flows are reinvested at the Hurdle Rate.

The Profitability Index (PI) is the Net Present Value divided by the initial cost

4. Operating Leverage Operating leverage is the use of fixed costs rather than variable costs. The higher the proportion of fixed costs within a firms overall cost structure, the greater the firms operating leverage. Leverage magnifies gains and loses Financial Leverage Financial leverage is the use of debt rather than equity financing. The higher the firms debt/equity ratio, the greater the firms financial leverage. Capital Structure Analysis Determine Debt/Equity ratios of comparables. Evaluate lender and rating agency attitudes. Use financial forecasting models to show impact of capital structure on stock price, etc. Consider operating leverage; firms tax position; market conditions; management attitudes In the end, capital structure will be based on a combination of analysis and judgment. Fin leverage increases ROE if the unleveraged ROE is greater than the after tax cost of debt 5. Dividend policy. Share repurchase program. Maintain dividends at all cost (do not cut), it's a signal that smth wrong with the company You want to raise the dividends when sustainable (you signaling that you are doing well in business and have increasing cash flow). Investors view dividend changes as signals of managements view of the future. Managers hate to cut dividends, so wont raise dividends unless they think raise is sustainable. Share repurchase program- A program by which a company buys back its own shares from the marketplace, reducing the number of outstanding shares. Share repurchase is usually an indication that the company's management thinks the shares are undervalued. Reasons:

To As To To To

improve reported Earnings per share an alternative to distributing cash as dividends. dispose of one-time cash from an asset sale- one time share repurchase make a large capital structure change. acquire Treasury Stock for Option programs and M&A activity. It is important to remember that you do not want to borrow money for repurchase the stock program

6. Overseas Investment - Rationale/Risks/Methods To seek new markets. To seek new supplies of raw materials. To gain new technologies. To gain production efficiencies. To avoid political and regulatory obstacles. To reduce risk by diversification. Risks: Currency risk. Political risk. Economic and legal differences. Language differences. Cultural differences. Government roles. Methods: Exporting :-Exploit new market by exporting products abroad to see if your product is working there Starting producing abroad - by licensing agreement - pay them to produce (risk - is lost of technology, that is why typically is done with the old technologies to bring to overseas) Want to have more control create a joint venture (risk - could be problems between the partners, important to have exit plan)or Wholly owned Affliate in the form of Greenfield investment or Acquisition Greenfield investment - find your own land, build and run the plant and have wholly owned business or acquire a foreign enterprise. (Risk: you pay too much for that and culture problems) Acquisition of foreign Enterprise 7. Stock options

8. Breakeven analysis Q is quantity sold, P is price per unit, F is fixed cost, and V is variable cost. Operating breakeven = QBE QBE = F / (P V) Example: F=$200, P=$15, and V=$10:

 QBE = $200 / ($15 $10) = 40. F=P*Q-VC*Q