Académique Documents
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Copyright 2004
Copyright 2004
Categories of Investment
Replacement
Cost Reduction
Output Expansion to Accommodate
Demand Increases
Output Expansion for New Products
Government Regulation
Copyright 2004
Supply of Capital
Marginal cost of capital
Increasing marginal cost
Copyright 2004
Copyright 2004
Copyright 2004
Sales
$1,000,000
Less: Variable costs
500,000
Fixed costs
150,000
Depreciation
200,000
Profit before taxes
$150,000
Less: Income tax
60,000
Profit after taxes
$90,000
Plus: Depreciation
200,000
Net cash flow
$290,000
Prepared by Robert F. Brooker, Ph.D.
Copyright 2004
Rt
NPV
C0
t
t 1 (1 k )
Copyright 2004
Rt
C0
t
t 1 (1 k *)
Copyright 2004
Capital Rationing
Profitability Index (PI)
n
Rt
t
(1
k
)
t 1
PI
C0
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Copyright 2004
Copyright 2004
D
D
D
P
ke
t
ke
P
t 1 (1 ke )
P = Price of a share of stock
D = Constant dividend per share
ke = Required rate of return
Prepared by Robert F. Brooker, Ph.D.
Copyright 2004
D
ke g
P
Copyright 2004
Copyright 2004
wd = Proportion of debt
kd = Cost of debt
we = Proportion of equity
ke = Cost of equity
Prepared by Robert F. Brooker, Ph.D.
Copyright 2004