Capital Structure

Incremental Cash Flows
1. Include
  1. Cash Flows
  2. Opportunity Costs
  3. Erosion/Synergy
2. Ignore
  1. Sunk Costs
  2. Allocated costs
  3. Financing costs
Capital Budgeting
1. Complications
  1. Inflation
  2. Taxation
  3. Mutually exclusive investments
Taxation
1. Companies pay corporation tax after profits
  1. Taxable income is not the same as cash flows
  2. Amount and timing will affect NPV
2. Companies can claim depreciation charge against income
Depreciation vs. Capital Allowance
1. Depreciation
  1. Disallowed for tax
2. Capital Allowance
  1. HMRC grants capital allowance before arriving at taxable profit
Equivalent Annual Cost
1. 2 mutually exclusive investments
  1. Transform each investment's cash flows into annuity payments with same PV
2. PV = EAC x Ar^T
  1. Ar^t = annuity of £1 for T periods
Cash Flows
1. Cash flows from operations
  1. Revenues & Expenses
  2. Derived from profit/income
2. Cash flows from investments
  1. Net capital investment
  2. Net working capital
Sensitivity and Scenario Analysis
1. Sensitivity Analysis
  1. Sensitivity of NPV to changes in underlying assumptions
  2. BOP Analysis
    1. Best, Optimistic, Pessimistic
2. Scenario Analysis
  1. Each scenario involves a confluence of factors
  2. Market share and price may decline due to negative market dynamics

Resource summary

	Created by alex.walker over 11 years ago