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Set Up and Objective 1: What is corporate finance 2: The Objective: Utopia and Let Down 3: The Objective: Reality and Reaction The Investment Decision Invest in assets that earn a return greater than the minimum acceptable hurdle rate Hurdle Rate 4. Define & Measure Risk 5. The Risk free Rate 6. Equity Risk Premiums 7. Country Risk Premiums 8. Regression Betas 9. Beta Fundamentals 10. Bottom-up Betas 11. The "Right" Beta 12. Debt: Measure & Cost 13. Financing Weights
The Financing Decision Find the right kind of debt for your firm and the right mix of debt and equity to fund your operations
Financing Mix 17. The Trade off 18. Cost of Capital Approach 19. Cost of Capital: Follow up 20. Cost of Capital: Wrap up 21. Alternative Approaches 22. Moving to the optimal
The Dividend Decision If you cannot find investments that make your minimum acceptable rate, return the cash to owners of your business
Dividend Policy 24. Trends & Measures 25. The trade off 26. Assessment 27. Action & Follow up 28. The End Game
Financing Type 23. The Right Financing
Valuation 29. First steps 30. Cash flows 31. Growth 32. Terminal Value 33. To value per share 34. The value of control 35. Relative Valuation
Investment Return 14. Earnings and Cash flows 15. Time Weighting Cash flows 16. Loose Ends
36. Closing Thoughts
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Discounted at Rio Disney cost of capital of 8.46%
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Discount at $R cost of capital = (1.0846) (1.09/1.02) – 1 = 15.91%
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Payback = 10.3 years
Year Cash Flow Cumulated CF PV of Cash Flow Cumulated DCF 0 -$2,000 -$2,000 -$2,000 -$2,000 1 -$1,000 -$3,000 -$922 -$2,922 2 -$859 -$3,859 -$730 -$3,652 3 -$267 -$4,126 -$210 -$3,862 4 $340 -$3,786 $246 -$3,616 5 $466 -$3,320 $311 -$3,305 6 $516 -$2,803 $317 -$2,988 7 $555 -$2,248 $314 -$2,674 8 $615 -$1,633 $321 -$2,353 9 $681 -$952 $328 -$2,025 10 $715 -$237 $317 -$1,708 11 $729 $491 $298 -$1,409 12 $743 $1,235 $280 -$1,129 13 $758 $1,993 $264 -$865 14 $773 $2,766 $248 -$617 15 $789 $3,555 $233 -$384 16 $805 $4,360 $219 -$165 17 $821 $5,181 $206 $41
Discounted Payback = 16.8 years 7
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Country Risk Premium (Base Case = 3% (Brazil))
Operating Expenses at Parks as % of Revenues (Base Case = 60%)
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NPV ranges from -$1 billion to +$8.5 billion. NPV is negative 12% of the time. 11
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Value Trade Off Cash flow benefits - Tax benefits - Better project choices
What is the cost to the firm of hedging this risk? Negligible
High
Is there a significant benefit in terms of higher cash flows or a lower discount rate? Yes
Is there a significant benefit in terms of higher expected cash flows or a lower discount rate?
No
Hedge this risk. The benefits to the firm will exceed the costs
Yes
Indifferent to hedging risk
No
Can marginal investors hedge this risk cheaper than the firm can?
Yes Let the risk pass through to investors and let them hedge the risk.
Discount rate benefits - Hedge "macro" risks (cost of equity) - Reduce default risk (cost of debt or debt ratio)
Do not hedge this risk. The benefits are small relative to costs
Yes
No
Will the benefits persist if investors hedge the risk instead of the firm?
Survival benefits (truncation risk) - Protect against catastrophic risk - Reduce default risk
Hedge this risk. The benefits to the firm will exceed the costs
No Hedge this risk. The benefits to the firm will exceed the costs
Pricing Trade Earnings Multiple - Effect on multiple
X
Earnings - Level - Volatility
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Maximize the value of the business (firm)
The Investment Decision Invest in assets that earn a return greater than the minimum acceptable hurdle rate
The hurdle rate should reflect the riskiness of the investment and the mix of debt and equity used to fund it.
The return should relfect the magnitude and the timing of the cashflows as welll as all side effects.
The Financing Decision Find the right kind of debt for your firm and the right mix of debt and equity to fund your operations
The optimal mix of debt and equity maximizes firm value
The right kind of debt matches the tenor of your assets
The Dividend Decision If you cannot find investments that make your minimum acceptable rate, return the cash to owners of your business
How much cash you can return depends upon current & potential investment opportunities
How you choose to return cash to the owners will depend whether they prefer dividends or buybacks
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