Corporate Finance: Instructor\'s Manual Applied Corporate Finance

Aswath Damodaran 241 Equity Analysis: The Parallels ! The investment analysis can be done entirely in equity terms, as well. The ...

Aswath Damodaran 242 A Brief Example: A Paper Plant for Aracruz - Investment Assumptions The plant is expected to have a capacit ...

Aswath Damodaran 243 Operating Assumptions ! The plant will be partly in commission in a couple of months, but will have a capac ...

Aswath Damodaran 244 The Hurdle Rate ! The analysis is done in real, equity terms. Thus, the hurdle rate has to be a real cost o ...

Aswath Damodaran 245 Breaking down debt payments by year Year Beginning Debt Interest expense Principal Repaid Total Payment End ...

Aswath Damodaran 246 Project Income: Paper Plant 1 2 3 4 5 6 7 8 9 10 Capacity (in ' 000 s) 650 700 750 750 750 750 750 750 750 ...

Aswath Damodaran 247 A ROE Analysis Real ROE of 23. 24 % is greater than Real Cost of Equity of 11. 46 % Year Net Income Beg. BV ...

Aswath Damodaran 248 From Project ROE to Firm ROE ! As with the earlier analysis, where we used return on capital and cost of ca ...

Aswath Damodaran 249 An Incremental CF Analysis 0 1 2 3 4 5 6 7 8 9 10 Net Income 9 , 933 20 , 171 29 , 500 37 , 213 39 , 896 35 ...

Aswath Damodaran 250 An Equity NPV Year FCFE PV of FCFE 0 ( 185 , 100 BR) ( 185 , 100 BR) 1 34 , 375 BR 30 , 840 BR 2 37 , 201 B ...

Aswath Damodaran 251 An Equity IRR Figure 5.6: NPV Profile on Equity Investment in Paper Plant: Aracruz ($50,000.00) $0.00 $50,0 ...

Aswath Damodaran 252 The Role of Sensitivity Analysis ! Our conclusions on a project are clearly conditioned on a large number o ...

Aswath Damodaran 253 Viability of Paper Plant: Sensitivity to Price per Ton Clearly NPV goes down as the price per ton goes down ...

Aswath Damodaran 254 What does sensitivity analysis tell us? Assume that the manager at Aracruz who has to decide on whether to ...

Aswath Damodaran 255 Side Costs and Benefits ! Most projects considered by any business create side costs and benefits for that ...

Aswath Damodaran 256 Opportunity Cost ! An opportunity cost arises when a project uses a resource that may already have been pai ...

Aswath Damodaran 257 Case 1 : Opportunity Costs ! Assume that Disney owns land in Bangkok already. This land is undeveloped and ...

Aswath Damodaran 258 Case 2 : Excess Capacity ! In the Aracruz example, assume that the firm will use its existing distribution ...

Aswath Damodaran 259 Estimating the Cost of Excess Capacity ! The existing Capacity is 100 , 000 units; the book value of this u ...

Aswath Damodaran 260 Opportunity Cost of Excess Capacity Year Old New Old + New Lost ATCF PV(ATCF) 1 50. 00 % 30. 00 % 80. 00 % ...