E-Book Content
© CFA Institute. For candidate use only. Not for distribution. CORPORATE FINANCE CFA® Program Curriculum 2020 • LEVEL II • VOLUME 3 © CFA Institute. For candidate use only. Not for distribution. © 2019, 2018, 2017, 2016, 2015, 2014, 2013, 2012, 2011, 2010, 2009, 2008, 2007, 2006 by CFA Institute. All rights reserved. This copyright covers material written expressly for this volume by the editor/s as well as the compilation itself. It does not cover the individual selections herein that first appeared elsewhere. Permission to reprint these has been obtained by CFA Institute for this edition only. Further reproductions by any means, electronic or mechanical, including photocopying and recording, or by any information storage or retrieval systems, must be arranged with the individual copyright holders noted. CFA®, Chartered Financial Analyst®, AIMR-PPS®, and GIPS® are just a few of the trademarks owned by CFA Institute. To view a list of CFA Institute trademarks and the Guide for Use of CFA Institute Marks, please visit our website at www.cfainstitute.org. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. All trademarks, service marks, registered trademarks, and registered service marks are the property of their respective owners and are used herein for identification purposes only. ISBN 978-1-946442-84-0 (paper) ISBN 978-1-950157-08-2 (ebk) 10 9 8 7 6 5 4 3 2 1 © CFA Institute. For candidate use only. Not for distribution. CONTENTS How to Use the CFA Program Curriculum Background on the CBOK Organization of the Curriculum Features of the Curriculum Designing Your Personal Study Program Feedback v v vi vi viii ix Corporate Finance Study Session 7 Corporate Finance (1) Reading 19 Capital Budgeting Introduction The Capital Budgeting Process Basic Principles of Capital Budgeting Investment Decision Criteria Net Present Value Internal Rate of Return Payback Period Discounted Payback Period Average Accounting Rate of Return Profitability Index NPV Profile Ranking Conflicts between NPV and IRR The Multiple IRR Problem and the No IRR Problem Popularity and Usage of the Capital Budgeting Methods Cash Flow Projections Table Format with Cash Flows Collected by Year Table Format with Cash Flows Collected by Type Equation Format for Organizing Cash Flows More on Cash Flow Projections Straight-Line and Accelerated Depreciation Methods Cash Flows for a Replacement Project Spreadsheet Modeling Effects of Inflation on Capital Budgeting Analysis Project Analysis and Evaluation Mutually Exclusive Projects with Unequal Lives Capital Rationing Risk Analysis of Capital Investments—Stand-Alone Methods Risk Analysis of Capital Investments—Market Risk Methods Real Options Common Capital Budgeting Pitfalls Other Income Measures and Valuation Models The Basic Capital Budgeting Model Economic and Accounting Income indicates an optional segment 3 5 6 6 8 10 10 11 13 14 15 16 17 18 22 25 27 27 29 29 31 31 34 36 37 38 38 40 42 49 52 55 57 58 58 ii Reading 20 Reading 21 © CFA Institute. For candidate use only. Not for distribution. Contents Economic Profit, Residual Income, and Claims Valuation Summary Practice Problems Solutions 61 65 69 83 Capital Structure Introduction The Capital Structure Decision Proposition I without Taxes: Capital Structure Irrelevance Proposition II without Taxes: Higher