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CORPORATE FINANCE
CFA® Program Curriculum 2020 • LEVEL II • VOLUME 3
© CFA Institute. For candidate use only. Not for distribution.
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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