1. Plan for Today 1.Hand in case 2.Administration & Questions 3.Review of last class 4.Case: Tartempion: The incremental approach 5.Tax shields -- Capital Cost Allowance (CCA) 6.Case: Fonderia Di Torino S.P.A. 7.Conclusion and preparation for next week

2. Review of Last Week We study the long-term decisions of a financial manager: –How to use funds: What projects to undertake to maximize firm value How much dividends to pay –Where to get funds: equity and debt Key concepts in financial decision making: –Time value of money –Risk and return Use NPV to value investments: –Use cash flows, not accounting numbers –Focus on incremental cash flows

3. Course in a Nutshell Stockholders Bondholders Financial Manager Projects Investments Cash flow Interest Dividends The Firm Capital Budgeting The Market Capital Structure Equity Debt Government Corporate Taxes Personal Taxes

4. What we know now Capital investments generate tax effects over time –Use PVCCATS formula to account for tax shields Challenges in NPV analysis –Finding the relevant incremental cash flows Include all effects of a project and compare with the status quo –Dealing with inflation Match real CFs with real rates and nominal CFs with nominal rates –Comparing equipment with different lives Use Equivalent Annual Cost or extend to same life NPV analysis incorporates most of Buffet’s investment principals

5. Next Week Quiz –Start of class –Material from weeks 1 and 2 Readings: Chapters 9 and 11 Case: The Investment Detective –Read through only