财务管理Chap001.ppt

The value of an investment made by a firm depends on the timing of cash flows. One dollar received today is worth more than one dollar received next year. 1-* the Midland Company is attempting to choose between two proposals for new products. Both proposals will provide additional cash flows over a four-year period and will initially cost $10,000. The cash flows from the proposals are as follows: YEAR NEW PRODUCT A NEW PRODUCT B 1 $ 0 $4,000 2 0 4,000 3 0 4,000 4 20,000 4,000 Total $20,000 $16,000 1-* Conclusion: At first it appears that new product A would be best. However, the cash flows from proposal B come earlier than those of A . Without more information, we cannot decide which set of cash flows would create the most value for the bondholders and shareholders. It depends on whether the value of getting cash from B up front outweighs the extra total cash from A . 1-* The firm must consider risk. The amount and timing of cash flows are not usually known with certainty. Most investors have an aversion to risk. 1-* The Midland Company is considering expanding operations overseas. It is evaluating Europe and Japan as possible sites. Europe is considered to be relatively safe, whereas operating in Japan is seen as very risky. In both cases the company would close down operations after one year. PESSIMISTIC MOST LIKELY OPTIMISTIC Europe $75,000 $100,000 $125,000 Japan 0 150,000 200,000 1-* Conclusion: Japan appears to be riskier, but it also offers a higher expected level of cash flow. What is risk and how can it be defined? Corporate finance cannot avoid coping with risky alternatives, and much of our book is devoted to developing methods for evaluating risky opportunitie