2019年CFA课程二级分册3

CORPORATEFINANCE

®

CFAPROGRAMCURRICULUM

2019•LevelII•Volume3

1

©2018,2017,2016,2015,2014,2013,2012,2011,2010,2009,2008,2007,2006byCFA

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ISBN978-1-946442-13-0(paper)

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TABLEOFCONTENTS

TitlePage

CopyrightPage

TableofContents

HowtoUsetheCFAProgramCurriculum

CurriculumDevelopmentProcess

OrganizationoftheCurriculum

FeaturesoftheCurriculum

Requiredvs.OptionalSegments[OPTIONAL]

PracticeProblems/Solutions

GlossaryandIndex

LOSSelf-Check

SourceMaterial

DesigningYourPersonalStudyProgram

CreateaSchedule

CFAInstitutePracticeQuestions

CFAInstituteMockExams

PreparatoryProviders

Feedback

CorporateFinance

StudySessions

TopicLevelLearningOutcome

StudySession7.CorporateFinance(1)

ReadingAssignments

Reading20.CapitalBudgeting

LearningOutcomes

1.Introduction[OPTIONAL]

2.TheCapitalBudgetingProcess[OPTIONAL]

3.BasicPrinciplesofCapitalBudgeting[OPTIONAL]

4.InvestmentDecisionCriteria[OPTIONAL]

4.1.NetPresentValue[OPTIONAL]

4.2.InternalRateofReturn[OPTIONAL]

4.3.PaybackPeriod[OPTIONAL]

4.4.DiscountedPaybackPeriod[OPTIONAL]

4.5.AverageAccountingRateofReturn[OPTIONAL]

4.6.ProfitabilityIndex[OPTIONAL]

4.7.NPVProfile[OPTIONAL]

4.8.RankingConflictsbetweenNPVandIRR[OPTIONAL]

4.9.TheMultipleIRRProblemandtheNoIRRProblem

[OPTIONAL]

4.10.PopularityandUsageoftheCapitalBudgetingMethods

[OPTIONAL]

5.CashFlowProjections

5.1.TableFormatwithCashFlowsCollectedbyYear

5.2.TableFormatwithCashFlowsCollectedbyType

5.3.EquationFormatforOrganizingCashFlows

6.MoreonCashFlowProjections

6.1.Straight-LineandAcceleratedDepreciationMethods

6.2.CashFlowsforaReplacementProject

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6.3.SpreadsheetModeling

6.4.EffectsofInflationonCapitalBudgetingAnalysis

7.ProjectAnalysisandEvaluation

7.1.MutuallyExclusiveProjectswithUnequalLives

7.2.CapitalRationing

7.3.RiskAnalysisofCapitalInvestments—Stand-AloneMethods

7.4.RiskAnalysisofCapitalInvestments—MarketRiskMethods

7.5.RealOptions

7.6.CommonCapitalBudgetingPitfalls

8.OtherIncomeMeasuresandValuationModels

8.1.TheBasicCapitalBudgetingModel

8.2.EconomicandAccountingIncome

8.3.EconomicProfit,ResidualIncome,andClaimsValuation

Summary

References

PracticeProblems

Solutions

Reading21.CapitalStructure

LearningOutcomes

1.Introduction

2.TheCapitalStructureDecision

2.1.PropositionIwithoutTaxes:CapitalStructureIrrelevance

2.2.PropositionIIwithoutTaxes:HigherFinancialLeverageRaises

theCostofEquity

2.3.Taxes,theCostofCapital,andtheValueoftheCompany

2.4.CostsofFinancialDistress

2.5.AgencyCosts

2.6.CostsofAsymmetricInformation

2.7.TheOptimalCapitalStructureAccordingtotheStaticTrade-Off

Theory

3.PracticalIssuesinCapitalStructurePolicy

3.1.DebtRatings

3.2.EvaluatingCapitalStructurePolicy

3.3.LeverageinanInternationalSetting

Summary

References

PracticeProblems

Solutions

Reading22.DividendsandShareRepurchases:Analysis

LearningOutcomes

1.Introduction

2.Dividends:FormsandEffectsonShareholderWealthandIssuing

Company’sFinancialRatios

2.1.RegularCashDividends

2.2.ExtraorSpecial(Irregular)Dividends

2.3.LiquidatingDividends

2.4.StockDividends

2.5.StockSplits

3.DividendPolicyandCompanyValue:Theory

3.1.DividendPolicyDoesNotMatter

3.2.DividendPolicyMatters:TheBirdintheHandArgument

3.3.DividendPolicyMatters:TheTaxArgument

3.4.OtherTheoreticalIssues

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3.5.DividendTheory:Summary

4.FactorsAffectingDividendPolicyinPractice

4.1.InvestmentOpportunities

4.2.TheExpectedVolatilityofFutureEarnings

4.3.FinancialFlexibility

4.4.TaxConsiderations

4.5.FlotationCosts

4.6.ContractualandLegalRestrictions

4.7.FactorsAffectingDividendPolicy:Summary

5.PayoutPolicies

5.1.StableDividendPolicy

5.2.ConstantDividendPayoutRatioPolicy

5.3.ResidualDividendPolicy

6.ShareRepurchases

6.1.ShareRepurchaseMethods

6.2.FinancialStatementEffectsofRepurchases

6.3.ValuationEquivalenceofCashDividendsandShare

Repurchases:TheBaseline

6.4.TheDividendversusShareRepurchaseDecision

7.GlobalTrendsinPayoutPolicy

8.AnalysisofDividendSafety

Summary

References

PracticeProblems

Solutions

StudySession8.CorporateFinance(2)

ReadingAssignments

Reading23.CorporatePerformance,Governance,andBusinessEthics

LearningOutcomes

Overview

StakeholdersandCorporatePerformance

StakeholderImpactAnalysis

TheUniqueRoleofStockholders

Profitability,ProfitGrowth,andStakeholderClaims

AgencyTheory

Principal–AgentRelationships

TheAgencyProblem

EthicsandStrategy

EthicalIssuesinStrategy

TheRootsofUnethicalBehavior

PhilosophicalApproachestoEthics

BehavingEthically

Reading24.CorporateGovernance

LearningOutcomes

1.Introduction

2.CorporateGovernance:ObjectivesandGuidingPrinciples

3.FormsofBusinessandConflictsofInterest

3.1.SoleProprietorships

3.2.Partnerships

3.3.Corporations

4.SpecificSourcesofConflict:AgencyRelationships

4.1.Manager–ShareholderConflicts

4.2.Director–ShareholderConflicts

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5.CorporateGovernanceEvaluation

5.1.TheBoardofDirectors

5.2.ExamplesofCodesofCorporateGovernance

6.Environmental,Social,andGovernanceFactors

7.ValuationImplicationsofCorporateGovernance

Summary

PracticeProblems

Solutions

Reading25.MergersandAcquisitions

LearningOutcomes

1.Introduction

2.MergersandAcquisitions:DefinitionsandClassifications

3.MotivesforMerger

3.1.Synergy

3.2.Growth

3.3.IncreasingMarketPower

3.4.AcquiringUniqueCapabilitiesandResources

3.5.Diversification

3.6.BootstrappingEarnings

3.7.Managers’PersonalIncentives

3.8.TaxConsiderations

3.9.UnlockingHiddenValue

3.10.Cross-BorderMotivations

4.TransactionCharacteristics

4.1.FormofAcquisition

4.2.MethodofPayment

4.3.Mind-SetofTargetManagement

5.Takeovers

5.1.Pre-OfferTakeoverDefenseMechanisms

5.2.Post-OfferTakeoverDefenseMechanisms

6.Regulation

6.1.Antitrust

6.2.SecuritiesLaws

7.MergerAnalysis

7.1.TargetCompanyValuation

7.2.BidEvaluation

8.WhoBenefitsfromMergers?

9.CorporateRestructuring

Summary

PracticeProblems

Solutions

Glossary

A

B

C

D

E

F

G

H

I

J

K

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HowtoUsetheCFAProgramCurriculum

©2018CFAInstitute.Allrightsreserved.

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CongratulationsonreachingLevelIIoftheCharteredFinancialAnalyst®(CFA®)Program.

Thisexcitingandrewardingprogramofstudyreflectsyourdesiretobecomeaserious

investmentprofessional.Youareembarkingonaprogramnotedforitshighethicalstandards

andthebreadthofknowledge,skills,andabilities(competencies)itdevelops.Your

commitmenttotheCFAProgramshouldbeeducationallyandprofessionallyrewarding.

Thecredentialyouseekisrespectedaroundtheworldasamarkofaccomplishmentand

dedication.Eachleveloftheprogramrepresentsadistinctachievementinprofessional

development.Successfulcompletionoftheprogramisrewardedwithmembershipina

prestigiousglobalcommunityofinvestmentprofessionals.CFAcharterholdersarededicatedto

life-longlearningandmaintainingcurrencywiththeever-changingdynamicsofachallenging

profession.TheCFAProgramrepresentsthefirststeptowardacareer-longcommitmentto

professionaleducation.

TheCFAexaminationmeasuresyourmasteryofthecoreknowledgeandskillsrequiredto

succeedasaninvestmentprofessional.Thesecoreknowledgeandskillsarethebasisforthe

CandidateBodyofKnowledge(CBOK™).TheCBOKconsistsoffourcomponents:

◾AbroadoutlinethatliststhemajortopicareascoveredintheCFAProgram

(/cbok);

◾Topicareaweightsthatindicatetherelativeexamweightingsofthetop-leveltopicareas

(/level_II);

◾Learningoutcomestatements(LOS)thatadvisecandidatesaboutthespecificknowledge,

skills,andabilitiestheyshouldacquirefromreadingscoveringatopicarea(LOSare

providedincandidatestudysessionsandatthebeginningofeachreading);and

◾TheCFAProgramcurriculumthatcandidatesreceiveuponexamregistration.

Therefore,thekeytoyoursuccessontheCFAexaminationsisstudyingandunderstandingthe

CBOK.ThefollowingsectionsprovidebackgroundontheCBOK,theorganizationofthe

curriculum,andtipsfordevelopinganeffectivestudyprogram.

7

CURRICULUMDEVELOPMENTPROCESS

TheCFAProgramisgroundedinthepracticeoftheinvestmentprofession.Beginningwiththe

GlobalBodyofInvestmentKnowledge(GBIK),CFAInstituteperformsacontinuouspractice

analysiswithinvestmentprofessionalsaroundtheworldtodeterminethecompetenciesthatare

relevanttotheprofession.Regionalexpertpanelsandtargetedsurveysareconductedannually

toverifyandreinforcethecontinuousfeedbackfromtheGBIKcollaborativewebsite.The

practiceanalysisprocessultimatelydefinestheCBOK.TheCBOKreflectsthecompetencies

thataregenerallyacceptedandappliedbyinvestmentprofessionals.Thesecompetenciesare

usedinpracticeinageneralistcontextandareexpectedtobedemonstratedbyarecently

qualifiedCFAcharterholder.

TheEducationAdvisoryCommittee,consistingofpracticingcharterholders,inconjunction

withCFAInstitutestaff,designstheCFAProgramcurriculuminordertodelivertheCBOKto

candidates.Theexaminations,alsowrittenbycharterholders,aredesignedtoallowyouto

demonstrateyourmasteryoftheCBOKassetforthintheCFAProgramcurriculum.Asyou

structureyourpersonalstudyprogram,youshouldemphasizemasteryoftheCBOKandthe

practicalapplicationofthatknowledge.Formoreinformationonthepracticeanalysis,CBOK,

anddevelopmentoftheCFAProgramcurriculum,pleasevisit.

ORGANIZATIONOFTHECURRICULUM

TheLevelIICFAProgramcurriculumisorganizedinto10topicareas.Eachtopicareabegins

withabriefstatementofthematerialandthedepthofknowledgeexpected.

Eachtopicareaisthendividedintooneormorestudysessions.Thesestudysessions—17

sessionsintheLevelIIcurriculum—shouldformthebasicstructureofyourreadingand

preparation.

Eachstudysessionincludesastatementofitsstructureandobjectiveandisfurtherdividedinto

specificreadingassignments.Anoutlineillustratingtheorganizationofthese17studysessions

canbefoundatthefrontofeachvolumeofthecurriculum.

ThesereadingsaredrawnfromcontentcommissionedbyCFAInstitute,textbookchapters,

professionaljournalarticles,researchanalystreports,andcases.EachreadingincludesLOSand

thecorematerialtobestudied,oftenacombinationoftext,exhibits,andin-textexamplesand

questions.Areadingtypicallyendswithpracticeproblemsfollowedbysolutionstothese

problemstohelpyouunderstandandmasterthetopicareas.TheLOSindicatewhatyoushould

beabletoaccomplishafterstudyingthematerial.TheLOS,corematerial,andthepractice

problemsaredependentoneachother,withthecorematerialandpracticeproblemsproviding

contextforunderstandingthescopeoftheLOSandenablingyoutoapplyaprincipleorconcept

inavarietyofscenarios.

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Theentirereadings,includingthepracticeproblemsattheendofthereadings,arethebasisfor

allexaminationquestionsandareselectedordevelopedspecificallytoteachtheknowledgeand

skillsreflectedintheCBOK.

YoushouldusetheLOStoguideandfocusyourstudybecauseeachexaminationquestionis

basedononeormoreLOSandthecorematerialandpracticeproblemsassociatedwiththe

LOS.Asacandidate,youareresponsiblefortheentiretyoftherequiredmaterialinastudy

session.

WeencourageyoutoreviewtheinformationabouttheLOSonourwebsite

(/programs/cfaprogram/courseofstudy/Pages/study_sessions.aspx),

includingthedescriptionsofLOS“command

words”(/programs/Documents/cfa_and_cipm_los_command_words.pdf).

FEATURESOFTHECURRICULUM

Beginoptionalsegment

Requiredvs.OptionalSegments

Youshouldreadallofanassignedreading.Insomecases,though,wehavereprintedanentire

chapterorarticleandmarkedcertainpartsofthereadingas“optional.”TheCFAexaminationis

basedonlyontherequiredsegments,andtheoptionalsegmentsareincludedonlywhenitis

determinedthattheymighthelpyoutobetterunderstandtherequiredsegments(byseeingthe

requiredmaterialinitsfullcontext).Whenanoptionalsegmentbegins,youwillseeaniconand

adashedverticalbarintheoutsidemarginthatwillcontinueuntiltheoptionalsegmentends,

accompaniedbyanothericon.Unlessthematerialisspecificallymarkedasoptional,you

shouldassumeitisrequired.Youshouldrelyontherequiredsegmentsandthereading-specific

LOSinpreparingfortheexamination.

Endoptionalsegment

PracticeProblems/Solutions

Allpracticeproblemsattheendofthereadingsaswellastheirsolutionsarepartofthe

curriculumandarerequiredmaterialfortheexam.Inadditiontothein-textexamplesand

questions,thesepracticeproblemsshouldhelpdemonstratepracticalapplicationsandreinforce

yourunderstandingoftheconceptspresented.Manyofthesepracticeproblemsareadapted

frompastCFAexaminationsand/ormayserveasabasisforexamquestions.

GlossaryandIndex

Foryourconvenience,wehaveprintedacomprehensiveglossaryineachvolume.Throughout

thecurriculum,aboldedwordinareadingdenotesatermdefinedintheglossary.The

curriculumeBookissearchable,butwealsopublishanindexthatcanbefoundontheCFA

InstitutewebsitewiththeLevelIIstudysessions.

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LOSSelf-Check

WehaveinsertedcheckboxesnexttoeachLOSthatyoucanusetotrackyourprogressin

masteringtheconceptsineachreading.

SourceMaterial

Theauthorship,publisher,andcopyrightownersaregivenforeachreadingforyourreference.

WerecommendthatyouusetheCFAInstitutecurriculumratherthantheoriginalsource

materialsbecausethecurriculummayincludeonlyselectedpagesfromoutsidereadings,

updatedsectionswithinthereadings,andproblemsandsolutionstailoredtotheCFAProgram.

NotethatsomereadingsmaycontainawebaddressorURL.Thereferencedsiteswereliveat

thetimethereadingwaswrittenbutmayhavebeendeactivatedsincethen.

SomereadingsinthecurriculumcitearticlespublishedintheFinancialAnalysts

Journal®,whichistheflagshippublicationofCFAInstitute.Sinceitslaunchin1945,

theFinancialAnalystsJournalhasestablisheditselfastheleadingpractitioner-oriented

journalintheinvestmentmanagementcommunity.Overtheyears,ithasadvancedthe

knowledgeandunderstandingofthepracticeofinvestmentmanagementthroughthe

publicationofpeer-reviewedpractitioner-relevantresearchfromleadingacademicsand

practitioners.Ithasalsofeaturedthought-provokingopinionpiecesthatadvancethe

commonlevelofdiscoursewithintheinvestmentmanagementprofession.Someofthe

mostinfluentialresearchintheareaofinvestmentmanagementhasappearedinthe

pagesoftheFinancialAnalystsJournal,and12Nobellaureateshavecontributedmore

than40articles.

CandidatesarenotresponsibleforfamiliaritywithFinancialAnalystsJournalarticles

thatarecitedinthecurriculum.But,asyourtimeandstudiesallow,westrongly

encourageyoutobeginsupplementingyourunderstandingofkeyinvestment

managementissuesbyreadingthispractice-orientedpublication.Candidateshavefull

onlineaccesstotheFinancialAnalystsJournalandassociatedresources.Allyouneed

istologinonusingyourcandidatecredentials.

DESIGNINGYOURPERSONALSTUDY

PROGRAM

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CreateaSchedule

Anorderly,systematicapproachtoexampreparationiscritical.Youshoulddedicatea

consistentblockoftimeeveryweektoreadingandstudying.Completeallreadingassignments

andtheassociatedproblemsandsolutionsineachstudysession.ReviewtheLOSbothbefore

andafteryoustudyeachreadingtoensurethatyouhavemasteredtheapplicablecontentand

candemonstratetheknowledgeandskillsdescribedbytheLOSandtheassignedreading.Use

theLOSself-checktotrackyourprogressandhighlightareasofweaknessforlaterreview.

Asyouprepareforyourexam,wewille-mailyouimportantexamupdates,testingpolicies,and

studytips.Besuretoreadthesecarefully.Curriculumerrataareperiodicallyupdatedand

postedonthestudysessionpageat.

Successfulcandidatesreportanaverageofmorethan300hourspreparingforeachexam.Your

preparationtimewillvarybasedonyourprioreducationandexperience,andyouwillprobably

spendmoretimeonsomestudysessionsthanonothers.AstheLevelIIcurriculumincludes17

studysessions,agoodplanistodevote15−20hoursperweekfor17weekstostudyingthe

materialandusethefinalfourtosixweeksbeforetheexamtoreviewwhatyouhavelearned

andpracticewithpracticequestionsandmockexams.Thisrecommendation,however,may

underestimatethehoursneededforappropriateexaminationpreparationdependingonyour

individualcircumstances,relevantexperience,andacademicbackground.Youwillundoubtedly

adjustyourstudytimetoconformtoyourownstrengthsandweaknessesandtoyour

educationalandprofessionalbackground.

Youshouldallowampletimeforbothin-depthstudyofalltopicareasandadditional

concentrationonthosetopicareasforwhichyoufeeltheleastprepared.

Aninteractivestudyplannerisprovidedalongwithyourpracticequestionsandmockexamsto

helpyouplanyourstudytime.Theinteractivestudyplannercalculatesyourstudyprogressand

pacebasedonthetimeremaininguntilexamination.

CFAInstitutePracticeQuestions

TheCFAInstitutepracticequestionsareintendedtoassessyourmasteryofindividualtopic

areasasyouprogressthroughyourstudies.Aftereachpracticequestionset,youwillreceive

immediatefeedbacknotingthecorrectresponsesandindicatingtherelevantassignedreadingso

youcanidentifyareasofweaknessforfurtherstudy.Formoreinformationonthepractice

questionsets,pleasevisit.

CFAInstituteMockExams

Thethree-hourmockexamssimulatethemorningandafternoonsessionsoftheactualCFA

examination,andareintendedtobetakenafteryoucompleteyourstudyofthefullcurriculum

soyoucantestyourunderstandingofthecurriculumandyourreadinessfortheexam.Youwill

receivefeedbackattheendofthemockexam,notingthecorrectresponsesandindicatingthe

relevantassignedreadingssoyoucanassessareasofweaknessforfurtherstudyduringyour

reviewperiod.Werecommendthatyoutakemockexamsduringthefinalstagesofyour

preparationfortheactualCFAexamination.Formoreinformationonthemockexaminations,

pleasevisit.

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PreparatoryProviders

AfteryouenrollintheCFAProgram,youmayreceivenumeroussolicitationsforpreparatory

coursesandreviewmaterials.Whenconsideringaprepcourse,makesuretheproviderisin

compliancewiththeCFAInstituteApprovedPrepProviderProgram

(/utility/examprep/Pages/index.aspx).Justremember,thereareno

shortcutstosuccessontheCFAexaminations;readingandstudyingtheCFAcurriculumisthe

keytosuccessontheexamination.TheCFAexaminationsreferenceonlytheCFAInstitute

assignedcurriculum—nopreparatorycourseorreviewcoursematerialsareconsultedor

referenced.

SUMMARY

EveryquestionontheCFAexaminationisbasedonthecontentcontainedinthe

requiredreadingsandononeormoreLOS.Frequently,anexaminationquestionis

basedonaspecificexamplehighlightedwithinareadingoronaspecificpractice

problemanditssolution.TomakeeffectiveuseoftheCFAProgramcurriculum,please

rememberthesekeypoints:

1.Allpagesofthecurriculumarerequiredreadingfortheexaminationexceptfor

occasionalsectionsmarkedasoptional.Youmayreadoptionalpagesas

background,butyouwillnotbetestedonthem.

2.Allquestions,problems,andtheirsolutions—foundattheendofreadings—are

partofthecurriculumandarerequiredstudymaterialfortheexamination.

3.Youshouldmakeappropriateuseofthetopictestsandmockexaminationsand

otherresourcesavailableat.

4.Usetheinteractivestudyplannertocreateascheduleandcommitsufficientstudy

timetocoverthe17studysessions,reviewthematerials,andtaketopictestsand

mockexaminations.

5.Someoftheconceptsinthestudysessionsmaybesupersededbyupdatedrulings

and/orpronouncementsissuedafterareadingwaspublished.Candidatesare

expectedtobefamiliarwiththeoverallanalyticalframeworkcontainedinthe

assignedreadings.Candidatesarenotresponsibleforchangesthatoccurafterthe

materialwaswritten.

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FEEDBACK

AtCFAInstitute,wearecommittedtodeliveringacomprehensiveandrigorouscurriculumfor

thedevelopmentofcompetent,ethicallygroundedinvestmentprofessionals.Werelyon

candidateandmemberfeedbackasweworktoincorporatecontent,design,andpackaging

improvements.Youcanbeassuredthatwewillcontinuetolistentoyoursuggestions.Please

sendanycommentsorfeedbacktoinfo@.Ongoingimprovementsinthe

curriculumwillhelpyouprepareforsuccessontheupcomingexaminationsandforalifetime

oflearningasaseriousinvestmentprofessional.

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CorporateFinance

©2018CFAInstitute.Allrightsreserved.

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STUDYSESSIONS

StudySession7CorporateFinance(1)

StudySession8CorporateFinance(2)

TOPICLEVELLEARNINGOUTCOME

Thecandidateshouldbeabletoevaluatecapitalbudgetprojects,capitalstructurepolicy,dividend

policy,corporategovernance,andmergersandacquisitions.

Capitalinvestments,corporatestructure,payoutpolicies,governance,mergers,andacquisitions

cansignificantlyaffectacompany’soperations,financials,andperformance.Companieshaving

strongleadership,wellmanagedoperations,soundcorporategovernancepolicies,andprofitable

investmentactivitiesaremorelikelytoaddvaluefortheirshareholdersandotherstakeholders.

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StudySession7 

CorporateFinance(1)

©2018CFAInstitute.Allrightsreserved.

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Thisstudysessioncoversthecapitalbudgetingprocesswithemphasisonitsprinciplesand

investmentdecisioncriteria.Projectevaluationthroughtheuseofspreadsheetmodelingis

presented.Otherincomeandvaluationmodelapproachesarecompared.Thesubjectofcapital

structureisintroducedwiththeclassicModigliani–Millerirrelevancetheory,whichproposes

thatcapitalstructuredecisionsshouldhavenoeffectoncompanyvalue.Additional

considerationsoftaxes,agencycosts,andfinancialdistressareintroduced.Thesession

concludeswithdiscussionondividendpolicies,factorsaffectingdistributionorreinvestment,

anddividendpayoutorsharerepurchasedecisions.

READINGASSIGNMENTS

Reading20CapitalBudgeting

byJohnD.Stowe,PhD,CFA,andJacquesR.Gagné,FSA,CFA,CIPM

Reading21CapitalStructure

byRajAggarwal,PhD,CFA,PamelaPetersonDrake,PhD,CFA,Adam

Kobor,PhD,CFA,andGregoryNoronha,PhD,CFA

Reading22DividendsandShareRepurchases:Analysis

byGregoryNoronha,PhD,CFA,andGeorgeH.Troughton,PhD,CFA

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Reading20 

CapitalBudgeting

byJohnD.Stowe,PhD,CFA,andJacquesR.Gagné,FSA,CFA,CIPM

JohnD.Stowe,PhD,CFA,isatOhioUniversity(USA).JacquesR.Gagné,FSA,CFA,CIPM,

isatENAP(Canada).

CorporateFinance:APracticalApproach,byMichelleR.Clayman,CFA,MartinS.Fridson,CFA,andGeorgeH.

Troughton,CFA.©2008CFAInstitute.Allrightsreserved.

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LEARNINGOUTCOMES

Thecandidateshouldbeableto:

a.calculatetheyearlycashflowsofexpansionandreplacementcapitalprojectsand

evaluatehowthechoiceofdepreciationmethodaffectsthosecashflows;

b.explainhowinflationaffectscapitalbudgetinganalysis;

c.evaluatecapitalprojectsanddeterminetheoptimalcapitalprojectinsituationsof1)

mutuallyexclusiveprojectswithunequallives,usingeithertheleastcommonmultipleof

livesapproachortheequivalentannualannuityapproach,and2)capitalrationing;

d.explainhowsensitivityanalysis,scenarioanalysis,andMonteCarlosimulationcanbe

usedtoassessthestand-aloneriskofacapitalproject;

e.explainandcalculatethediscountrate,basedonmarketriskmethods,touseinvaluinga

capitalproject;

f.describetypesofrealoptionsandevaluateacapitalprojectusingrealoptions;

g.describecommoncapitalbudgetingpitfalls;

h.calculateandinterpretaccountingincomeandeconomicincomeinthecontextofcapital

budgeting;

i.distinguishamongtheeconomicprofit,residualincome,andclaimsvaluationmodelsfor

capitalbudgetingandevaluateacapitalprojectusingeach.

Beginoptionalsegment

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1.INTRODUCTION

Capitalbudgetingistheprocessthatcompaniesusefordecisionmakingoncapital

projects—thoseprojectswithalifeofayearormore.Thisisafundamentalareaofknowledge

forfinancialanalystsformanyreasons.

◾First,capitalbudgetingisveryimportantforcorporations.Capitalprojects,whichmake

upthelong-termassetportionofthebalancesheet,canbesolargethatsoundcapital

budgetingdecisionsultimatelydecidethefutureofmanycorporations.Capitaldecisi