Financial Management AdvantagesandLimitations.................................. 205 SensitivityAnalysis ........................................... 206 Capital Budgeting in Practice ................................... 208 Alternative Approaches to Capital Budgeting . . . . . . . . . . . . . . . . . . . . . . 209 A Final Word on PLDT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 DiscussionQuestions............................................ 210 Practice Problems .............................................. 211 Multiple Choice Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 223 Intended Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 Risks ....................................................... 224 OperatingLeverage......................................... 226 FinancialLeverage.......................................... 231 Combining Operating Leverage and Financial Leverage. . . . . . . . . . . . 233 Hamada Equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234 OptimalCapitalStructure...................................... 235 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 DiscussionQuestions............................................ 237 Practice Problems .............................................. 237 Multiple Choice Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 CHAPTER 6 Risk and Leverage 243 Intended Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244 Hybrid Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244 TypesofHybridFinancing.................................... 245 Advantages and Disadvantages of Hybrid Financing . . . . . . . . . . . . . . . . 253 HybridFinancinginPractice.................................... 253 FutureofHybridFinancing..................................... 257 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258 DiscussionQuestions............................................ 258 Practice Problems .............................................. 258 Multiple Choice Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261 263 Intended Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264 WhatIsDividendPolicy?....................................... 264 ThreeOptimalPayoutTheories............................... 265 Residual Dividend Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 Illustration ................................................ 269 DividendReinvestmentPlans................................. 270 Low-Regular-Dividends-plus-Extra Policy . . . . . . . . . . . . . . . . . . . . . . . . . 271 DividendPolicyTakeaways................................... 271 StockRepurchases............................................ 272 Principal Types of Repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272 AdvantagesofRepurchases.................................. 272 DisadvantagesofRepurchases................................ 274 Illustrative Problem on Stock Repurchase. . . . . . . . . . . . . . . . . . . . . . . 274 Stock Dividends and Splits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276 Why Split the Stock or Pay a Stock Dividend?. . . . . . . . . . . . . . . . . . . . 277 Illustration ................................................ 277 CHAPTER 7 Hybrid Financing CHAPTER 8 Dividend Policy
Comprehensive Illustration of Cebu Air’s WACC. . . . . . . . . . . . . . . . . . 143 TheMarginalCostofCapital(MCC).............................. 145 Retained Earnings Breakpoint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 Long-Term Debt Breakpoint .................................. 146 PreferredStockBreakpoint .................................. 147 Marginal Cost of Capital (MCC) Structure . . . . . . . . . . . . . . . . . . . . . . . 147 AFinalWordonCebuPacific................................... 147 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 DiscussionQuestions............................................ 148 Practice Problem ............................................... 149 MultipleChoiceQuestions ....................................... 151 Appendix 4.1: Calculating Covariance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 Appendix 4.2: Calculating Variance and Standard Deviation . . . . . . . . . . . . 160 Appendix 4.3: Approximating the nth Root of Any Number . . . . . . . . . . . . . 161 163 Intended Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 WhatIsCapitalBudgeting?..................................... 164 Types of Capital Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 Basic Principles in Capital Budgeting ........................... 166 Steps in Capital Budgeting ................................... 167 RelevantCashFlows........................................ 168 Non-discounted Capital Budgeting Techniques. . . . . . . . . . . . . . . . . . . . . 168 Payback Period (PBP) ....................................... 168 PaybackReciprocal......................................... 172 Bailout Payback ............................................ 173 AccountingRateofReturn(ARR).............................. 175 Discounted Capital Budgeting Techniques. . . . . . . . . . . . . . . . . . . . . . . . . 179 Discounted Payback Period .................................. 179 Discounted Bailout Payback .................................. 182 NetPresentValue(NPV)..................................... 184 ProfitabilityIndex(PI)....................................... 187 CHAPTER 5 Capital Budgeting InternalRateofReturn(IRR) ................................. 188 Modified Internal Rate of Return (MIRR) . . . . . . . . . . . . . . . . . . . . . . . 193 Comparison of Capital Budgeting Techniques. . . . . . . . . . . . . . . . . . . . . . 196 NPVProfiles................................................. 197 NPVCrossoverRate ........................................ 198 Evaluating Projects with Different Lives . . . . . . . . . . . . . . . . . . . . . . . . . . 202 ReplacementChainNPV..................................... 203 EquivalentAnnualAnnuity(EAA).............................. 204 AdvantagesandLimitations.................................. 205 SensitivityAnalysis ........................................... 206 Capital Budgeting in Practice ................................... 208 Alternative Approaches to Capital Budgeting . . . . . . . . . . . . . . . . . . . . . . 209 AFinalWordonPLDT ......................................... 210 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 DiscussionQuestions............................................ 210 Practice Problems .............................................. 211 Multiple Choice Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 223 Intended Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 Risks ....................................................... 224 OperatingLeverage......................................... 226 FinancialLeverage.......................................... 231 Combining Operating Leverage and Financial Leverage. . . . . . . . . . . . 233 CHAPTER 6 Risk and Leverage
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2025 Higher Education Learning Solutions for the Business and Accountancy Program 49
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