Describe the capital budgeting process and distinguish among the various categories of capital projects

Describe the basic principles of capital budgeting

Explain how the evaluation and selection of capital projects is affected by mutually exclusive projects, project sequencing, and capital rationing

Calculate and interpret net present value (NPV), internal rate of return (IRR), payback period, discounted payback period, and profitability index (PI) of a single capital project

Explain the NPV profile, compare the NPV and IRR methods when evaluating independent and mutually exclusive projects, and describe the problems associated with each of the evaluation methods

Contrast the NPV decision rule to the IRR decision rule and identify problems associated with the IRR rule

Describe expected relations among an investment’s NPV, company value, and share price

Calculate and interpret the weighted average cost of capital (WACC) of a company

Describe how taxes affect the cost of capital from different capital sources

Describe the use of target capital structure in estimating WACC and how target capital structure weights may be determined

Explain how the marginal cost of capital and the investment opportunity schedule are used to determine the optimal capital budget

Explain the marginal cost of capital’s role in determining the net present value of a project

Calculate and interpret the cost of debt capital using the yield-to-maturity approach and the debt-rating approach

Calculate and interpret the cost of noncallable, nonconvertible preferred stock

Calculate and interpret the cost of equity capital using the capital asset pricing model approach, the dividend discount model approach, and the bond-yieldplus risk-premium approach

Calculate and interpret the beta and cost of capital for a project

Describe uses of country risk premiums in estimating the cost of equity

Describe the marginal cost of capital schedule, explain why it may be upward sloping with respect to additional capital, and calculate and interpret its break-points

Explain and demonstrate the correct treatment of flotation costs

Define and explain leverage, business risk, sales risk, operating risk, and financial risk and classify a risk

Calculate and interpret the degree of operating leverage, the degree of financial leverage, and the degree of total leverage

Analyze the effect of financial leverage on a company’s net income and return on equity

Calculate the breakeven quantity of sales and determine the company’s net income at various sales levels

Calculate and interpret the operating breakeven quantity of sales

Describe primary and secondary sources of liquidity and factors that influence a company’s liquidity position;

Compare a company’s liquidity measures with those of peer companies

Evaluate working capital effectiveness of a company based on its operating and cash conversion cycles and compare the company’s effectiveness with that of peer companies

Describe how different types of cash flows affect a company’s net daily cash position

Calculate and interpret comparable yields on various securities, compare portfolio returns against a standard benchmark, and evaluate a company’s short-term investment policy guidelines

Evaluate a company’s management of accounts receivable, inventory, and accounts payable over time and compared to peer companies

Evaluate the choices of short-term funding available to a company and recommend a financing method