In this session, I review the material covered by the second quiz, ranging from how to estimate the cost of capital for a project, to how best to arrive at the additional cash flows and weight them in the time.

Slides: http://www.stern.nyu.edu/

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### Corporate finance quiz 2: review session

*Q1 hedge fund letters, conference, scoops, etc.*

**Transcription**

This is the interview for the second quiz and basically found out about the material we’ve been doing since the first stops. Simply put, these are the three skill sets I wish I could fit into the quiz. The first is whether he can calculate the cost to be achieved per project and not just for Ferb and that requires estimating the cost of equity and deciding which dead trees should be used on a project. The second is to offer cash flow as an investment. So you need to understand the difference between earnings and cash flow which is different from cash flow from equity. How Depreciation Affects Cash Flow and Why We Care About Working Capital. You also need to understand the difference between something that is progressive and something that is not broad is being played out. And finally, you’ll be able to convert the cash flow you have available to a time-weighted performance measure and ACB if you’re considering a stand-alone project. But if you are comparing multiple projects, can you compare the net present value of projects with different risks and different animals. So a lot of takes to do.

Let’s start with cash flow. The cash flow of a project or business can be estimated in two different ways before paying off debt. And this is called cash flow for the business. So this is either a forecast cash flow or it can be estimated after debt payments, interest payments, and principal payments. This is called cash flow equity. Why is this important. Well the discount rate is going to be different depending on how the cash flow is calculated versus how the cash flow is actually calculated, it’s a three step process. You start with accounting profit and, but it’s net profit or operating profit, we depend on whether you make cash flow from equity to cash flow to which you add depreciation or charges off. Treasury. Why because in the accounting expenses which lowered your income you subtract the capital expenses if you have a habit and if you have a project you may not have one. Once you have made that initial investment and then subtracted the change in working capital to get cash flow, this is one more step in paying off your debt.

So let’s take a simple example from a few quizzes a few moments ago. So the investment that Nova Chemicals makes the initial investment is $ 250 million, you receive amortization of income and operating income for the next three years, and you receive the three items of amortization or other expenses of operation and the allocated GNN. So I gave you the pre-tax operating profit each year for the next three years on the metro curve. turnover expected each year in working capital at the start of the year. The keyword started the year. This is what affects the working capital timing at the end of three years, you would expect to get back the remaining book value of your initial investment and the working capital investment during that period, so estimate the expected after-tax cash flow. Notice I’m not asking you to estimate net present value, just estimate after-tax cash flow assuming 40% marginal tax rate. So let’s start in your zero which is really zero time, you have your initial investment of 250 million. Your income is given and the ball is subtracted from the depreciation and you first Organum on the investment which will be 75 15 24.

Also, given the profit you subtract from other operating expenses, but remember you are told deallocated DNA has nothing to do with the project, so send it to zero. In this project. You apply the 40% tax rate or if you get an operating rate of 40% after tax, add depreciation, because remember that this is a non-cash expense. And this is where the Twisden this problem occurs. There is working capital that changes each year as a percentage of revenue that’s 10 percent of revenue 10 percent of your wine is twenty-two point five million dollars. I showed in your story saying what. Remember, investing in working capital happens at the start of the year, the first year of starting is actually right now, so I’m showing it and the user. Now what goes into your working capital goes from 10 percent to 300 Sturdevant put. Why are not 30 million appearing. Well because I’ve already invested twenty-two point five million. I just saw the change in working capital which is seven point five million in one year. Then you get to your 2.

I think the change in working capital from year to year which is 15 and showed that as the cash flow is 22 7 twenty two point five seven and a half and 15 collectively you have invested 45 billion dollars in working capital. Now what happens at the end of the three, you complete the project, you get your salvage value and your equipment back, which is $ 50 million, you should get the working capital back because this state and your tree’s cash flow is increased by these. two Cashen plus I have my cash flow every year.

Now that you look at this from your, you know how the working capital plays out, it’s just the change in the working capital that affects the cash flow will come back into another working capital from Pramad.

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