CORPORATE FINANCE STRATEGY

Corporate Finance Strategy



Table of Contents

Investment Appraisal3

Net Present Value3

Internal Rate of Return4

Other Capital Budget Techniques4

Payback Period4

Profitability Index5

Weighted Average Cost of Capital6

Project Evaluation7

Investment Decision7

Review of Literature8

Average rate of return8

Payback Period9

Pros and cons of using periods of payback9

Net Present Value10

Internal Rate of Return10

Critics10

Weighted Average Cost of Capital11

Dividend Policy11

Factors Influencing Dividend Policy12

Vodafone Plc Dividend Policy13

Corporate Finance Strategy

Investment Appraisal

Net Present Value

The Net Present Value (NPV) is the most popular method when evaluating investment projects in the long term. It is used to determine whether an investment complies with the basic objective financial i.e. to maximize investment. It evaluates if the investment may increase or decrease the value of SMEs. This change in the estimated value may be positive, negative, or remain the same (Aka 1985, 651). If it is positive, it means that the value of the firm will have an increase equal to the amount of Net Present Value. If it is negative, it implies that the firm will reduce its wealth in the value yielding the VPN. If the result is zero NPV, the company will not change the amount of its value.

It is important to note that the value of net present value depends on the initial investment, prior investments during the operation, the net cash flows, the discount rate and the number of periods throughout the project. The positive qualities of NPV is its clear criteria for decision making and he index takes into account the time value of money (discount rate used in the formulas). A good investment is an investment that increases the value of economic assets i.e. that creates wealth. In other words, we need that revenue generated by the investment exceeds its cost (Brijial 2009, 37-46). To calculate the net present value (NPV), two types of flow are necessary. The first is the amount of initial investment, which includes all charges relating to the project. It is the investment cost. Then we must evaluate the cash flows generated by the same investment for all future periods. These are the recipes. This phase is very important and challenging. Indeed, economic conditions are continually changing, cash flows may vary significantly. These cash flows should be updated in time 0 which entails the current value of future cash flows. This update is necessary because a euro today is not worth a euro tomorrow.

NPV = CF1 (1 + WACC) -1 + CF 2 (1 + WACC) -2 ..... CFn + (1 + WACC) - n - initial investment

Internal Rate of Return

The internal rate of return or internal rate of return (IRR) of an investment is defined as the geometric average of expected future returns on that investment, and it certainly involves the assumption of an opportunity to "reinvest". In simple terms, it is conceptualized as the interest rate (or discount rate) at which the net present value (NPV or NPV) is zero. It is a discount rate that cancels the net present value of a chronicle of financial flows (usually relating to a project with an initial investment followed by positive cash flows) ...