Chapter 12 discusses how historical returns for the various asset classes.  Chapter 9 covers the valuation techniques used to value Capital Budgeting projects.

All page numbers are references to Fundamentals of Corporate Finance, 11th edition by Ross, Westerfield, and Jordan (McGraw Hill, 2016)

Your Responsibilities: Chapter 12

Things to Absorb

Be able to compute arithmetic and geometric returns, Know the approximate returns, risk premiums, and standard deviations of the various classes of securities (Figure 12-10), Understand the implications and forms of efficient capital markets. Know what is meant by market efficiency and the three main types (weak, semi-strong, and strong).

Things to Read

Chapter 12

Things to Do

• Make 100 on the quiz. Be able to answer Concepts Review Questions 2-5, 7, 8 and Questions and Problems 1-8, 14-19, and 23.
• Watch the Chapter 12 Overview video and review the PowerPoints for all of this chapter’s videos are located here (are in Content).
• Read pages 382-395.
• Watch the video on Historical Returns for an in depth review of the chapter. The PowerPoints for this video begin at about slide 4.
• Read the remainder of the chapter.
• Watch the video on Computing Returns, Standard Deviations and Market Efficiency.
• Be prepared for a quiz with roughly 8 questions. Take the Chapter 12 quiz.

Your Responsibilities: Chapter 9

Things to Absorb

Capital Budgeting Decisions are the most important decisions that are made by a company. This chapter covers the methods of evaluating capital budgeting projects. This chapter is largely a review of material you learned in BA 530.

How to calculate and interpret Payback method, Net Present Value, Internal Rate of Return, and Profitability Index. Know the difference between Normal/Non-normal and Independent/Mutually Exclusive projects. Pay particular attention to NPV and IRR, and know why they sometimes produce different choices. Know the Reinvestment Rate assumptions for all methods. Know the strengths and weaknesses of Payback, Net Present Value, Internal Rate of Return, Modified Internal Rate of Return, Accounting Rate of Return and Profitability Index (Ignore Discounted Payback). Be able to define Capital Rationing.

Things You Do Not Need to Absorb

How to calculate Modified Internal Rate of Return or how to calculate and interpret Discounted Payback.

Things to Read

Chapter 9

Things to Do

• Make 100 on the quiz. Questions and Problems that you should be able to answer- Self Test 1-3, Concept Review 1-3, 5-9, 11, 14, 15, and all end of chapter Problems related to NPV, IRR, Payback, and Profitability Index. For exam level problems, focus on problems with uneven cash and non-conventional cash flows (e.g. Self-Test 1 & 2, and Problems 17 & 24). Review the the available Excel to help you with spreadsheet calculations.

Calculator links - Most Calculator Types

• Watch the Chapter Introduction and Overview video. The PowerPoints for all of this chapter's videos are located here (file is under Content).
• Read pages 272-277.
• Watch the Key Concepts and Net Present Value video.
• Read pages 277-285.
• Watch the video on Payback, Discounted Payback, and Average Accounting Return.
• Read pages 413-416.
• Watch the video on Internal Rate of Return, Independent versus Mutually Exclusive Projects, and Conflicts Between NPV and IRR.
• Read the remainder of the chapter.
• Not important is the last video. Topics on this video will not be tested on exams, Modified Internal Rate of Return, Profitability Index, and Chapter Review.
• Below are audio solutions to problems of the type you will see from this chapter.
1. Determine the net present value for a project that costs $104,000 and would yield after-tax cash flows of $16,000 the first year, $18,000 the second year, $21,000 the third year, $23,000 the fourth year, $27,000 the fifth year, and $33,000 the sixth year. Your firm's cost of capital is 12.00%. | Audio Solution
2. Determine the net present value for a project that costs $253,494.00 and is expected to yield after-tax cash flows of $29,000 per year for the first ten years, $37,000 per year for the next ten years, and $50,000 per year for the following ten years. Your firm's cost of capital is 12.00%. | Audio Solution
3. Determine the internal rate of return for a project that costs $78,000 and would yield after-tax cash flows of $12,000 the first year, $14,000 the second year, $17,000 the third year, $19,000 the fourth year, $23,000 the fifth year, and $29,000 the sixth year. | Audio Solution
4. Determine the internal rate of return for a project that costs $180,532.00 and is expected to yield after-tax cash flows of $25,000 per year for the first five years, $33,000 per year for the next five years, and $46,000 per year for the following five years. | Audio Solution
5. Your company has an opportunity to invest in a project that is expected to result in after-tax cash flows of $18,000 the first year, $20,000 the second year, $23,000 the third year, -$8,000 the fourth year, $30,000 the fifth year, $36,000 the sixth year, $39,000 the seventh year, and -$6,000 the eighth year. The project would cost the firm $142,000. If the firm's cost of capital is 12%, what is the modified internal rate of return for the project? | Audio Solution
6. Your company has an opportunity to invest in a project that is expected to result in after-tax cash flows of $8,000 the first year, $10,000 the second year, $13,000 the third year, -$8,000 the fourth year, $20,000 the fifth year, and $26,000 the sixth year. The project would cost the firm $59,000. If the firm's cost of capital is 13%, what is the modified internal rate of return for the project? | Audio Solution
7. Determine the payback period (in years) for a project that costs $120,000 and would yield after-tax cash flows of $20,000 the first year, $22,000 the second year, $25,000 the third year, $27,000 the fourth year, $31,000 the fifth year, and $37,000 the sixth year. | Audio Solution
• Be prepared for a 60 minute quiz, with about 10 questions. Take the Quiz for Chapter 9.