Download - Invest Ret_Invest Analysis
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The Investment DecisionInvest in assets that earn a
return greater than theminimum acceptable hurdle
rate
The Financing DecisionFind the right kind of debtfor your rm and the rightmix of debt and equity to
fund your operations
The Dividend DecisionIf you cannot nd investments
that make your minimumacceptable rate, return the cash
to owners of your business
The hurdle rateshould reect theriskiness of theinvestment andthe mix of debt
and equity usedto fund it.
The return shouldreect the
magnitude andthe timing of the
cashows as welllas all side effects.
The optimalmix of debtand equity
maximizes rm
value
The right kindof debt
matches thetenor of your
assets
How muchcash you can
returndepends upon
current &potential
investmentopportunities
How you chooseto return cash tothe owners will
depend onwhether they
prefer dividendsor buybacks
Maximize the value of the business (rm)
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12.5% of bookvalue at end ofprior year($3,000)
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(a) Based upon book capital at the start of each year (b) Based upon average book capital over the year
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To get from income to cash ow, we
I. added back all non-cash charges such as depreciation. Tax
benets:
II. subtracted out the capital expenditures
III. subtracted out the change in non-cash working capital
Aswath Damodaran
0 1 2 3 4 5 6 7 8 9 10
After-tax Operating Income Wdhi Wdom Wdfk dmn diei diko dioo dhfi dkje dkij+ Depreciation & Amortization de dfe dkif dkmo dkkk dhli dhml dhmk dhmk dhmm dhmn- Capital Expenditures diLfee djLeee djLjnn dlfi dilm difn dinf dhjk dhhe dhkl dhfe
- Change in non-cash Work Capital $0 $63 $25 $38 $31 $16 $17 $19 $21 $5
Cashow to rm ($2,500) ($982) ($921) ($361) $198 $285 $314 $332 $367 $407 $434
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$ 500 million hasalready been spent & $50 million indepreciation will existanyway
2/3rd of allocated G&A is xed.
Add back this amount (1-t) Tax rate = 36.1%
Aswath Damodaran
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0 1 2 3 4 5 6 7 8 9 10
Revenues $0 $1,250 $1,750 $2,500 $3,125 $3,438 $3,781 $4,159 $4,575 $4,667Direct Expenses $0 $788 $1,103 $1,575 $1,969 $2,166 $2,382 $2,620 $2,882 $2,940Incremental Depreciation $0 $375 $419 $394 $322 $317 $314 $314 $316 $318Incremental G&A $0 $63 $88 $125 $156 $172 $189 $208 $229 $233Incremental Operating Income $0 $25 $141 $406 $678 $783 $896 $1,017 $1,148 $1,175- Taxes $0 $9 $51 $147 $245 $283 $323 $367 $415 $424
Incremental after-tax Operating income $0 $16 $90 $260 $433 $500 $572 $650 $734 $751+ Incremental Depreciation $0 $375 $419 $394 $322 $317 $314 $314 $316 $318- Capital Expenditures $2,000 $1,000 $1,188 $752 $276 $258 $285 $314 $330 $347 $350- Change in non-cash Working Capital $0 $63 $25 $38 $31 $16 $17 $19 $21 $5
Cashow to rm ($2,000) ($1,000) ($859) ($267) $340 $466 $516 $555 $615 $681 $715
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Aswath Damodaran
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Aswath Damodaran
-$3,000.00
-$2,000.00
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$4,000.00
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8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30%
N P V
Discount Rate
Internal Rate of Return=12.60%
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! ,48 '&& ?:K 948 (D+ 6BGG ;B8GK CB7BG?= =8CAG9C 75C9 5< 948 J78L945A@4 948=8 ?=8 KBR8=8:E8C O89688: 948 965 ?FF=5?E48C 94?97?; E?AC8 F=5^8E9 =?:VB:@C 95 H?=; K8F8:KB:@ AF5: 948 ?FF=5?E4AC8KM ,48; E?: ;B8GK KBR8=8:9 =8CAG9CL 8CF8EB?GG; 64; E57F?=B:@?E=5CC F=5^8E9C O8E?AC8! # F=5^8E9 E?: 4?H8 5:G; 5:8 (D+L 648=8?C B9 E?: 4?H8 75=8 94?: 5:8 '&&M! ,48 (D+ BC ? K5GG?= CA=FGAC H?GA8L 648=8?C 948 '&& BC ? F8=E8:9?@8 78?CA=
5< =89A=:M ,48 (D+ BC 948=8
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44
`58C 948 EA==8:E; 7?Q8=_
! ,48 ?:?G;CBC 6?C K5:8 B: K5GG?=CM \5AGK 948E5:EGACB5:C 4?H8 O88: ?:; KBR8=8:9 B< 68 4?K K5:8948 ?:?G;CBC B: Y=?TBGB?: &8?BC_?M 38COM (5
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,48‘‘
/5:CBC98:E; &AG8”
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46
`BC:8; ,4878 D?=V- D=5^8E9 #:?G;CBC B: d&
!"#$%& ($)*+$,$-
46
! ,48 B:I?J5: =?98C 68=8 ?CCA78K 95 O8 op B: Y=?TBG ?:K ip B: 948%:B98K $9?98CM ,48 d&]K5GG?= =?98 ?9 948 J78 5< 948 ?:?G;CBC 6?CiMhf d&]K5GG?=M
! ,48 8NF8E98K 8NE4?:@8 =?98 6?C K8=BH8K ?CCA7B:@ FA=E4?CB:@F568= F?=B9;M! "NF8E98K "NE4?:@8 &?989 s "NE4?:@8 &?98 95K?; y SjMeo]jMeiU9
! ,48 8NF8E98K @=5694 =?98 ?u8= ;8?= je BC CJGG 8NF8E98K 95 O8 948B:I?J5: =?98L OA9 B9 BC 948 op d& B:I?J5: =?98M
! ,48 E5C9 5< E?FB9?G B: d& 6?C K8=BH8K
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47
`BC:8; ,4878 D?=V- d& (D+
(D+ s &d lLlkf]iMhfs d hLiom !BGGB5:(D+ BC 8ZA?G 95 (D+ B: K5GG?= 98=7C
Discount at $R cost of capital
= (1.0846) (1.09/1.02) – 1 = 15.91%Expected Exchange Rate
t
= Exchange Rate today * (1.09/1.02) t
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48
%:E8=9?B:9; B: D=5^8E9 #:?G;CBC- \4?9 E?: 68K5_
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! Y?C8K 5: 5A= 8NF8E98K E?C4 I56C ?:K 948 8CJ7?98K E5C9 5< E?FB9?GL 948F=5F5C8K 94878 F?=V G55VC GBV8 ? H8=; @55K B:H8C978:9
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49
0:8 CB7FGBCJE C5GAJ5:- $88 456 ZABEVG;;5A E?: @89 ;5A= 75:8; O?EVa
! '< ;5A= OB@@8C9
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# CGB@49G; 75=8 C5F4BCJE?98K ?FF=5?E4-$8:CBJHB9; #:?G;CBC q \4?9WB< xA8CJ5:Ca! ,48 (D+L '&& ?:K ?EE5A:J:@ =89A=:C
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52
,48 P:?G C98F AF- ':E5=F5=?98 F=5O?OBGBCJE8CJ7?98CMM &?948= 94?: 8NF8E98K H?GA8CM
Actual Revenues as % of Forecasted Revenues (Base case = 100%)
Operating Expenses at Parks as % of Revenues (Base Case = 60%)
Country Risk Premium (Base Case = 3%(Brazil))
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53
,48 =8CAGJ:@ CB7AG?J5:a
Average = $3.40 billion Median = $3.28 billion
NPV ranges from -$1 billion to +$8.5 billion. NPV is negative 12% of thetime.
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54
35A ?=8 948 K8EBCB5: 7?V8=a
!"#$%& ($)*+$,$-
54
! #CCA78 94?9 ;5A ?=8 948 F8=C5: ?9 `BC:8; 645 BC @BH8:948 =8CAG9C 5< 948 CB7AG?J5:M ,48 ?H8=?@8 ?:K 78KB?:(D+ ?=8 EG5C8 95 ;5A= O?C8 E?C8 H?GA8C 5< dhMio OBGGB5:M.568H8=L 948=8 BC ? jep F=5O?OBGB9; 94?9 948 F=5^8E9
E5AGK 4?H8 ? :8@?JH8 (D+ ?:K 94?9 948 (D+ E5AGK O8 ?G?=@8 :8@?JH8 H?GA8_ .56 65AGK ;5A AC8 94BCB:
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55
"ZAB9; #:?G;CBC- ,48 D?=?GG8GC
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55
! ,48 B:H8C978:9 ?:?G;CBC E?: O8 K5:8 8:J=8G; B: 8ZAB9;98=7CL ?C 68GGM ,48 =89A=:CL E?C4I56C ?:K 4A=KG8 =?98C6BGG ?GG O8 K8P:8K
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56
# +?G8 '=5: 0=8 !B:8 B: /?:?K? ':H8C978:90F8=?J:@ #CCA7FJ5:C
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jM ,48 7B:8 6BGG =8ZAB=8 ?: B:BJ?G B:H8C978:9 5< djMif OBGGB5: ?:K BC 8NF8E98K 95 4?H8 ? F=5KAEJ5:E?F?EB9; 5< n 7BGGB5: 95:C 5< B=5: 5=8L 5:E8 8C9?OGBC48KM ,48 B:BJ?G B:H8C978:9 5< djMif OBGGB5: 6O8 K8F=8EB?98K 5H8= 98: ;8?=CL ACB:@ K5AOG8 K8EGB:B:@ O?G?:E8 K8F=8EB?J5:L K56: 95 ? C?GH?@8H?GA8 5< dife 7BGGB5: ?9 948 8:K 5< 98: ;8?=CM
iM ,48 7B:8 6BGG C9?=9 F=5KAEJ5: 7BK6?; 94=5A@4 948 :8N9 ;8?=L F=5KAEB:@ k 7BGGB5: 95:C 5< B=5:5=8
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57
1B:?:EB:@ #CCA7FJ5:C
!"#$%& ($)*+$,$-
57
+?G8 FG?:C 95 O5==56 deMf OBGGB5: ?9 B9C EA==8:9 E5C9 5< K8O9 5< kMefp SO?C8AF5: B9C =?J:@ 5< #WUL ACB:@ ? 98:W;8?= 98=7 G5?: S648=8 948 G5?: 6BGG O8 F?BK5R B: 8ZA?G ?::A?G B:E=878:9CUM ,48 O=8?VK56: 5< 948 F?;78:9C 8?E4 ;8?=B:95 B:98=8C9 ?:K F=B:EBF?G ?=8 F=5HBK8K O8G56-
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58
,48 .A=KG8 &?98
!"#$%& ($)*+$,$-
58
! ,48 ?:?G;CBC BC K5:8 %$ K5GG?= 98=7C ?:K 95 8ZAB9;B:H8C95=CM ,4ACL 948 4A=KG8 =?98 4?C 95 O8 ? %$ d E5C5< 8ZAB9;M
! ': 948 8?=GB8= C8EJ5:L 68 8CJ7?98K E5C9C 5< 8ZAB9;LK8O9 ?:K E?FB9?G B: %$ K5GG?=C ?:K d&
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59
(89 ':E578- +?G8 '=5: 0=8 !B:8
!"#$%& ($)*+$,$-
59
1 2 3 4 5 6 7 8 9 10
Production (millions of tons) 4.00 6.00 8.00 8.00 8.00 8.00 8.00 8.00 8.00 8.00
* Price per ton 102 104.04 106.12 108.24 110.41 112.62 114.87 117.17 119.51 121.9
= Revenues (millions US$) $408.00 $624.24 $848.97 $865.95 $883.26 $900.93 $918.95 $937.33 $956.07 $975.20
- Variable Costs $180.00 $275.40 $374.54 $382.03 $389.68 $397.47 $405.42 $413.53 $421.80 $430.23
- Fixed Costs $125.00 $127.50 $130.05 $132.65 $135.30 $138.01 $140.77 $143.59 $146.46 $149.39- Depreciation $200.00 $160.00 $128.00 $102.40 $81.92 $65.54 $65.54 $65.54 $65.54 $65.54EBIT -$97.00 $61.34 $216.37 $248.86 $276.37 $299.91 $307.22 $314.68 $322.28 $330.04- Interest Expenses $20.25 $18.57 $16.82 $14.99 $13.10 $11.13 $9.07 $6.94 $4.72 $2.41
Taxable Income -$117.25 $42.77 $199.56 $233.87 $263.27 $288.79 $298.15 $307.74 $317.57 $327.63- Taxes ($39.87) $14.54 $67.85 $79.51 $89.51 $98.19 $101.37 $104.63 $107.97 $111.40
= Net Income (millions US$) -$77.39 $28.23 $131.71 $154.35 $173.76 $190.60 $196.78 $203.11 $209.59 $216.24 Book Value and Depreciation
Beg. Book Value $1,250.00 $1,050.00 $890.00 $762.00 $659.60 $577.68 $512.14 $446.61 $381.07 $315.54- Depreciation $200.00 $160.00 $128.00 $102.40 $81.92 $65.54 $65.54 $65.54 $65.54 $65.54+ Capital Exp. $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
End Book Value $1,050.00 $890.00 $762.00 $659.60 $577.68 $512.14 $446.61 $381.07 $315.54 $250.00- Debt Outstanding $458.45 $415.22 $370.24 $323.43 $274.73 $224.06 $171.34 $116.48 $59.39 $0.00
End Book Value of Equity $591.55 $474.78 $391.76 $336.17 $302.95 $288.08 $275.27 $264.60 $256.14 $250.00
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60
# &0" #:?G;CBC
!"#$%& ($)*+$,$-
60
Year Net Income Beg. BV:Assets Depreciation Capital
Expense Ending BV:
Assets BV of
WorkingCapital
Debt BV: Equity Average BV:Equity ROE
0 $0.00 $0.00 $1,250.00 $1,250.00 $81.60 $500.00 $831.601 ($77.39) $1,250.00 $200.00 $0.00 $1,050.00 $124.85 $458.45 $716.40 $774.00 -10.00% 2 $28.23 $1,050.00 $160.00 $0.00 $890.00 $169.79 $415.22 $644.57 $680.49 4.15% 3 $131.71 $890.00 $128.00 $0.00 $762.00 $173.19 $370.24 $564.95 $604.76 21.78% 4 $154.35 $762.00 $102.40 $0.00 $659.60 $176.65 $323.43 $512.82 $538.89 28.64% 5 $173.76 $659.60 $81.92 $0.00 $577.68 $180.19 $274.73 $483.13 $497.98 34.89% 6 $190.60 $577.68 $65.54 $0.00 $512.14 $183.79 $224.06 $471.87 $477.50 39.92% 7 $196.78 $512.14 $65.54 $0.00 $446.61 $187.47 $171.34 $462.74 $467.31 42.11% 8 $203.11 $446.61 $65.54 $0.00 $381.07 $191.21 $116.48 $455.81 $459.27 44.22% 9 $209.59 $381.07 $65.54 $0.00 $315.54 $195.04 $59.39 $451.18 $453.50 46.22%
10 $216.24 $315.54 $65.54 $0.00 $250.00 $0.00 $0.00 $250.00 $350.59 61.68% Average ROE over the ten-year period = 31.36%
US $ ROE of 31.36% is greater thanVale Iron Ore US$ Cost of Equity of 11.13%
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61
1=57 D=5^8E9 &0" 95 1B=7 &0"
!"#$%& ($)*+$,$-
61
! #C 6B94 948 8?=GB8= ?:?G;CBCL 648=8 68 AC8K =89A=: 5: E?FB9?G ?:K E5C9 5<E?FB9?G 95 78?CA=8 948 5H8=?GG ZA?GB9; 5< F=5^8E9C ?9 P=7CL 68 E?:E57FA98 =89A=: 5: 8ZAB9; ?:K E5C9 5< 8ZAB9; 95 F?CC ^AK@78:9 5:648948= P=7C ?=8 E=8?J:@ H?GA8 95 B9C 8ZAB9; B:H8C95=CM
! $F8EBPE?GG;L 68 E?: E57FA98 948 =89A=: 5: 8ZAB9; S:89 B:E578 ?C ?F8=E8:9?@8 5< O55V 8ZAB9;U ?:K E57F?=8 95 948 E5C9 5< 8ZAB9;M ,48 =89A=:CF=8?K BC 948:-! "ZAB9; &89A=: $F=8?K s &89A=: 5: "ZAB9; v /5C9 5< 8ZAB9;
! ,4BC 78?CA=8 BC F?=JEAG?=G; AC8
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62
#: ':E=878:9?G /1 #:?G;CBC
!"#$%& ($)*+$,$-
62
0 1 2 3 4 5 6 7 8 9 10 Net Income ($77.39) $28.23 $131.71 $154.35 $173.76 $190.60 $196.78 $203.11 $209.59 $216.24
+ Depreciation & Amortization $200.00 $160.00 $128.00 $102.40 $81.92 $65.54 $65.54 $65.54 $65.54 $65.54- Capital Expenditures $750.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00- Change in Working Capital $81.60 $43.25 $44.95 $3.40 $3.46 $3.53 $3.60 $3.68 $3.75 $3.82 ($195.04) - Principal Repayments $41.55 $43.23 $44.98 $46.80 $48.70 $50.67 $52.72 $54.86 $57.08 $59.39+ Salvage Value of mine $250.00
Cashow to Equity ($831.60) $37.82 $100.05 $211.33 $206.48 $203.44 $201.86 $205.91 $210.04 $214.22 $667.42
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63
#: "ZAB9; (D+
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Discounted at US$ cost ofequity of 11.13% for Vale’siron ore business
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64
#: "ZAB9; '&&
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65
&8?G H8=CAC (57B:?G #:?G;CBC
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66
`8?GB:@ 6B94 !?E=5 %:E8=9?B:9;- ,48 "R8E9 5<'=5: 0=8 D=BE8
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67
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Will the benets persist if investors hedgethe risk instead of the rm?
NoYes
NoYes
Can marginal investorshedge this risk cheaper
than the rm can?
NoYes
Is there a signicant benet interms of higher expected cashows or a lower discount rate?
NoYes
Is there a signicant benet interms of higher cash ows ora lower discount rate?
What is the cost to the rm of hedging this risk?
Negligible High
Do not hedge this risk.The benets are smallrelative to costs
Hedge this risk. Thebenets to the rm willexceed the costs
Hedge this risk. Thebenets to the rm willexceed the costs
Let the risk passthrough to investorsand let them hedgethe risk.
Hedge this risk. Thebenets to the rm willexceed the costs
Indifferent tohedging risk
Cash ow benets - Tax benets
- Better project choices
Discount rate benets - Hedge "macro" risks (cost of equity)- Reduce default risk (cost of debt or debt ratio)
Survival benets (truncation risk)- Protect against catastrophic risk- Reduce default risk
Value Trade Off
Earnings Multiple - Effect on multiple
Earnings - Level- Volatility
X
Pricing Trade
!"#$%& ($)*+$,$-69
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70
#EZABCBJ5:C ?:K D=5^8E9C
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! #: ?EZABCBJ5: BC ?: B:H8C978:9]F=5^8E9 GBV8 ?:; 5948= ?:K ?GG 5< 948=AG8C 94?9 ?FFG; 95 9=?KBJ5:?G B:H8C978:9C C45AGK ?FFG; 95?EZABCBJ5:C ?C 68GGM ': 5948= 65=KCL
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72
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73
"CJ7?J:@ /?C4I56CW 1B=C9 $98FC
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74
Y=B:@B:@ B: @=5694
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76
1B=C9 D=B:EBFG8C
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The Investment DecisionInvest in assets that earn a
return greater than theminimum acceptable hurdle
rate
The Financing DecisionFind the right kind of debtfor your rm and the rightmix of debt and equity to
fund your operations
The Dividend DecisionIf you cannot nd investments
that make your minimumacceptable rate, return the cash
to owners of your business
The hurdle rateshould reect theriskiness of theinvestment andthe mix of debt
and equity used
to fund it.
The return shouldreect the
magnitude andthe timing of the
cashows as welllas all side effects.
The optimalmix of debtand equity
maximizes rmvalue
The right kindof debt
matches thetenor of your
assets
How muchcash you can
returndepends upon
current &potential
investmentopportunities
How you chooseto return cash tothe owners will
depend onwhether they
prefer dividendsor buybacks
Maximize the value of the business (rm)