Financial Management and Corporate Finance
Core toolkit
Appraise on incremental, after-tax cash flows. NPV is the decision rule; IRR and discounted payback support it; sensitivity and scenario analysis stress-test it. The discount rate is the risk-adjusted WACC: Ke from CAPM (PKR T-bill or PIB yield, equity risk premium, beta), Kd after tax, weighted at market values. For a project in a different line of business, unlever a comparable's beta (Hamada) and relever at target gearing. Valuation uses DCF (FCFF at WACC, FCFE at Ke) and market multiples. Financing spans retained earnings, rights issues, TFCs/sukuk, bank debt under SBP prudential regulations, leases and private equity; dividend capacity is constrained by distributable profits under the Companies Act 2017. Working capital - inventory, receivable and payable days - is a cash-release lever and a favourite case issue.
Traps
Using pre-tax Kd (overstating WACC), book rather than market weights, discounting nominal cash flows at a real rate, omitting working capital or terminal value, and applying a company-wide WACC to a higher-risk project.
Worked example
Equity Rs 600m at market, debt Rs 400m, Ke 15%, Kd 10% pre-tax, tax 29%. WACC = 0.6 x 15 + 0.4 x 10 x 0.71 = 9.0 + 2.84 = 11.8%. Using pre-tax Kd gives 12.9% and could wrongly reject a viable project. Show the formula, the weights and the source of each input.