BU8201

Appendix 1
Selected Formulas
Chapter 2
Stockholders' equity Paid-in capital Retained earnings = +
Stockholders' equity Total assets Total liabilities =
( ) Net working capital Current assets Payables Accruals = +
Operating income (or EBIT) Sales revenue Operating costs =
( ) ( )
Capital Change in net
FCF EBIT 1 T Depreciation&Amortization
expenditures working capital
| |
= + +
|
\

Chapter 3
Current assets
Current ratio
Current liabilities
=
Current assets Inventories
Quick, or acid test ratio
Current liabilities

=
Sales
Inventory turnover ratio
Inventories
=
Receivables Receivables
Days sales outstanding (DSO)
Average sales per day Annual sales 365
= =
Sales
Fixed assets turnover ratio
Net fixed assets
=
Sales
Total assets turnover ratio
Total assets
=
Total debt
Debt ratio
Total assets
=
EBIT
Times-interest-earned (TIE) ratio
Interest charges
=
D A
D E
1 D A
=

and
D D E
A 1 D E
=
+

Operating income (EBIT)
Operating margin
Sales
=
Net income
Profit margin
Sales
=



Note: Appendix 1 continues on page 10
9

BU8201

Appendix 1 (continued)

Net income
Return on total assets (ROA)
Total assets
=

EBIT
Basic Earning Power (BEP)
Total assets
=

Net income
Return on common equity (ROE)
Common equity
=
Price per share
Price/Earnings (P/E) ratio
Earnings per share
=
Common equity
Book value per share
Shares outstanding
=
Market price per share
Market/Book ratio (M/B)
Book value per share
=
ROE Profit margin Total assets turnover Equity multiplier
Net income Sales Total assets
Sales Total assets Total common equity
=
=

Chapter 6
*
RF
Quoted interest rate (r) r IP DRP LP MRP
r DRP LP MRP
= + + + +
= + + +

*
T-bill RF
r r r IP = = +
*
T-bond t t t
r r IP MRP = + +
*
C-bond t t t t t
r r IP MRP DRP LP = + + + +

Chapter 7
N
1 1 2 2 N N i i
i=1
Expected rate of return (r) = P r P r ... P r = Pr + + +


N
2
i i
i 1
Standard deviation (r r) P
=
= =

N
2
t Avg
1
( r r )
Estimated
N 1
t

Coefficient of variation CV
r

= =


Note: Appendix 1 continues on page 11
10

BU8201

Appendix 1 (continued)

N
p 1 1 2 2 N N i i
i=1
r = w r w r ... w r = w r + + +

N
p 1 1 2 2 N N i i
i=1
b = w b +w b +...+w b = w b

i M i
RP (RP )b =
i RF M RF i
r r (r r )b = +


Chapter 8
N
N
Future value FV PV(1 I) = = +
N
N
FV
Present value PV
(1 I)
= =
+

N
N-1 N-2 N-3 0
N
(1+I) -1
FVA =PMT(1+I) +PMT(1+I) +PMT(1+I) +...+PMT(1+I) = PMT
I
(
(


( )
due ordinary
FVA FVA 1 I = +
N
N 1 2 N
1
1-
PMT PMT PMT (1+I)
PVA = + +...+ = PMT
(1+I) (1+I) (1+I) I
(
(
(
(
(


( )
due ordinary
PVA PVA 1 I = +
PMT
PV of a perpetuity
I
=
( ) ( ) ( ) ( )
N
N t 1 2
1 2 N t
t 1
CF CF CF CF
PV
1 I 1 I 1 I 1 I =
= + + + =
+ + + +

L
( )
PER
Stated annual rate I
Periodic rate I
Number of payments per year M
= =
( )( ) Number of periods Number of years Periods per year N M = =
( )
M
NOM
I
Effective annual rate EFF% 1 1.0
M
| |
= +
|
\




Note: Appendix 1 continues on page 12
11


BU8201

Appendix 1 (continued)

Chapter 9
( )
( ) ( ) ( ) ( )
( ) ( )
B 1 2 N N
d d d d
N
t N
t 1
d d
INT INT INT M
Bond' s value V
1 r 1 r 1 r 1 r
INT M
1 r 1 r =
= + + + +
+ + + +
= +
+ +

L

( ) ( )
N
t N
t 1
d d
INT Call price
Price of callable bond
1 r 1 r =
= +
+ +

( ) ( )
2N
B t 2N
t 1
d d
INT 2 M
Price of semiannual-coupon bond (V )
1 r 2 1 r 2 =
= +
+ +

Chapter 10
( )
( ) ( ) ( )
( )
0
1 2
1 2
s s s
t
t
t 1
s

Value of stock P PVof expected future dividends

D D D
1 r 1 r 1 r
D
1 r

=
=
= + + +
+ + +
=
+

L
( )
( )
( )
( )
( )
( )
( )
1 2
0 0 0
0 1 2
s s s
0 1
s s
D 1 g D 1 g D 1 g

Constant growth stock: P

1 r 1 r 1 r
D 1 g D
r g r g

+ + +
= + + +
+ + +
+
= =

L

Expected rate Expected Expected growth rate, or
of return dividend yield capital gains yield
= +
1
s
0
D
r g
P
= +
( ) Growth rate 1 Payout ratio ROE =
0
s
D

Zero growth stock: P

r
=
N+1
N
s
D

Horizon value P
r g
= =

Note: Appendix 1 continues on page 13
12

BU8201

Appendix 1 (continued)

( ) ( ) ( ) ( ) ( )
( ) ( ) ( ) ( )
N N 1 1 2
0 1 2 N N 1
s s s s s
N N 1 2
1 2 N N
s s s s
N
D D D D D

Nonconstant growth stock : P

1 r 1 r 1 r 1 r 1 r

D P D D
1 r 1 r 1 r 1 r

PV of nonconstant dividends PV of horizon value, P

+
+
= + + + + + +
+ + + + +
= + + + +
+ + + +
= +
L L
L
( )
( ) ( ) ( )
Company
1 2
1 2
Market value
V PV of expected future free cash flows
of company
FCF FCF FCF
1 WACC 1 WACC 1 WACC

=
= + + +
+ + +
L

( )
N 1
Company at t N
FCF
FCF
Horizon value V
WACC g
+
=
=

p
p
p
D
V
r
=
p
p
p
D
r
V
=

Chapter 11
( )
d d p p c s
% After-tax % of Cost of % of Cost of
WACC of cost of preferred preferred common common
debt debt stock stock equity equity
w r 1 T w r w r
| || | | || | | || |
| | | | | |
= + +
| | | | | |
| | | | | |
\ \ \ \ \ \
= + +

( )
d d
d
After-tax cost of debt Interest rate on new debt Tax savings
r r T
r 1 T
=
=
=

p
p
p
D
Component cost of preferred stock r
P
= =
1
s RF s
0
Required rate of return Expected rate of return
D
r r RP g r
P
=
= + = + =

( )
( )
s RF M i
RF M RF i
r r RP b
r r r b
= +
= +


1
s s
0
D
r r Expected g
P
= = +


Note: Appendix 1 continues on page 14
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BU8201

Appendix 1 (continued)
( )
1
e
0
D
Cost of equity from new stock r g
P 1 F
= = +

Addition to retained earnings for the year

Retained earnings breakpoint=
Equity Fraction

Chapter 12
N
N t 1 2
0 1 2 N t
t=0
CF CF CF CF
NPV= CF + + +...+ =
(1+r) (1+r) (1+r) (1+r)

Unrecovered cost
Number of
at start of year
Payback years prior to
Cash flow during
full recovery
full recovery year
= +
( ) ( ) ( )
( )
N 1 2
0 1 2 N
N
t
t
t 0
CF CF CF
IRR: CF 0
1 IRR 1 IRR 1 IRR
CF
0
1 IRR =
+ + + + =
+ + +
=
+

L

( )
( )
( )
N
N t
t N
t t 0
t N
t 0
CIF 1 r
COF
MIRR:
1 r 1 MIRR

=
=
+
=
+ +

( )
N
TV
PV costs
1 MIRR
=
+


Chapter 14
Value of option = Max (0, Expected NPV with option Expected NPV without option)


Chapter 15
EBIT PQ VQ F 0 = =
BE
F
Q
P V
=

( )( )
L U
b b 1 1 T D E ( = +


( )( )
L
U
b
b
1 1 T D E
=
+

Chapter 18
Exercise value Current stock price Strike price =


- END OF APPENDIX 1


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