==================================Capital Structure====================================

1. Total risk of equity shareholders = ROE

2. Business risk = ROE (u)
3. Financial risk = ROE - ROE (u)
Without Corporate Taxes;
[V(lev) = market value of a leveraged company, V(unlev) = market value of an unleveraged company,
Ko = weighted average cost of capital (WACC) of a leveraged company, Keu = cost of equity of an
unleveraged company, EBIT = earnings before interest and tax]
[Ko = overall capitalization rate (WACC), Ke = cost of equity capital, Kd = cost of debt, We =
proposition of equity in total capital, Wd = proposition of debt in total capital, E = amount of
equity capital, D = amount of debt capital]
4. V(lev) = V(unlev) = EBIT / Ko = EBIT / Keu
5. Ke = Ko + (Ko Kd) * D/E
With Corporate Taxes (t);
[Vu = value of unlevered company, Keu = cost of equity of unlevered company, t = corporate tax rate]
[V(lev) = market value of levered company, Vu = market value of unlevered company, D = market
value of debt, t = corporate tax rate]
[Ke = cost of equity of levered company, Keu = cost of equity of unlevered company, Kd = cost of debt,
D/E = debt equity ratio, t = corporate tax rate]
6. Vu = EBIT*(1-t) / Keu
7. V(lev) = Vu + Dt
8. Ke = Keu + (Keu Kd) * D/E * (1-t)
9. V(lev) = D + E
10. WACC = We * Ke + Wd * Kd * (1 t)
==================================Personal Tax====================================
11. A stockholder receives the net amount = (1-TC) x (1-TS)
12. The bondholder receives = (1-TB)
13. If T
S
= T
B
then the firm should be financed primarily by debt (avoiding double tax).
14. The firm is indifferent between debt and equity when: (1-T
C
) x (1-T
S
) = (1-T
B
)
15. Tax advantage of debt is positive when:

(1-T
C
) x (1-T
S
) < (1-T
B
)
16. Tax advantage of debt is negative when:

(1-T
C
) x (1-T
S
) > (1-T
B
)
17. Vu = EBIT * (1-T
C
)* (1-T
S
) / Keu
18.

19. EBIT Interest = EBT; EBT Taxes = EAT; EAT Preference Div = Earnings avail = EPS * No of Shares


D *
) T (1
) T (1 * ) T (1
1 V V
B
S C
U L

+ =
==================================
[Po =Current value of the equity share; Do=Dividend per share paid at time 0; g=Constant rate of
growth of dividends; Ke = Cost of the retained earnings
1. Ke = Do*(1+g) /Po + g
[gr = Rapid growth rate of dividend during the first n years; gn =Normal growth rate of dividend
continuously for ever; Pn = Share price at the end of n years]
2. Pn = Do*(1+gr)^n*(1+gn) / (Ke
3. Po = Do*(1+gr) / (1+Ke) + Do*(1+gr)^2 / (1+Ke)^2 + .

[E(Rs) = Expected rate of return of the security; Rf= Risk
return of the market; s = Beta co
4. E(Rs) = Rf + s [E(Rm) Rf]
5. E(Rs) = Rf + s [E(Rm) Rf]

6.
=====Cost of Equity========
7. Net proceeds = Po (1 f).
8. Cost of the new equity
9. Adjustment for flotation costs
=====Cost of Preference Capital
10. Kp = D / [Po*(1-f)]
11. Kat= (1-t) * Kbt
[We = Proportion of equity in the total capital; Wp = preference shares; Wd = debt ; Ke = Cost
of retained earnings / external equity; Kp = Cost of preference capital; Kd = Pre
t=corporate tax rate; We + Wp + Wd = 1.0
12. WACC = We * Ke + Wp * Kp
13. With constant D/E ratio;
14. With constant amount of D

===============================
FV = C
0
(1 + r)

C
0
is cash flow today (time zero),r is the appropriate interest rate.
FV = C
0
(1 + r)
T..

T is the number of periods over which the cash is invested.
NPV = Cost + PV
Continuous Compounding, FV =
==================================Cost of Capital====================================
e equity share; Do=Dividend per share paid at time 0; g=Constant rate of
Ke = Cost of the retained earnings]
Constant Dividend Growth Model
= Rapid growth rate of dividend during the first n years; gn =Normal growth rate of dividend
continuously for ever; Pn = Share price at the end of n years]
gn) Two Stage Growth Model
*(1+gr)^2 / (1+Ke)^2 + . + Do*(1+gr)^n / (1+Ke)^n +Pn / (1+Ke)^n
Using Discounted Cash Flow (DCF) approach
[E(Rs) = Expected rate of return of the security; Rf= Risk-free rate of return; E(Rm) = Expected rate of
Beta co-efficient of the security]
Capital Asset Pricing Model (CAPM) Approach
or, E(Rs) = (1-s) Rf + s E(Rm)


. [Po = Gross amount received per share; f =Percent floatation costs.]
= Cost of the existing equity + Adjustment for the flotatio
= Do*(1+g)*f / [Po*(1-f)]
=====Cost of Preference Capital========
[Kp = Cost of Preference share capital; D = Annual dividend]
[Kat=post-tax cost; Kbt=pre-tax cost; t=corporate income tax rate.]
[We = Proportion of equity in the total capital; Wp = preference shares; Wd = debt ; Ke = Cost
of retained earnings / external equity; Kp = Cost of preference capital; Kd = Pre
We + Wp + Wd = 1.0]
+ Wp * Kp + Wd * Kd * (1-t)
(equity) = (asset) (1+D/E)
(equity) = (unlevered firm) [1+(1-t)*D/E]
===============================Discounted Cash Flow==================================
is cash flow today (time zero),r is the appropriate interest rate.
T is the number of periods over which the cash is invested. ; e is a transcendental number approximately equal to 2.718.
= C
0 .
e
rT
2
2
) (
) , (
M
i
M
M i

R Var
R R Cov
= =
r
C
PV
+
=
1
1
C FV =
====================================
e equity share; Do=Dividend per share paid at time 0; g=Constant rate of
Constant Dividend Growth Model
= Rapid growth rate of dividend during the first n years; gn =Normal growth rate of dividend

+ Do*(1+gr)^n / (1+Ke)^n +Pn / (1+Ke)^n
Using Discounted Cash Flow (DCF) approach
free rate of return; E(Rm) = Expected rate of
Capital Asset Pricing Model (CAPM) Approach
f =Percent floatation costs.]
+ Adjustment for the flotation costs
[Kp = Cost of Preference share capital; D = Annual dividend]
t=corporate income tax rate.]
[We = Proportion of equity in the total capital; Wp = preference shares; Wd = debt ; Ke = Cost
of retained earnings / external equity; Kp = Cost of preference capital; Kd = Pre-tax cost of debt;
==================================
is cash flow today (time zero),r is the appropriate interest rate.
e is a transcendental number approximately equal to 2.718.
T m
m
r
C

+ 1
0
Perpetuity


Growing
Perpetuity



Annuity


Growing
Annuity







T
T
r
g C
r
g C
r
C
PV
) 1 (
) 1 (
) 1 (
) 1 (
) 1 (
1
2
+
+
+ +
+
+
+
+
=

L
1
1
]
1

|
|

\
|
+
+

=
T
r
g
g r
C
PV
) 1 (
1
1
T
r
C
r
C
r
C
r
C
PV
) 1 ( ) 1 ( ) 1 ( ) 1 (
3 2
+
+
+
+
+
+
+
= L

+
=
T
r r
C
PV
) 1 (
1
1
L +
+
+
+
+
+
+
+
=
3
2
2
) 1 (
) 1 (
) 1 (
) 1 (
) 1 ( r
g C
r
g C
r
C
PV
g r
C
PV

=
L +
+
+
+
+
+
=
3 2
) 1 ( ) 1 ( ) 1 ( r
C
r
C
r
C
PV
r
C
PV =