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Receivables

Turnover=Sales/AR
Times Int. Earned=EBIT/interest
Accounting veil: not affect stock prices
Break Even:
Accounting:
Q= (FC+D)/P-V

Total OCF= OCF
addition to NWC-capital
spending
Cash
Q= (FC)/P-V
Can only service op.
costs not investment

NI=0
Payback=N
NPV<0
IRR=0

OCF=0
Payback=infinity
NPV=Co<0
IRR=-100%

Financial:
Payback=N
Q= (FC+OCF*)/P-V
NPV=0
OCF*=Co/PVAF
IRR=r
DOL= 1+ (FC/OCF)
DOL= degree to which
Change
project relies on fixed
OCF=DOL*%change in Q costs
Bond Value= PV(Coupons) + PV(FV)
HPR=(P1-P0)/P0
SML! = ! + ! ! !
Does not require companies to apy dividends &
have steady growth, base calculations on 2
estimates, explicitly considers risk.

Fixed Asset Turnover= sales/net fixed assets
Total; Debt Ratio= (Assets-Equity)/Assets

Capital Intensity Ratio:Total Assets/Sales (use % of sales approach)

Efficient Market: NPV=0, well organized markets


are efficient, investors get what they pay for, firms
get exact value.
Holding Period Yield: Rate where Co= PV(cash
inflows)
Price Earnings: P=EPS/R +NPVGO
DFL
= EBIT/(EBIT-Interest)
=%change in EPS/%change in EBIT
Long Term Debt Ratio = LT Debt/LT Debt+equity

Equity Multiplier: Total


Assrts/Total Equity
Days Sales in Receivable
=365/receivables turnover
M&M Proposition 1

! = !
= !
! ( )
= +
Arbitrage Opp when Vl<Vu
Capital Structure Irrelevant
WACC same no matterD/E
M&M Proposition 2:
!
! = ! + (! ! ) Ra =WACC
!

Cost of equity rises as debt increase


Equity Risk=business + financial
M&M Proposition 1 with Tax
1
! = !

!
! = ! + ()
straight line with slope of Tc. Y
intercept of Vu
Compound G of Dividends:
(! )!/! 1
And (1+r)*(1+r)^1/t - 1
M&M Proposition 2 with taxes:

! = ! + (! ! )(1 )

= ( ! )(1 )/!
CAPM: ! = ! + ! ! !

! = ! (1 + )

Interval Measure: current


assets/avg. daily op. costs

DuPoint ROE
= NI/Total Equity
=(NI/Assets) X (Total Assets/Total Equity)
=(NI/S) X (S/A) X (A/E)
=(NI/S) X (S/A) X (1+ D/E)
=Profit Margin x total asset turnover x equity
multiplier
Dividends:
Share price cum div = equity/#of sharesw
Share price ex div = share price div
Share price =PV(all future divs)
Dividend Payout Ratio = Dividends/NI

Cost of Equity Capital=R=(D1/Po)


+g = dividend yield +capital gains
yield
Point of financial leverage
Indifference: EPS(with
Debt)=EPS(without Debt)
EBIT = interest/ 1 (#shares with
debt/#shares without Debt)
Nominal Risk Prem=Avg. Nom
Return-Risk free= arithmetic
Real Risk Free Rate= Risk free avg.
infl.
Real Risk Prem=Avg Real return-
RealRisk Free

Dilution:
NI increases by ROE x New issue
amount
New Market share price: use EPS
not sale price

Effective Annual Rate:


Home
250,000

Downpmt
12500

Loan
237,500

Term
120m

APR
13% SEMI ANNUAL COMPOUND
EAR
(1+6.5%)^2 -1 =0.134225
Effective monthly rate (1+EAR)power(1/12) -1
Set your calculator to BEG
PV =-237,500
T=120
R=1.0551
FV=0
THEN COMPUTE PMT = 3462.31
Check: EAR = ! 1

Theoretical Value of a right:


!

! =

+ 1

! =common share price
with rights
S=subscription
Price

N= # of rights required to buy 1
share=#old
shares/#of

new shares
= ! ! = share price exrights
= (! )/ = Ex rights value
of a right
Funds raised= S*#new shares
Dollar Flotation cost=
funds raised net proceeds
% Flotation Cost=
Dollar FC/Funds Raised

Return on Portfolio:
! = ! ! + (! ! )
EFN = - pSR + g(A-pSR)
=A(g)-pSR(1+g)-CL(g)
Exact Fisher Effect:
(1+Rnom)=(1+Rreal) x (1+infl)

! = ! ! + (! ! (= 0))

BASE CASE NPV


PV(ATOCF)+(PV(CCATS)+PV(Salvage)+
PV(NWC Recovered)- Co-Initial NWC

NWC to total assets = (current


assets-current liabilities)/total
assets
NWC Turnover=Sales/NWC
OCF Basic = EBIT+D-Taxes
Private Leverage:
OCF Bottom up= NI+D
Leverage reduces value of firm
OCF TopDown=S-Costs-Taxes
when:
OCF Tax Shield= (S-C)(1-T)+(D*T)
1 ! < (1 ! )(1 ! )
Analysis OCF=[(P-V)Q-FC) X (1-T)]+TD =
C=corporate tax rate

Annuity:
S=private dividend tax rate
Annuity Due=PMT PVAF(1+r)
If> then increases
!"#
!!! !
If = then indifferent
PVgrowing Annuity =
[1
]
!!!
!!!
If B=S then leverage increases
PVgrowing perp = PMT/r-g
firm value
P/E =price/EPS
Capital Budgeting Alternatives:
P Index= PV(cash flows)/Investment > 1 NPV
(may lead to wrong dec. when mut. Ex)
IRR (IRR>R = accepted)
Profit Margin=NI/Sales
Payback Ruke
ROA=NI/Total Assets
Discounted Payback rule
Retention ratio= pSR X(1+g) or RE/NI
Avg. Accounting Return
Std Dev on Calculator:
Capital Budgeting: adjust for
2nd F, Mode,0,0,Mode,1,0, data enter,
time value? Adjust for risk?
alpha, 5 =
Provide information & value
Reward to Risk= (ERi Rf)/Betai
@equilibrium:RTRA=RTRB=RTRp

r^2=portion of total risk that is
systematic
Growth
=b x ROE

Sustainable=(ROE X R)/(1-(ROE X R))

Internal Growth:
=pSR/(A-pSR)
ROA X R)/(1-(ROA X R))
= (! ! ) + (! ! )
Total Amnt raised
=Project Cost/1-WAFC
Capital Structure Weights=
MV(Debt)=BondPrice*#bonds/Assets
MV(Equity)= Price*#shares/assets
MV(PS)=PS Price*#of PS/Assets
Unlevered/Levered Borrowing:
D/E=0.5, EPS=2.5, i=10%
D=0.5E, @ E=2000, D=1000.
Total=3000, #shares=3000/20=150,
Expected Payoff=EPS(Shares)-
(1000*0.1)=375-100=275, Expected
Payoff=375+100=475 (lender)
! !!
Stock Valuation= ! = ! !
Constant Growth: ! =

!!!
!!

!!!

Supernormal Growth = ! =

!!
(!!!)!

/ 1 +
Funds to be Raised
= Net Proceeds/1-flotation spread
MV(Before)=#of

old shares * Rights on
share

price
MV(after)=(Total

*Me)-(#of new
shares*S)


0.010551

@Sustainable g, company can


increase sales & Assets without
selling equity. Debt can increase
Calculator to Find IRR
Cfi,2ndf,
CA,ON,data,ON,2ndf,cash,2ndf,CA
Nonconventional Cash flows: use
diff between cash flows for each
project and use as entries
MIRR: Method 1: discount 2nd
negative cash flow back to Co
Method2: FV all cash flows and
add to last negative cash
flow.3)use both methods simult.
Replacement of equipment:
NPV= Net Investment +
PV (ATOCF) +PV(net salvage
value=salvage of old-salvage of
new)+PV(CCATS, C=New cost-old
salvage)
Setting Price on a bid:
NPV=0=Capital
spending+PF(Salvage)+addition/
recovery of NWC+PV(ATOCF)(S-
C)(1-T) + tax sield on CCA. Then
find S and Q.

Avg Account. Return: Avg.NI/Avg


Investment(1/2 of Co, need target)

EFN=increase in total assets-


addition to RE-New Borrowing

Dividend Growth Model:


Re=(D1/Po)+g
Days Sales in
Inventory=365/Inventory Turnover

Approximate:
Rnom=Rreal+infl.

Inventory Turn. =COGS/Inv.


EAC = PV(Costs)/ PVAF

Equally risky investments=equally


risky returns

Homemade leverage: assumption that


individuals can lend& borrow at same rate as
the firm