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0% found this document useful (0 votes)
76 views6 pagesFinance Cheat Sheet
Uploaded by
ShadierCopyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
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/ 6
Corporate Finance, Financial Management and Investments Formula Sheet
Equity
Holding Period Return
For a stock of price S, with dividend D
Di+S,
B(n) =
Dividend Yield
14 = DifSo
Gordon model
‘Assume constant growth of dividends g, req. rate of return r
(Last year’s dividend D3)
Next year's dividend Dy = Dp(1+ 9)
Present value of future cash payments in perpetuity
Dy
rent Bx (=m)
4 Plowbackrato x Return on equlty
videod per share
Earnings por share
Plowback ratio= 1 ~ Payout rato
Payout ratio =
Earnings per share
Return on equity = Bok value per share
Tree
Earnings per share = ber of outstanding shares
Sooke» Connon soc Rene earings
Common ck = Fee ea tars
No-Growth Value
Dwdeng@ TOD pe
Present Value of Growth Opportunities
PvGO =P-NGV
pro = PAOD
PE Ratios with growth
% Dy E,—b)
(ROB)
1b
F=@RROE)
(0 = plowback ratio)
Residual dividend approach
Project returns: rp
Shareholder cost oF equity:
If rp > toy company creates value for shareholders
lf rp = ter shareholders indifferent
lf, < rq, company destroys value for shareholders
‘stipulate whether average or year-end equity used
Gordon two-stage
(Last year's dividend Do)
8. 3years variable growth gs, 2 and gs, after which growth
becomes constant gs.
Dividends are
Dy = D4(1 + g,) [Caution!]
Present value of future constant growth at t= 3is
* Gan Gana?
PV = Stage 1+ Stage 2
EBITDA multiples
EV
EBITDA ~F—9
+ multiple = Tr (risk) or + (growth)
EBITDA Multiple
Calculate multiples for comparable companies, to work out
enterprise value
Enterprise value = EBITDA x Multiple
Fair val.of Bquity = EV + excess cash — longterm debt
Falrvale= gare ateanding
Residual income model
PV of stock price in terms of ROE and book value of firm equity
(per share) projected. PV increases when ROE>f«:
(ROE, = re)BVo , (ROE: ~ r2)BV,
Oat
(ROE, ~ r2)BV
aan *
PY = BYy+
Dupont
‘Wet income
ROE = Shareholder equlty
ow ec arm bon
Dace shears Corporate Finance, Financial Management and Investments Formula Sheet
Debt
Effective annual rate
\With a compounding period 7 (measured in years eg. 1 month
T = 1/12), return over that period 1/(T)
FAR = [1tn(T)7=1
(eaPRx Tv 1
expec) = 1
[Annual percentage rate: APR = r/(T) x (1/T)
‘Continuously compounding rate: roc = In(1 + EAR)
Real and nominal interest rates
ation
tm"
n-year forward rate
ath
Forward rates give expectation of interest rates, as short-rates
based on yields to maturity of different-duration assets. Discount
future cashflows by product of relevant forward rates (taken from
10, these products are just the compounded yields)
Liquidity preference theory
‘This theory asserts that forward rates reflect expectations about
future interest rates plus a lqudity premium that increases with
maturity
Interest rate = Forward Rate —Ligudity Premium
Deferred loans
Implied annvally compounded forward rate fora deferred loan of
length x beginning in yar Y, based on the yields ris
(A esr
G+n)
Bond equivalent ytm
‘Convention: work out semi-annual veld to maturity, (.e. 2x
numberof periods) then doublet.
Realised compounding yield to maturity
= yield with reinvestment of coupons ata given interest rate. Add
up total proceeds, including T-compounded value of all coupons.
Total proceeds,”
neaigem = (Corenrree) ~*
f
Equivalent annual costs (Loan repayments)
Take out aloan of NPV=S, paid over a period of m with interest
rate r. myear annuity factors
1
Ma
Equivalent per-period costs (repayments is
cutee
Ti
NPV
nev = -chy-+F 4 oF Ce
Gen * dent tant
IRR: Expected rate of return. Use IRR((Cashflows}) in excel
IRR= re NPV
IRR > discount = accept
IRR < discount = reject
YTM = IRR, (888+ investor, 88
ym
YIM < coupon => ‘Premium’
junk)
coupon ='Par’
‘YTM > coupon => ‘Discount?
YIM = RFR + Default risk + Interest rate risk
+ Premium for embedded options
Interest rates 1 =» bond price , Interest rates 1 => bond price T
Eg. with coupons C 7TM r, num periods T, and face value F
PV(coupon + FV) = PV(r.7.C, FV)
PV(coupon only) = PV(r.7.C)
PV(EV only) = PV(r,T, 0,FV)
‘YIM = RATE (periods, payments, PY, FV) or IRR\(Cashflows})
"NOT THE DISCOUNTED CASHFLOWS, and with «ve PV
[check semi-annual, for rates + yields, PV must be negative.)
Bid = sell $to broker, Ask = buy $ from broker
Liquidity % 1/(Ask ~ Bid)
Duration
‘weighted average ofthe times when the bond's cash payments
are received.
LXPVG) 2x PVC) , | PXPUCCr)
Pv py tay
Portfolio duration
Total equity in portfoi
Duration
Assets Uabilities
Portfolio duration = Multiply component durations by thelr values
(abilities negative), dvide by total equity.
Asset x Durat.— ¥ Liab. Durat
Portfolio duration = Torat equity in portfolio
Modified duration
centage change in bond price for a1 percentage-point
change in yield (adjusts for accuracy). Appreximates % change in
‘bond price for 3% change in yield. Units i ‘years, so %A\price) =
Iyel* [96arate/year] = %.
Mod dur
Trade discounts
Discount ry for payment at ¢; days rather than usual tp day
payment terms. Corporate Finance, Financial Management and Investments Formula Sheet
Capital structure
Cost of debt
r= 7 + credit spread
‘Credit spread = default risk for firms of snar intrest coverage
err
Interest expenses
Cost of equity (From CAPM):
ry + BX Market risk premium
Weighted Average Cost of Capital (WACC)
Financial + systematic risk: V =D +E
WACC = (1-1) xB xa Ere
Levered/unlevered return (concentration of risk)
rf is return on unlevered equity = return on assets, leverage D/E,,
ives rf as cost of levered equity, and:
rb=rt +(2)a-mey-m
Levered/unlevered beta
When determining cost fequty, consider cunt frm leverage
D./E vs target leverage D,/E;. Levered beta = business risk +
financial risk.
f= Pox[i+2xa-1)]
Bu
pi+xa-n3]
So, to determine torget beta:
Bu
14 an
FE
Pe= Bex
14g 0-7)
Tax shields
‘When value of debt Dis permanent, tax shields with deductions at
taxrate Tinereases frm value!
Value of levered firm = Value fall equty-financed +7, x D
Leverage => add financial distress (measure as PY, -ve). Optimise!
Value of government claim on firm
Tax rate 7, PV of taxes pad is
ext,
E+ T) XT. :
1-%
‘Sustainable Growth Rate (SGR)
Rate at which frm can grow in without further equity aise,
‘assuming new debt canbe taken on. (Uses book value of equity)
cen Retained earnings
“Beginning equity
RE, NL Sales D+E
NL * Sales“ W.A.” —E
Powback> N Margin Asset
Net assets = BV. + Labilties{Loans)
Buybacks
ADebt= exces cash used + new debt raised
Pv (Tax shields) = AD xT,
Debs shield Volue to share sellers = Premium » Volume
%tosellers = Value to sellers / PV (Tax)
Enow = Fate ~ AD + AD Te
Total Enterprise Value (TEV)
TEV= 0+ £ ~ non-operating cashflows
During buybacks, incorporate changes including ~ cost of buyback
+ PV tax shields + cash value of new debt
Equate to PV of sustainable cash flows
rey =EBITX =)
WACC
Metrics
Economic Value Added (Stern-Stewart)
EVA = residual income = income earned — income required
= income earned ~ cost of capltal x investment
Economie Profit (MeKinsey)
EP = (RO! ~r) x capital invested
Earnings per share
wee Net income
Number of shares outstanding
Return on equity (netlessr.)
Netincome
FOE Book value of common equity
Return on assets (nt less WACC}
Net operating profit after taxes (NOPAT)
mais Total assets
Price-€arnings ratio
Share price
EPS
Personal vs Corporate tax rates for dividends
Corp, tax rate Tc, personal tax rate T,. Compare
4 Distribute $1 today, shareholder invest for 1 year will have
8-1) x (14x (1-7)
2. Firm invest $1 today, distribute next year, shareholder will have
s(-7)x(1+rx 1-1)
Te> Ty = payout 1,Te < Ty = payout b
Franking credit
We is corp tax rate and DIV is franked credit distributed, then
{ranking creditis
Fe= pW x
Dividend policy
prop < Te = Poor projects, FCFE to shareholders: Dividends /
buybacks, review policies/management
Toroy > Ta = Bo0d projects, invest where cash avalable
‘Working capital management
‘Working capital = Ace rec. +4 Inv Acc payable
‘Work out PV cash low perpetuity after tax for r = WACC
ageir
Py = (1-1) x Corporate Finance, Financial Management and Investments Formula Sheet
Markets
‘Synthetic bonds / law of one price
Consider three cash flows Cy, Cand Cy. IF
Gy = AXC + A-A) XC,
then
G-G
with
PV, = AX PY, (1A) x PY
6 6,=$100, Cy = $0 and C3 = $50, Then
$50—$0
= soo $0 = 50%
Two-asset portfolio
Mean returns i rsk StDev) 49, correlation
600 (pts)
Pas =o, Xp
Fisk-ree rate ry. Weights 0» and wp = 1 0
Mean portfolio return
By = Wa X a+ On X hy
Variance of portfolio.
3 02 + a} 03 + 2.04 0» covlra te)
Oh of + wh of +2 04 0» Pasoats
Minimum-variance portfolio
= tb = comtra
Oj + of — 2 colt Ty)
‘Optimal (tangent) portfolio is given by A-stock weighting:
(a= 11)ob - Ge - 1Paw see
OO i= TOE + Cin = 108 = Gia + t= 27 Pane
Sharpe rato f reward to isk i
=
* Sharpe is max. olong Tengent ine/Coptol Market Line (CMU)
Sharpe ratio
%
For CML portfolio with risky asset allocation 4
(1 = wp p+ pty,
Sharpe * +7
To achieve a target return jr,
utility
U = E(7) - 05407
200: Risk aversion, preference for lower risk
‘A-O: Risk neutral highest return sought
‘AO: Pathological risk seeking, lower returns ok with Prisk
With ristfree rate r7, and risky asset rp, dp, maximum level of risk
aversion for which rsky asset is preferred:
20p=m)
For the CML portfoli, utiltyis
1
(1-05) 17+ opty — 5 hood
0 tomaxinise ty,
wu 5
dag Tt +p Ayo +0
ou, =
KE
Capital Asset Pricing Model / CAPM
Market risk premium
im Ty
Required return on rsky asset (systematic risk ony!)
+ BX (m7)
‘Asset Beta:
pp = Leulstock, market)
~~ var(market)
8 > 1 = Aggressive stock
B < 1= Defensive stock
Realised CAPM in terms of risk premium: Rr a is anomalous
return and e; is random term
Raat Pky te,
Risks expressed in terms of systematic and firm specific
‘components of variance
oF = Bron + 070)
‘With R-square, expressing portion of variation in stock movement
thatis systematic:
‘When there is a portfolio of stocks P with weight w, so that
of = Bioh + 0°(ep)
‘And for two stocks /and)
Cov(Ri, Rj) = BiB) Cov Rus, Roe) = Buby oh
Pibjoe
Be oa
Fama-French
‘CAPM, but with three betas for market, firm sie and book:-to-
market ratios.
a Ty + Bmariee * Cin = 14)
+ Baize X Gamat ~ Farge)
+ Bow X Coun ~ Toews)
> 0 +ve risk-adjusted returns
@ <0 = —ve risk-adjusted returns Corporate Finance, Financial Management and Investments Formula Sheet
Options and risk management
Sell als “You buy this stock in future ata set price"
Buy call: “can buy this stock at set price in future”
Sell put: "You can sel this stock to me at a set price in future”
Buy put: “Ican sell this stock to you at set price in future”
IR swaps
Lay off risk: Pay fixed and receive floating in IR swap (-ve duration)
Party that receives fixed has duration equivalent to owning the
bbond (+ve). Party that pays has -ve. Change in equity AP for a
‘change in yield is backed out from duration of bond with price P
AP.
(>)
B+
Cs)
Binomial pricing:
Portfolio is perfectly hedged i one holds H shares of stock for
‘each call option written, where C and Sare the prices in future
‘outcomes:
5. 5u
Equivalent portfolio is holding (1-H) shares and placing
remaining funds (from stock-+put/call portfolio) into T-bill
Black Scholes
Value of call option = [delta x share price] ~ (bank loan}
[N(d,) x P] = [N(@s) x EXe™"7]
where
InfP/EX] + (r+ 0/27
N(@) = NORMSIDST(a);
BX = Exercise price of option;
T= number of periods to expiration;
tock price now; and
17 = standard deviation per period of (continuously compounded)
rate of return of stock
+= continuously compounded rsk free rate
B-S With dividends
‘annual dividend yield
Value of call option = [N(ds) x Soe") ~ [N(d) x EXe™"7]
Value of put = EXe~""(1 ~N(d3)] ~ Sye"*"[1 - NCA]
where
In[P/EX] + +07/2)T
see eee,
y=, oT;
4
Put call parity (ex