LONG TERM FINANCE (CH 4)
DISCOUNTED CASH FLOW VALUATION (CH 6)
SHARE VALUATION (CH 8)
b = retention ratio b = cash dividends paid NPAT IGR = Internal Growth Rate IGR = [RONA x b] [1 (RONA x b)] = RONA0 x b (Opening value) RONA = Return on closing net assets RONA = NPAT Net Assets
Annuity (series of identical cash
flows) * FV = C x [FVIFA(r,t)-1] r =C x [{(1+r)t-1} r] * PV = C x [1-PVIFA(r,t) ] r = C x [1-{1 (1+r)t}] r
P0 Dt
= =
Todays share price. Paid dividend in t Periods. Constant growth rate Required return P0 = D R
Perpetuity (same cash flow
forever) * PV = C r
periods. t = g = of dividend. R =
SGR = Sustainable Growth Rate SGR = [ROE x b] [1 (ROE x b)] = ROE0 x b (Opening value) ROE = Return on closing equity TIME VALUE OF MONEY (CH 5)
Zero Growth:
D0(1 + g)t
Effective Annual Rate
Constant Growth (Gordon) : Dt = Dividend Growth Model:
- P0 = D0 (1 + g) (R g) - Pt = Dt (1 + g) (R g) - Pt = Dt + 1 (R g)
* EAR = [1+(nominal rate) m]m-1
PV
= what future cash flows are worth today. FVt = what cash flows are worth in the future. r = rate (interest / return / discount) t = number of periods C = Cash amount
Annual Percentage Rate
* IR per period x by the # of periods per year * 12% pa with monthly payments = 1% per month. The EAR = 12.6825%. INTEREST RATES AND BOND VALUATIONS (CH 7) r = Yield per period. t = Periods to maturity. C = coupon paid per period. F = Nominal value paid at maturity. Coupon = Regular interest payments. Nominal value = par value = face value - Amount to be repaid at the end of the term. Coupon rate = coupon nominal value
PV = C1 (R g)
= C0 (1 + g) (R g)
Non-constant Growth:
Time Value Calculations
* FVt = C x (1+r)t - future (compound) factor : (1+r)t * PVt = C (1+r)t - present (discount) factor : 1/( 1 + r ) t *PV = FVt (1+r)t FVt = PV x ( 1 + r ) t
- calculate dividend growth for Pt - P0 = D1 (1 + r)+ Dt (1 + r)t + Pt (1 + r)t
r = dividend yield + capital gains
yield r = (D1 P0) + g
DU PONT
Profit = Assets x Profit x Sales
Equity Equity Sales Assets
Maturity = # of years until the nominal value paid Yield to maturity = IR required on bond by market
PE = Leverage x Profitability x
Efficiency turnover) (Profit Margin) (Asset
Bond value = PVcoupon + PVnominal C x [1 {1 (1 + r)t} r] + F (1 + r)t
NPV AND OTHER INVESTMENT CRITERIA (CH 9)
RISK, REWARD & SML (CH 13)
COST OF CAPITAL (CH 15) NB pg 478
Net Present Value (NPV)
NPV = PV costs NPV = [expected return + salvage value] costs (1 + IR)t (1 + IR)t (When you have diff cash flows add independently)
E(RA) = Expected Return
E(RA) = (probabilityA)(returnA) = (XA)(RA)
Cost of Equity (RE)
RE = D1 (P0 + g) g = ROE0 x b
Risk premium = E(RA) Rf (risk free
rate)
Security Market Line (SML
Internal Rate of Return (IRR)
IRR = Required return for 0 NPV (breakeven)
E(RP) = (XA)(RA) +(XB)(RB) + + (Xn)
(Rn)
approach) RE = RF + (RM RF)E EQUITY = SHARE (RM RF) = Market Risk Premium
Variance = [E(RA) actual return]2
x probability = 2
Capital Structure
Profitability Index (PI)
PI = PVfuture cash flows initial investment (shows bang for buck) SHORT TERM FINANCING (CH 19)
100% = E/V + D/V E/V = weight of equity D/V = weight of debt
Std Dev = (Total risk of a share / portfolio)
Weighted Average Cost of
Cash Cycle = Op Cycle Acc
Payable. Period Operating Cycle = Inv period + Acc Rec Period Inv Period = (365 x ave Inv) Cost of goods sold Acc Rec = (365 x ave Rec) Credit sales Acc Pay = (365 x ave Pay) Cost of goods sold MERGERS AND ACQUISITIONS (CH 24)
= Variance of portfolio 2P = (XA)2(2A) +(XB)2( 2B) + 2(XA)(XB) (PA,B)(A)(B) XA = Probability/ Weight of Share A 2A = Variance of Share A PA,B = Correlation Coefficient A = Std Dev of Share A
2 P
Capital (WACC) WACC = (E/V x RE) + (D/V x RD)(1 - Tc) If pref. shares too, add them : (P/V x RP) WACC = value (and visa versa) Doesnt when capital structure s
Economic Value Add (EVA)
eta = Measure of systematic
PE Ratio
P0 = (1 b) E1 RE (ROE x b) b = retention ratio (see ch 4) RE = cost of equity (usually WACC)
risk increase = increase risk = increase return P = (XA)(A) +(XB)(B) + + (Xn)(n) ( all Xs = 1)
= [NOPAT/Sales x Sales/Capital WACC] x capital Improve EVA by: NOPAT/Sales = Profitability Sales/Capital = Asset Turnover WACC = RD ; RE ; capital structure Capital = invest in more +NPV projects
Free Cash Flow (FCF) Model
Reward-to-Risk ratio = E(RA) Rf
A (Shows if a share is correctly priced) CAPM = Capital Asset Pricing Model CAPM = E(Ri) = Rf + [E(RA) Rf] x i E(Ri) = Expected return on Asset i [E(RA) Rf] = Risk Premium
Cost of Equity in unlisted firm
Get EQUITY for listed firm EQ = ASS x [ 1 + (1- Tc)(D/E)] Calculate ASSETS for listed firm Assume A LISTED = A UNLISTED Calculate E for unlisted firm
FCF = OCF - NWC Net CapEx OCF = (PBIT)(1 Tc) + Depreciation
