lOMoARcPSD|20879968

Chapter 2 & 3 - (Annual = 1, Biannual = 0.5, Semi Annual = 2, Daily = 365, Weekly = 52, Biweekly = 26, Monthly = 12), PE = Preferred Equity, PS = Price-Sales, EV = Enterprise Value, NFA = Net Fixed Assets
Assets (A) = Liabilities (L) + SE Income = Revenues – Expenses 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑁𝑊𝐶 = 𝐶𝐴 − 𝐶𝐿 𝑁𝐼 𝑁𝑊𝐶 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑀𝑎𝑟𝑔𝑖𝑛
𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝑁𝑊𝐶 𝑡𝑜 𝐴𝑠𝑠𝑒𝑡𝑠 =
𝐴𝑠𝑠𝑒𝑡 𝐵𝑉 = 𝐶𝐴 + 𝑁𝐹𝐴 𝐸𝐵𝐼𝑇 = 𝐸𝐵𝑇 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑆𝑎𝑙𝑒𝑠 𝑆𝑎𝑙𝑒𝑠 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒
𝑆𝑎𝑙𝑒𝑠 − 𝐶𝑂𝐺𝑆 =
SE = MAX[(TA-TL),0] 𝑁𝐼 = 𝐸𝐵𝑇 − (𝐸𝐵𝑇 × 𝑇𝑐) = ∆𝑁𝑊𝐶 𝑆𝑎𝑙𝑒𝑠
𝐸𝐵𝑇 = 𝐸𝐵𝐼𝑇 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝐵𝐼𝑇𝐷𝐴 = 𝐸𝐵𝐼𝑇 + 𝐷&𝐴 𝑆𝑎𝑙𝑒𝑠 = 𝐶𝑌(𝐸𝑛𝑑. 𝐶𝐴 − 𝐵𝑒𝑔. 𝐶𝐿) 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝐹 = 𝐸𝐵𝐼𝑇 + 𝐷𝑒𝑝𝑟 − 𝑇𝑐 𝑆𝑎𝑙𝑒𝑠
𝑁𝑊𝐶 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐸𝐵𝐼𝑇 𝐵𝑉 𝐸𝑞𝑢𝑖𝑡𝑦 = 𝑇𝐴 − 𝑇𝐿 − 𝑃𝑌(𝐸𝑛𝑑. 𝐶𝐴 − 𝐵𝑒𝑔. 𝐶𝐿) 𝑁𝑊𝐶 𝐶𝑂𝐺𝑆
𝐸𝐵𝐼𝑇 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝐴𝑣𝑔. 𝐷𝑎𝑖𝑙𝑦 𝑂𝑝. 𝐶𝑜𝑠𝑡𝑠 =
𝑆𝑎𝑙𝑒𝑠 365
𝐺𝑜𝑜𝑑𝑤𝑖𝑙𝑙 = 𝐴𝑚𝑜𝑢𝑛𝑡 𝑃𝑎𝑖𝑑 − 𝐹𝑉 𝐶𝐴 𝐶𝑎𝑠ℎ + 𝐶𝑎𝑠ℎ 𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠 𝐿𝑇 𝐷𝑒𝑏𝑡 𝑇𝐴 − 𝑇𝐸 𝑇𝐿 𝐸𝐵𝐼𝑇𝐷𝐴 𝐷𝑎𝑖𝑙𝑦 𝑆𝑎𝑙𝑒𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 = 𝐶𝑎𝑠ℎ 𝑅𝑎𝑡𝑖𝑜 = 𝐿𝑇 𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 = 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 = = 𝐶𝑎𝑠ℎ 𝐶𝑜𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑎𝑡𝑖𝑜 = 𝐴𝑣𝑔 𝐷𝑎𝑖𝑙𝑦 𝑆𝑎𝑙𝑒𝑠 =
𝐶𝐿 𝐶𝐿 𝐿𝑇 𝐷𝑒𝑏𝑡 + 𝑇𝐸 𝑇𝐴 𝑇𝐴 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 365
𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡 𝑄𝑢𝑖𝑐𝑘 𝑅𝑎𝑡𝑖𝑜 𝑁𝐼 𝑆𝑎𝑙𝑒𝑠 𝐴𝑠𝑠𝑒𝑡𝑠 𝑀𝑎𝑟𝑘𝑒𝑡 𝑡𝑜 𝑏𝑜𝑜𝑘 𝑟𝑎𝑡𝑖𝑜 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐶𝑜𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑎𝑡𝑖𝑜 𝑆𝐸 − 𝑃𝐸 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
𝐷𝐸 𝑅𝑎𝑡𝑖𝑜 = 𝐷𝑢𝑃𝑜𝑛𝑡 𝑅𝑂𝐸 = × × 𝐵𝑉 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 = 𝐴𝑅 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦 𝐶𝑎𝑠ℎ + 𝐴𝑅 + 𝑆𝑇 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 𝑆𝑎𝑙𝑒𝑠 𝐴𝑠𝑠𝑒𝑡𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 𝐸𝐵𝐼𝑇𝐷𝐴 𝑂𝑆 𝑆ℎ𝑎𝑟𝑒𝑠 𝐴𝑅
= = = 𝐷𝑎𝑦𝑠 𝑖𝑛 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝐶𝐿 = 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 × 𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 𝐶𝐴 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 × 𝐸𝑞𝑢𝑖𝑡𝑦 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 365
𝐷𝐸 𝑅𝑎𝑡𝑖𝑜 = = =
(1 − 𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜) 𝐶𝐿 𝐴𝑅 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
𝑁𝑒𝑡 𝐷𝑒𝑏𝑡 𝑇𝐷 𝑇𝐴 𝐷 𝑇𝐿 𝑁𝐼 𝑇𝑖𝑚𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 𝑅𝑎𝑡𝑖𝑜 𝑆ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒 𝐶𝑂𝐺𝑆
𝐷𝑒𝑏𝑡 𝑡𝑜 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑅𝑎𝑡𝑖𝑜 = 𝐸𝑞𝑢𝑖𝑡𝑦 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 = =1+ =1+ 𝑅𝑂𝐸 = = 𝑅𝑂𝐴 × 𝐸𝑀 𝑃𝐸 𝑅𝑎𝑡𝑖𝑜 = 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
= 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡 𝑇𝐸 + 𝑇𝐷 𝑇𝐸 𝐸 𝑇𝐸 𝑇𝐸 𝐸𝐵𝐼𝑇 𝐸𝑃𝑆 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
= 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝.
− (𝐸𝑥𝑐𝑒𝑠𝑠 𝐶𝑎𝑠ℎ & 𝑆𝑇 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠) 𝑁𝐼 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 𝐷𝑎𝑦𝑠 𝑖𝑛 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐸𝑉 𝑅𝑂𝐴 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 365
𝐸𝑞𝑢𝑖𝑡𝑦 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 (𝑀𝑎𝑟𝑘𝑒𝑡) = 𝑇𝐴 =
𝑀𝑉 𝐸𝑞𝑢𝑖𝑡𝑦 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
𝑆𝑎𝑙𝑒𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 𝑀𝑉 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 (𝑅𝑂𝐼𝐶) 𝑁𝐼 𝐷𝑒𝑏𝑡 𝑡𝑜 𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒 𝑅𝑎𝑡𝑖𝑜 𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒 𝐴𝑃
𝐹𝐴 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝐸𝑃𝑆 = 𝑃𝑆 = 𝐴𝑃 𝐷𝑎𝑦𝑠 =
𝑁𝐹𝐴 = 𝑂𝑆 𝑆ℎ𝑎𝑟𝑒𝑠 × 𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒 𝐸𝐵𝐼𝑇(1 − 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒) 𝑂𝑆 𝑆ℎ𝑎𝑟𝑒𝑠 𝑁𝑒𝑡 𝐷𝑒𝑏𝑡 𝑆𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐴𝑣𝑔 𝐷𝑎𝑖𝑙𝑦 𝐶𝑂𝐺𝑆
𝑆𝑎𝑙𝑒𝑠 = =
𝐸𝑞𝑢𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒 = 𝐸𝑉 − 𝐷𝑒𝑏𝑡 𝐵𝑉 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 + 𝑁𝑒𝑡 𝐷𝑒𝑏𝑡 𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒 𝑆𝑎𝑙𝑒𝑠 𝐶𝑂𝐺𝑆
𝑇𝐴 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝑆𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 = 𝐴𝑃 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝑇𝐴 𝐸𝑉 = 𝑀𝑉 𝐸𝑞𝑢𝑖𝑡𝑦 + 𝐷𝑒𝑏𝑡 − 𝐶𝑎𝑠ℎ 𝑂𝑆 𝑆ℎ𝑎𝑟𝑒𝑠 𝐴𝑃
CF from assets = CF to bondholders + CF to shareholders 𝐶𝐹 𝑡𝑜 𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑖𝑑 – 𝑁𝑒𝑡 𝑁𝑒𝑤 𝐵𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔 𝑁𝑒𝑡 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑆𝑝𝑒𝑛𝑑𝑖𝑛𝑔 = 𝐸𝑛𝑑. 𝑁𝐹𝐴 − 𝐵𝑒𝑔. 𝑁𝐹𝐴 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
CF from assets = Operating CF - Net Capital Spending - Changes in NWC 𝐶𝐹 𝑡𝑜 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 = 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑃𝑎𝑖𝑑 – 𝑁𝑒𝑡 𝑁𝑒𝑤 𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑎𝑖𝑠𝑒𝑑 𝑁𝑒𝑡 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑆𝑝𝑒𝑛𝑑𝑖𝑛𝑔 = 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 𝐵𝑜𝑢𝑔ℎ𝑡 − 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 𝑆𝑜𝑙𝑑
𝑁𝑒𝑡 𝑁𝑒𝑤 𝐵𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔 = 𝐷𝑒𝑏𝑡 𝐼𝑠𝑠𝑢𝑒𝑑 – 𝐷𝑒𝑏𝑡 𝑅𝑒𝑡𝑖𝑟𝑒𝑑 Net New Equity Raised = CY SE – PY SE – Addition to RE (NI – Div. Paid) 𝐸𝑉 𝑀𝑉 𝐸𝑞𝑢𝑖𝑡𝑦 + 𝑀𝑉 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑑𝑒𝑏𝑡 𝐶𝑎𝑠ℎ & 𝐸𝑞𝑢𝑖𝑣𝑎𝑙
=
𝐸𝐵𝐼𝑇𝐷𝐴 𝐸𝐵𝐼𝑇𝐷𝐴
Net New Borrowing = CY Long-term Debt – PY Long-term Debt Debt-Equity Ratios tell us about company’s capital structure-measures leverage 𝑃𝐸 𝑅𝑎𝑡𝑖𝑜
𝑃𝐸𝐺 𝑅𝑎𝑡𝑖𝑜 =
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑓𝑢𝑡𝑢𝑟𝑒 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 × 100
Chapter 2 (CCA)
CCA →1. Determine tax year → 2. To calculate CCA amounts must determine asset class & CCA rate → 3. CRA has 1.5 year rule, multiply OG amount times 1.5 & CCA rate in first year → 4. Deduct from beg. Amount in the year
CCA Recapture → Selling price > Ending UCC → CCA Recap = Lower of Selling price and OG Cost – Ending UCC Capital Gain → Selling price > OG Cost CCA Terminal Loss → Selling price < Ending UCC → CCA Terminal Loss = Selling Price – Ending UCC
Capital Gains are taxed at 50% of federal and provincial tax rates. Interest Revenue is taxed fully at average (federal + provincial). Eligible dividends are taxed at the combined tax bracket.
Chapter 3 Financial Statements
The common-size balance sheet – divide each category by total assets Liquidity → Measure ability to take care of ST obligations
The common-base year – divide each category value for CY by the same category value for PY Profitability → Measure ability to obtain sufficient profits
The common-size, common-base year – divide the common-size percentage for CY by the common-size percentage for PY Solvency → Measure ability to pay off its debt obligations
Chapter 5 (TVM) – Use Calculator!!!!
𝐹𝑉 = 𝑃𝑉 × (1 + 𝑟)𝑡 $1 𝐹𝑉𝑡 ln (𝐹𝑉/𝑃𝑉) Perpetuity 𝐶 𝐶 USE CALCULATOR WHEN IT IS NOT A GROWING ANNUITY
𝑃𝑉 = 𝑃𝑉 = 𝑡= 𝑃𝑉 = 𝑃𝑉 𝑔𝑟𝑜𝑤𝑖𝑛𝑔 =
(1 + 𝑟)𝑡 (1 + 𝑟)𝑡 ln (1 + 𝑟) 𝑟 𝑟−𝑔 CALCULATE THE PERPETUITY USING THE FORMULA
(1 + 𝑟)𝑡 − 1 1 − 1/(1 + 𝑟)𝑡 𝐹𝑉 1/𝑡
Growing Annuity 𝐶 1 + 𝑔 𝑡 𝐶 𝐶 1
𝐴𝑛𝑛𝑢𝑖𝑡𝑦 𝐹𝑉 𝐹𝑎𝑐𝑡𝑜𝑟 = 𝑃𝑉𝐴 = 𝐶 × 𝑟 =( ) −1 𝑃𝑉 = [1 − ( )] 𝐹𝑉𝐺 = [(1 + 𝑟) 𝑡
− (1 + 𝑔)𝑡 ] 𝑃𝑉 𝐺𝑟𝑜𝑤𝑖𝑛𝑔 𝐴𝑛𝑛𝑢𝑖𝑡𝑦 = [1 − ]
𝑟 𝑟 𝑃𝑉 𝑟−𝑔 1+𝑟 𝑟−𝑔 𝑟 (1 + 𝑟)𝑛
Chapter 6 – Compounding Interest Rates (USE CALCULATOR) – EAR is used for Annual and Semi-annual Compounding; APR has to be divided to every month if not compounded annually or semi-annually, Mortgage Rates are compounded semi-annually, k = payment periods, q = compounding perios
𝒌=𝒒 𝐴𝑃𝑅 𝑘 1
𝒌≠𝒒 𝑘
𝐸𝐴𝑅 = 𝑒 𝐴𝑃𝑅 − 1 𝐶 𝐶
𝐸𝐴𝑅 = (1 + ) −1 𝐴𝑃𝑅 = [(1 + 𝐸𝐴𝑅)𝑘 − 1] × 𝑘 𝐴𝑃𝑅 𝑞 𝑃𝑉 = + 2
𝑘 𝑟 ∗ = (1 + ) −1 𝐴𝑃𝑅 = ln (1 + 𝐸𝐴𝑅) 𝑅 𝑅
𝑘
𝐴𝑃𝑅 𝑃𝑉𝐴𝑑𝑢𝑒 = (1 + 𝑟)𝑃𝑉𝐴 𝐹𝑉𝐴𝑑𝑢𝑒 = (1 + 𝑟)𝐹𝑉𝐴 1
𝐴𝑃𝑅 = ln (1 + 𝐸𝐴𝑅) 𝐸𝑀𝑅 = (1 + 𝐸𝐴𝑅)1/𝑚 − 1 𝐹𝑉 = 𝑃𝑉 × 𝑒 𝑖×𝑛
𝑟= 𝑟 ∗= (1 + 𝐸𝐴𝑅)𝑞 − 1
𝑘 (Lump Sum investments)
Chapter 7 - Bonds (YTM = Coupon Rate - Bond = Par Value, YTM > Coupon Rate - Bond < Par Value (Discount), YTM < Coupon Rate – Bond > Par Value (Premium)) F = Face Value
𝐵𝑜𝑛𝑑 𝑉𝑎𝑙𝑢𝑒 = 𝐶(𝑃𝑉𝐼𝐹𝐴) + 100(𝑃𝑉𝐼𝐹) 𝐹𝑖𝑠ℎ𝑒𝑟 𝐸𝑓𝑓𝑒𝑐𝑡 = (1 + 𝑅) = (1 + 𝑟)(1 + ℎ) 𝐴𝑝𝑝𝑟𝑜𝑥. 𝑅𝑒𝑎𝑙 𝑅𝑎𝑡𝑒 (𝑟) = 𝑅 − ℎ 𝐴𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 (𝑃𝑟𝑖𝑐𝑒 𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑓𝑟𝑜𝑚 𝑃𝑎𝑟) YTM↑ Price↓
𝐴𝑝𝑝𝑟𝑜𝑥. 𝑌𝑇𝑀 =
R = Nominal Rate 𝑃𝑟𝑖𝑐𝑒 + 𝑃𝑎𝑟 𝑉𝑎𝑙𝑢𝑒
1 r = real rate 𝐶𝑙𝑒𝑎𝑛 𝑝𝑟𝑖𝑐𝑒 2 Face Value → Future Value (FV) [Assume 1000 if not told]
𝑃𝑉𝐼𝐹𝑅,𝑡 =
(1 + 𝑟)𝑡 h = expected inflation = 𝐷𝑖𝑟𝑡𝑦 𝑝𝑟𝑖𝑐𝑒 − 𝐴𝑐𝑐𝑟𝑢𝑒𝑑 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 Price → Present Value (PV)
1 Zero Coupon Bonds: P =
FV
“About to receive coupon payment” = Discount: YTM > Coupon Rate YTM given is usually an APR, unless otherwise stated so YTM = k
APR
1 − (1 0 𝑛
+ 𝑟)𝑡 (1+𝑌𝑇𝑀𝑛 )
add CPN to PV found Face Value > PV
𝑃𝑉𝐼𝐹𝐴𝑅,𝑡 = 1
𝑟 FV 𝑛 Premium: YTM < Coupon Rate
YTM = ( ) − 1 Yield Curve Upward: YTM ↓, CPN Rates ↑
P0 PV right after coupon = PV- CPN Face Value < PV of Cash Flows
𝑃𝑉 = 𝐶(1 + 𝑟) Yield Curve Downward: YTM ↑, CPN Rates ↓
Can use YTM (spot rate) in that certain year for zero Par: YTM = Coupon Rate
CPN CPN
coupon bond’s duration Firm can increase its dividend by: Price = Face Value 1 1 FV
Price of CPN bond w/ spot rates = 1+r + (1+r )2 + No Coupon PMTs, Always trades at discount, YTM = IRR 1. ↑earnings, 2. ↑dividend payout Coupon Bonds: P0 = CPN (YTM ) (1 − (YTM )n) + (1+YTM )n → PV of Coupons, PV of Face Value
1 2 n n n

⋯+
(CPN+FV) rate, 3. ↓shares outstanding
(1+rn )n

Chapter 8 – Stock Pricing (CGY = Growth Rate (g), stock that pays no dividends Implied Return = Growth Rate), IF YOU BRING DISCOUNT THE VALUES, IT BRING IT BACK 1 YEAR EXTRA, SO IF YOU HAVE D3, WHEN YOU DISCOUNT, IT WILL BE P2
To calculate the questions: 1. Draw a timeline of the dividends, 2. Identify when dividends are paid, 3. Identify when they stop growing at a certain percentage and changes to either a constant growth in perpetuity or it stops completely, 4. Get the PV at the time it changes in #3 and then find price at PV0,
5. Bring all other Dividends back to PV0. When you have more than one growth that isn’t constant, multiply the initial dividend times (1+g) for as many growth rates until they level off to perpetuity or stop paying, and then divide by R minus the last growth rate to get the price today.
𝐷0 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑆𝑎𝑙𝑒𝑠 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑅 = 𝐷𝑌 + 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐺𝑎𝑖𝑛𝑠 𝑌𝑖𝑒𝑙𝑑 (𝐶𝐺𝑌) 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑅𝑂𝐸 × 𝑏
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑌𝑖𝑒𝑙𝑑 (𝐷𝑌) = = 𝑃 = 𝑃𝐸 𝑅𝑎𝑡𝑖𝑜 × 𝐸𝑃𝑆 = 𝑃𝑆 𝑅𝑎𝑡𝑖𝑜 × 𝑃𝑎𝑦𝑜𝑢𝑡 𝑅𝑎𝑡𝑖𝑜 = 𝑅𝑒𝑡𝑒𝑛𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑖𝑜 (𝑏) = 1 − 𝑆𝑢𝑠𝑡𝑎𝑖𝑛𝑎𝑏𝑙𝑒 𝐺𝑟𝑜𝑤𝑡ℎ 𝑅𝑎𝑡𝑒 =
𝑃0 𝑆𝑡𝑜𝑐𝑘 𝑃𝑟𝑖𝑐𝑒 𝑆ℎ𝑎𝑟𝑒 𝑁𝐼 𝑁𝐼 1 − 𝑅𝑂𝐸 × 𝑏
𝐷𝑡 𝐸𝑃𝑆𝑡+1 = 𝐸𝑃𝑆𝑡 (1 + 𝑔) 𝑃𝑡+1 −𝑃𝑡 𝐸𝑄𝑅 = (1 + 𝑅)1/4 − 1 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑁𝐼 = 𝐸𝑃𝑆 × 𝑂𝑆 𝑆ℎ𝑎𝑟𝑒𝑠
𝐸𝑃𝑆𝑡 = Implied Return 𝑅 =
𝑃𝑎𝑦𝑜𝑢𝑡 𝑅𝑎𝑡𝑖𝑜 𝑃𝑡 = 𝑆ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒 − 𝑁𝑒𝑡 𝐶ℎ𝑎𝑛𝑔𝑒
Growing Dividend: Pricing of Dividend: To know price in t years Two Stage Dividend Growth Model Bring Dividends Back When you have more than 1 growth # of Dividends from One Half of Current Stock P
𝐷0 (1 + 𝑔) 1+𝑔 𝑡 𝐷1 1+𝑔 𝑡 𝐷𝑡 (1 + 𝑔) 𝐷𝑡+1 𝐷0 (1 + 𝑔)𝑡+1 𝐷0 (1 + 𝑔1 ) 1 + 𝑔1 𝑇 1 + 𝑔1 𝑇 𝐷0 (1 + 𝑔2) 𝐷0 (1 + 𝑔)𝑡 𝐷0 (1 + 𝑔)𝑡 (1 + 𝑔2 ) ln(0.5)
𝑃0 = [1 − ( ) ]= [1 − ( )] 𝑃𝑡 = = 𝑃𝑡 = 𝑃0 = [1 − ( ) ] + {( ) [ ]} 𝑃0 = 𝑃𝑛 = 𝑡=
𝑅−𝑔 1+𝑅 𝑅−𝑔 1+𝑅 𝑅−𝑔 𝑅−𝑔 𝑅−𝑔 𝑅 − 𝑔1 1+𝑅 1+𝑅 (𝑅 − 𝑔2 ) (1 + 𝑅) 𝑡 𝑅 − 𝑔2 1+𝑔
ln (1 + 𝑅 )

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𝐷0 (1+𝑔1 )𝑡(1+𝑔2 )
Price of Stock when the first growth rate is exactly equal to the required return: 𝑃0 = 𝑡 × 𝐷0
(𝑅−𝑔2 )×(1+𝑅)𝑡
Chapter 9 – Cash flows – If any cost or investment is depreciated by straight-line, divide by 2 to get average book value
𝐴𝑣𝑔. 𝑁𝐼 IRR – Interest rate that makes NPV = 0 Maximum deviation allowable in cost of capital (rE ) estimate to leave decision unchanged = IRR – cost of When to compare returns: Investments must: Have the same scale, have same timing of cash flows,
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑖𝑛𝑔 𝑅𝑒𝑡𝑢𝑟𝑛 (𝐴𝐴𝑅) = 𝐶𝐹𝑛
𝐴𝑣𝑔. 𝐵𝑉 capital → If COC is higher than more than the difference, NPV is (–) have the same risk
𝑁𝑃𝑉 = 𝐶𝐹0 +
(1 + 𝐼𝑅𝑅) 𝑛 IRR > cost of capital = take opportunity | IRR < cost of capital = do not take Cross-over Rate = IRR of Cash Flow differences except Initial Investment
To find growth at which break-even: NPV = 0 with PV Perpetuity formula Profitability Index: PV of CFs / Discount Rate
Chapter 10 – Analysis of Cash Flows (S = Sales, C = OPEX, D = Depreciation for tax purposes, Tc = Tax Rate) – **NEVER INCLUDE INTEREST EXPENSE WHEN ANALYZING A PROJECT, ATNR = After-tax revenue
Basic Approach OCF Bottom-up Approach OCF Top-down Approach OCF Tax Shield Approach
𝑂𝐶𝐹 = 𝐸𝐵𝐼𝑇 + 𝐷𝑒𝑝𝑟. −𝑇𝑎𝑥𝑒𝑠 = 𝑆 − 𝐶 − (𝑆 − 𝐶 − 𝐷) × 𝑇𝑐 𝑂𝐶𝐹 = 𝐸𝐵𝐼𝑇 − 𝑇𝑎𝑥𝑒𝑠 = (𝑆 − 𝐶 − 𝐷)(1 − 𝑇𝑐 ) 𝑂𝐶𝐹 = 𝑆𝑎𝑙𝑒𝑠 − 𝐶𝑜𝑠𝑡𝑠 − 𝑇𝑎𝑥𝑒𝑠 = (𝑆 − 𝐶) − (𝑆 − 𝐶 − 𝐷) × 𝑇𝑐 𝑂𝐶𝐹 = (𝑆 − 𝐶)(1 − 𝑇𝑐 ) + 𝐷 × 𝑇𝑐
𝑇𝑎𝑥 𝑠ℎ𝑖𝑒𝑙𝑑 = 𝐷 × 𝑇𝑐
𝑇𝑜𝑡𝑎𝑙 𝐶𝐹 = 𝑂𝐶𝐹 − 𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑠 𝑡𝑜 𝑁𝑊𝐶 − 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑆𝑝𝑒𝑛𝑑𝑖𝑛𝑔 𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 = 𝐶𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤 − 𝐶𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤 = 𝑂𝐶𝐹 − ∆𝑁𝑊𝐶 𝐼𝑑𝑇𝑐 1 + 1.5𝑟 𝑆𝑛 𝑑𝑇𝑐 1 NPV =
𝑃𝑉𝐶𝐶𝐴𝑇𝑆 = [ ]− ×
𝐶𝐹 𝑎𝑓𝑡𝑒𝑟𝑡𝑎𝑥 = (𝑆𝑎𝑙𝑒𝑠 − 𝑉𝐶 − 𝐹𝐶)(1 − 𝑇𝑐 ) 𝑟+𝑑 1+𝑟 𝑟 + 𝑑 (1 + 𝑟) 𝑛 -Initial Investment (Can or not include NWC)
𝐸𝐴𝐶 = 𝑁𝑃𝑉/𝑃𝑉𝐼𝐹𝐴 – See Chapter 6 Bonds for PVIFA Bid price I = Total Capital Investment +Salvage recovered now/Opportunity Cost today
1. Find elements of NPV d = CCA rate +PV of OCF/Increased Operating Income (After-tax)
𝑃𝑉 𝑜𝑓 𝐶𝑜𝑠𝑡𝑠 = 𝐸𝐴𝐶 × 𝑃𝑉𝐼𝐹𝐴 2. Find PV of operating income by setting NPV = 0 and solve for PVOCF Tc = Marginal Tax Rate -PV of Salvage Forgone
For EAC decision, choose the project that has the lower EAC 3. Get PV Annuity w/ required return of the OCF to get the Price r = Discount Rate +PV of Salvage Recovered/Opportunity Cost in n years
For EAB decision, choose the project that has higher EAB 4. Solve for Sales Proceeds (S) after tax (S – Cost)(1 – Tc) = Price Sn = Salvage or disposal value of asset +PV of NWC Recovered
Analyze for EAC when there are different Useful Lives & Mutually Excl. 5. Divide by number of units sold to get the bid price n = Asset life in Years +PVCCATS
𝐶𝐹 Alternative for Bid Price (if given VC, FC & Q) – Get the after-tax revenue setting NPV = 0 and solving for PV of OCF (AKA PVIFA of ATNR), also if there is
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 = + (𝑁𝑃𝑉 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡)
𝑅 annual NWC capital spent, get the PV of that and add back because it is recoverable. 𝐴𝑇𝑁𝑅 = [(𝑃 − 𝑣)𝑄 − 𝐹𝐶](1 − 𝑇𝑐 ) If opportunity cost given plus salvage, then opportunity cost is after-tax
Chapter 10 – Project Analysis
Incremental Earnings Forecast Income Statement
Sales Sales
- Cannibalized Sales - COGS
- COGS Gross Profit
+ Cannibalized COGS - SG&A
Gross Profit - Depreciation
- SG&A Operating Income/EBIT
- Opportunity Costs - Interest Expense
- CCA EBT
EBIT - Tax Expense
- Interest** Net Income
- Tax Cash Flow Statement
Unlevered NI (Incremental Earnings) NI
+ CCA + Depreciation
- CAPEX Cash Effects
- Increases in NWC + Cash Sources
Free Cash Flows - Cash Uses

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