BA 440 Final Formula Sheet

CAPM / Cost of Equity:

Market risk premium: rm - rf
Unlevered/Levered Beta:
After tax cost of det !rd" # Before$tax cost of det % !&$t"
After tax cost of det !rd" # B'rd % !&$t"
After tax cost of det !rd" # ('M % !&$t"
After 'ax Cost of det # !'reasury yield ) spread" % !&$t"
*nterest Covera+e ,atio # EB*' / *nterest Expenses
Cost of Preferred -tock:

,
_

+ +
+
,
_

+ +
+
,
_

+ +

PS D E
PS
r
PS D E
D
r
PS D E
E
r WACC tal Costofcapi
ps d e
Cash Flows:
-trai+.t line depreciation: !/ri+inal asset value 0 salva+e value" / numer of years to e depreciated
EB*'#,ev 0 /peratin+ expenses !C/1-" 0 -1A Exp 0 /t.er allocated expenses $ 2epr34Amort3
Cas. flo5 to firm # EB*'!&$t" ) 2epr34Amort3 0 C.+ in 6C 0 Cap Exp3
Leases:
/peratin+ lease cas. flo5s: lease payments % !& 0 t"
Buy/orro5 cas. flo5s: *nterest expense !after tax"7 Principal payment7 Maintenance expenses !after tax"7
2epreciation tax enefit7 -alva+e value !after tax"
'.e net advanta+e to leasin+ : 8P9 of lease option 0 8P9 of uy option
Convertible Bonds:
Conversion option # Convertile ond price 0 value of strai+.t ond component
9alue of a ond
Conversion ratio # : of s.ares for 5.ic. eac. ond may e exc.an+ed
Conversion value # current value of s.ares for 5.ic. t.e onds can e exc.an+ed
Conversion premium # ond price 0 conversion value
( )( ) E D t
L
u
/ & & +

ps
ps
ps
P
D
r
( )
f m f e
r r r r +
n
r
incipal
" & !
Pr
r
r" ) !&
&
$ &
C #
n
+
+
1
1
1
1
]
1

Venture Capital Method:

Exit or terminal value # P/E multiple % forecasted earnin+s
2iscounted terminal value #
( )
n
etreturn t
xitvalue Estimatede
ar+ &+
9C o5ners.ip proportion # Capital provided / discounted terminal value
IP !nderpri"in#:
Underpricin+ !return" # !first day closin+ price 0 offer price" / offer price
$i#hts o%%erin#s:
,i+.ts required to purc.ase one s.are # : of ori+inal s.ares
: of s.ares issued in ,/
9alue of t.e ri+.t # ri+.ts$on price 0 suscription price
n ) &
/, ri+.ts$on price 0 ex$ri+.ts price
Ex$ri+.ts price # 8e5 value of equity
8e5 numer of s.ares
Bene%its&Costs o% debt:
(early tax enefit from det # 'ax ,ate % *nterest Payment
Cost o% Capital Approa"h to ptimal Capital Stru"ture:
*mplied +ro5t. rate assumin+ constant +ro5t. model:
;irm 9alue !-tale +ro5t." # C; to ;irm !& ) +" / !6ACC $+"
;irm 9alue opt 6ACC$ ;irm 9alue ori+ 6ACC
'ividend poli"(:
,elations.ip et5een prices7 dividends and tax rates around ex$dividend day:
;ree cas. flo5 to equity # 8et *ncome ) 2epr4Amort 0 C.+ in 6C 0 Cap Exp
) !8e5 2et *ssue 0 2et ,epay" 0 Pref3 2ividends
Estimated ;C;E # 8et *ncome $ !&$ " !Capital Expenditures $ 2epreciation"
$ !&$ " !C.+ in 6C" 0 Preferred 2ividends
5.ere is t.e det ratio !2 / !2)E" and
C.+ in 6C # 6Ct 0 6Ct$&
5.ere 6C # 8on$cas. current assets 0 non$det current liailities
C; to stock.olders to ;C;E ,atio # !2ividends ) Buyacks" / ;C;E
" & !
" & !
<
cg
A B
t
t
D
P P

V CF
CF WACC V
g
+

%
Valuation:
,elative valuation !P/E7 P/B97 P/-":
;irm value # Comparale multiple % ;irm$specific denominator value
PE1 # !P/E"/ 1ro5t.
P # stock price
E # 8et *ncome ad=usted for transitory components
B9 !of equity" # total s.are.olders equity 0 preferred stock
Profit mar+in # 8et income/-ales
,etention ratio # & 0 2ividends/Earnin+s
2C; valuation:

e
r
alValue !er
" & !
min
" r ) !&
Equity to C;
# Equity of 9alue
8 # t
& # t
t
e
t
+
+

'erminal value:
+ # % ,/E
-tock value usin+ constant !stale" +ro5t. model:
PV e)uations:
Present value of multiple cas. flo5s:
Present value of a perpetuity:
r
CF
PV
Present value of sin+le future cas. flo5:
t
r
FV
PV
" & ! +

1
1
1
1
]
1

r
r" ) !&
&
$ &
A # n" r7 P9!A7 # Annuity an of
n
PV
( )

n
t
t
t
r
CF
PV
&
&

n # t
& # t
t
e
t
" k ) !&
Equity to C;
# Equity of 9alue
s e
s
g r
g CFtoE"uit#

+ " & ! %
g r
g CF
e

+ " & ! %
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