Equation Sheet

FNCE 370: Overview of Corporate Finance
Equation Sheet
A
Average Accounting Return
Average Accounting Return =
Average net income

Average book value
See Chapter 9 of your textbook for more information.
B
Beta for Levered Firm
D
A = D + E
V
V
where A = the beta for the assets of the levered firm
D = the beta for the debt of the levered firm
E = the beta for the equity of the levered firm
E
V = percentage of equity

D
V = percentage of debt

Break-Even Measures
The relationship between operating cash flow and sales volume (ignoring taxes) is
OCF
where P
v
Q
FC
= Q(P v ) FC
= selling price per unit
= variable cost per unit
= total units sold
= fixed costs
If we rearrange this and solve it for Q we get the following general expression:
Q=
FC + OCF
P v
-1-
Accounting Break-Even
Accounting break-even occurs when net income is zero. OCF is equal to depreciation when
net income is zero. Therefore,
FC + D
P v
where P = selling price per unit
v = variable cost per unit
Q=
Q = total units sold

FC = fixed costs
D = depreciation
Cash Break-Even
Cash break-even occurs when OCF is zero. Therefore,
FC
P v
where Q = total units sold
Q=
FC = fixed costs
P = selling price per unit
Financial Break-Even
FC + OCF *
P v
where OCF * = the level of OCF that results in a zero NPV
Q = total units sold
Q=
P = selling price per unit

FC = fixed costs
See Chapter 11 in your textbook for more information. Refer to the Acronyms on the course Web
site if necessary.
-2-
Bond Value
Bond Value = PV (Coupons) + PV (Face Value)
Therefore,
1
C 1
(1 + r )t
F
+
Bond Value =
r
(1 + r )t
where F = bond's face value
C = coupon paid per period
t = number of periods to maturity
r = rate or yield to maturity
Business and Financial Risk

Using the SML, we can write the required return on the firm's assets as
RA = Rf + (RM Rf ) A
where RA = required return on the firm's assets
Rf = risk-free rate
RM = expected rate of return on market portfolio
A = firm's asset beta (unlevered beta)

See Chapter 16 of your textbook for more information. Refer to the Acronyms on the course Web
site if necessary.
The return on equity from the SML is
RE = Rf + (RM Rf ) E
where RE = required return on the firm's equity
Rf = risk-free rate
RM = expected rate of return on market portfolio
E = firm's equity beta

The relationship between E and A is
E = A 1 +
D
E
-3-
C
Call Option Value
Call option value = stock value PV of the exercise price
C0 = S0
E
(1 + Rf )t
where C0 = value of the call option today

S0 = stock price today
E = exercise price on the option
Rf = risk-free rate
t = time to expiration
Capital Asset Pricing Model (CAPM)

E (Ri ) = Rf + i [E (RM ) Rf ]
where E (Ri ) = expected return
i = amount of systematic risk

Rf = risk-free rate
E (RM ) Rf = market risk premium
Cash Coverage Ratio

EBIT + Depreciation
Interest
Cash Coverage Ratio =
Cash Ratio
Cash
Current liabilities
Cash Ratio =
Current Ratio
Current assets
Current liabilities
Current Ratio =
-4-
D
Days Sales in Inventory
365 days
Inventory turnover
Days' Sales in Inventory =
Days Sales in Receivables

365 days
Receivables turnover
Days' Sales in Receivables =
Debt/Equity Ratio
Total debt
Total equity
Debt/Equity Ratio =
Degree of Financial Leverage (DFL)

DFL =
EBIT
EBIT Interest
Degree of Operating Leverage

DOL = 1 +
FC
OCF
Therefore,
Q( P v )
Q(P v ) FC
= selling price per unit
= variable cost per unit
= total units sold
= fixed costs
DOL =
where P
v
Q
FC
-5-
Du Pont Identity
(i) ROE =
Net Income NI
=
Total Equity E
Net Income Total Assets
Total Assets Total Equity

NI A
=
A E
ROE =
(ii)
Net Income
Sales
Total Assets
Sales
Total Assets Total Equity
NI S A
=

S A E
ROE =
(iii)
ROE =
(iv)
=
Net Income
Sales
Total Debt
1 +
Sales
Total Assets
Total Equity
NI S D
1+
S A
E
(v) ROE = Pr ofit Margin Total Asset Turnover Equity Multiplier
E
Equivalent Annual Cost (EAC)
EAC =
PV Costs
PVIFAr ,t
where PVIFAr,t is the present value interest factor of an annuity

site if necessary.
-6-
Effective Annual Rate (EAR)

m
Quoted rate
EAR = 1 +
1
m
where m = the number of times the interest is compounded in a year

Quoted rate = quoted annual interest rate
As the number of times the interest is compounded gets extremely large, the EAR approaches
EAR = eq 1
where e = 2.71828 (e x on your calculator)
q = quoted rate
Equity Multiplier
Equity Multiplier =
Total assets
Total equity
site if necessary.
Expected Return [E(R)] of Portfolio

E (R ) = O j Pj
j
where O j = rate of return of the portfolio on the jth outcome

Pj = associated probability of the jth outcome occurring
= sum over all j
-7-
External Financing Needed (EFN)

External Financing Needed = Increase in total assets Addition to retained earnings New borrowing
EFN = A ( g ) pSR (1 + g ) p ( s ) R (1 + g )( D / E )
= pSR + g ( A pSR )
where A = total assets
p = profit margin
S = previous year's sales
R = retention ratio
g = growth rate in sales
F
Fisher Effect
The Exact Fisher Effect
(1 + Rnom) = (1 + Rreal) x (1 + inflation rate)
The Approximate Fisher Effect

Rnom = Rreal + inflation rate
Fixed Asset Turnover

Fixed Asset Turnover =
Sales
Net fixed assets
Future Value (FV)

FV = PV (1 + r )t
where r = interest rate, rate of return, or discount rate per period
t = number of periods
The term in parentheses above is the future value interest factor, so we may write the equation as
FV = PV (FVIFr ,t )
where r = interest rate, rate of return, or discount rate per period
site if necessary.
-8-
Future Value (FV) Annuity

C (1 + r )t 1
r
where C = dollars per period
FV Annuity =
r = interest rate or rate of return
The term above in parentheses is the future value interest factor for annuities, so we may write
the equation as
FV Annuity = C(FVIFAr ,t )
site if necessary.
Future Value (FV) Annuity Due

C (1 + r )t 1 (1 + r )
r
FV Annuity Due =
This equation can be rewritten as

FV Annuity Due = C(FVIFAr , t )(1 + r )
See Chapter 6 in your textbook for more information. Refer to the Acronyms on the course Web
site if necessary.
H
Holding Period Return
HPR =
=
MoneyReceivedfrom selling- MoneyPaid whenbuying

MoneyPaid whenbuying
P1 P0
P0
-9-
I
Internal Growth Rate
pSR
A pSR
where A = total assets
g=
p = profit margin
R = retention ratio
You may also find the internal growth rate using this formula:
ROA R
1 (ROA R )
where R = retention ratio
Internal Growth Rate =
ROA = return on assets
Interval Measure
Current assets
Average daily operating costs
Interval Measure =
Inventory Turnover
Cost of goods sold
Inventory
Inventory Turnover =
L
Long-term Debt Ratio
Long-term debt
Long-term debt + Total equity
Long-term Debt Ratio =
- 10 -
M
M&M Proposition I
Vu =
EBIT
REU
= VL = EL + DL
where Vu = value of the unlevered firm

VL = value of the levered firm
EBIT = perpetual operating income
REU = equity required return for the unlevered firm
EL = market value of equity
DL = market value of debt
M&M Proposition I with Corporate Tax

VL = Vu + Tc D
where VL = value of the levered firm
Vu = value of the unlevered firm
Tc = corporate tax
D = debt
See Chapter 16 of your textbook for more information
M&M Proposition II without Taxes

D
RE = RA + ( RA RD )
E
where RE = cost of equity capital
RA = required rate of return on firm's assets
RD = firm's cost of debt
D
= firm's debt/equity ratio
E
See Chapter 16 of your textbook for more information
- 11 -
Market-to-Book Ratio
Market-to-Book Ratio =
Market value per share

Book value per share
N
Net Advantage to Leasing (NAL)
NAL = Investment PV (aftertax lease payments) PVCCATS
where PVCCATS = the PV of the CCA tax shield
site if necessary.
Net Working Capital (NWC) to Total Assets

NWC to Total Assets =
Current assets Current liabilities

Total assets
Net Working Capital (NWC) Turnover

NWC Turnover =
Sales
NWC
- 12 -
O
Operating Cash Flow (OCF)
There are four basic approaches to calculating OCF:
Basic
OCF = EBIT + Depreciation Taxes
Bottom-up
OCF = Net income + Depreciation
Top-down
OCF = Sales Costs Taxes

Tax shield
OCF = (Sales Costs) (1 Tc ) + Depreciation Tc
P
Portfolio Beta
= xj j
j
where
= the sum over all j
x j = portfolio weight for stock j
j = beta for stock j

Portfolio Variance
P2 = xL2 L2 + xU2 U2 + 2 xL xU CORRL,U L U
where xL = portfolio weight for stock L
xU = portfolio weight for stock U
CORRL,U = correlation of the two stocks
L = standard deviation of the return of stock L

U = standard deviation of the return of stock U
- 13 -
Present Value (PV)

PV =
FV
(1 + r )t
where r = discount rate per period
t = number of periods of the investment
The term above in parentheses is the present value interest factor, so we may write the equation
as
PV = FV (PVIFr ,t )
where r = discount rate per period
t = number of periods of the investment
site if necessary.
Present Value (PV) Annuity
PV Annuity
where C
t
r
1
C 1
(1 + r )t
=
r
= dollars per period
= number of periods
= interest rate or rate of return
The term above in parentheses is the present value interest factor for annuities, so we may write
the equation as
PV Annuity = C(PVIFAr , t )
site if necessary.
Present Value (PV) Annuity Due
1
C 1
(1 + r )
(1 + r )t
PV Annuity Due =
r

PV Annuity Due = C(PVIFAr , t )(1 + r )
site if necessary.
- 14 -
Present Value (PV) Growing Annuity

1 + g t
1

1 + r
where C = payment to occur at the end of the first period
g = rate of growth per period
r = interest rate
T = number of periods for the annuity
PV Growing Annuity =
C
r g
Present Value (PV) Growing Perpetuity

C
r g
where C = cash flow to be received one period hence
PV Growing Perpetuity =
g = rate of growth per period

r = interest rate
Present Value (PV) Perpetuity

C
r
PV Perpetuity =
Present Value (PV) Tax Shield on CCA

PV Tax Shield on CCA =
(CdTc )(1 + .5k )

SdTc
(d + k )(1 + k ) (d + k )(1 + k )n
where C = total capital cost of the asset which is added to the pool
d = CCA rate for the asset class
Tc = company's marginal tax rate
k = discount rate
S = salvage or disposal value of asset
n = asset life in years
- 15 -
Price/Earnings (P/E) Ratio

P/E Ratio =
Price per share

Earnings per share
Profitability Index (PI)

PI =
PV (Cash flows)
Investment
Profit Margin
Profit Margin =
Net income
Sales
Q
Quick Ratio
Current assets Inventory
Current liabilities
Quick Ratio =
R
Receivables Turnover
Receivables Turnover =
Sales
Accounts receivable
Return on Assets
Return on Assets =
Net income
Total assets
- 16 -
Return on Equity
Return on Equity =
=
Net income
Total equity
Net income Sales Assets
Sales
Assets Equity
Return on Equity can also be calculated as

Return on Equity = Profit margin Total asset turnover Equity multiplier
This expression is called the Du Pont Identity.

Retention (Plowback) Ratio

Retention (Plowback) Ratio = 1 Dividend payout ratio
Risk Premium
Risk Premium = Expected return Risk-free rate
S
Standard Deviation
= 2
- 17 -
Stock Valuation
P0 =
( D1 + P1 )
1+ r
where P0 = current price of stock
P1 = price in one period

D1 = cash dividend paid at the end of the first period
r = required return
In the case of zero growth of dividends, the per-share value is given by

D
r
where D = constant dividend
r = required return
P0 =
Dividend Growth Model

Constant Growth
We can use the dividend growth model to determine the current price of a stock, as long
as the growth rate g is less than the discount rate r.
D0 (1 + g )
r g
where D0 = value of dividend just paid
P0 =
g = dividend growth rate per period

r = discount rate

P0 =
D1
r g
where D1 = D0 x (1 + g )
- 18 -
Supernormal Growth
If the dividend grows at a steady rate, g, after t periods, the price can be written as
P0 =
D1
(1 + r )
D2
(1 + r )
+"+
Dt
(1 + r )
Pt
(1 + r )t
where
Dt (1 + g )
r g
D1, D2 ,..., Dt = dividends for periods 1, 2,..., t respectively
Pt =
g = dividend steady growth rate

r = discount rate
Growth Opportunities
In the case where companies have opportunities to invest in profitable projects, the pershare value of the project is added to the original stock price. Therefore, the stock price
after the firm commits to a new project is given by
P0 =
where
EPS
+ NPVGO
r
EPS
= the value of the firm if it distributed all earnings to the shareholders
r
NPVGO = net present value per share of the growth opportunity
Required Return
The required return, R, can be written as the sum of two things

R=
where
D1
+g
P0
D1
= dividend yield
P0
g = captal gains yield (which is the same as the growth
rate in the dividends for the constant growth case)
site if necessary.
- 19 -
Sustainable Growth Rate

ROE R
1 (ROE R )
where g * = sustainable growth rate
R = retention ratio
ROE = return on equity
g* =
Refer to the Acronyms on the course Web site if necessary.

The sustainable growth rate can be written in greater detail as
S D
p 1 + R
A E
g* =
S D
1 p 1 + R
A E
where p = profit margin
A = total assets
D = total debt
E = total equity
R = rention ratio
T
Theoretical Value of a Right
Mo S
N +1
where Mo = common share price during the rights-on period
Ro =
S = subscription price
N = number of rights required to buy one new share
Times Interest Earned Ratio

Times Interest Earned Ratio =
EBIT
Interest
- 20 -
Total Asset Turnover

Sales
Total assets
Total Asset Turnover =
Total Debt Ratio

Total assets Total equity
Total assets
Total Debt Ratio =
Total Return
R = E (R ) + U
where R = actual total return in the year

E (R ) = expected part of the return
U = unexpected part of the return
V
Value of Rights after Ex-Rights Date
Me S
N
where Me = common share price during the ex-rights period
Re =
S = subscription price
N = number of rights required to buy one share

Me = Mo Ro
where Mo = common share price during the rights-on period

Ro = theoretical value of a right
- 21 -
Variance of Portfolio
2 = O j E (R ) Pj
2
where E (R ) = expected return

O j = rate of return of the portfolio on the jth outcome
Pj = associated probability of the jth outcome occurring
= sum over all j
W
Weighted Average Cost of Capital (WACC)
E
D
WACCunadjusted = RE + RD
V
V
where E = equity
V = market value of firm
RE = cost of equity
D = debt
RD = cost of debt
Adjusted for taxes, the WACC is calculated as

E
D
WACCadjusted = RE + RD (1 Tc )
V

V
where E = equity
V = market value of firm
RE = cost of equity
D = debt
RD = cost of debt
TC = corporate tax rate
- 22 -
Weighted Average Flotation Cost

E
D
fA = fE + fD
V
V
where fA = weighted average flotation cost
E
V = percentage of equity

D
V = percentage of debt

fE = equity flotation cost
fD = debt flotation cost
- 23 -

Equation Sheet

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Equation Sheet

Hochgeladen von

Copyright:

Verfügbare Formate

FNCE 370: Overview of Corporate Finance

Average net income

See Chapter 9 of your textbook for more information.

See Chapter 14 of your textbook for more information.

Q = total units sold

P = selling price per unit

See Chapter 7 of your textbook for more information.

Business and Financial Risk

A = firm's asset beta (unlevered beta)

E = firm's equity beta

where C0 = value of the call option today

See Chapter 25 of your textbook for more information.

Capital Asset Pricing Model (CAPM)

i = amount of systematic risk

See Chapter 13 of your textbook for more information.

Cash Coverage Ratio

Days Sales in Receivables

Degree of Financial Leverage (DFL)

See Chapter 16 of your textbook for more information.

Degree of Operating Leverage

See Chapter 11 of your textbook for more information.

Net Income Total Assets

Total Assets Total Equity

(v) ROE = Pr ofit Margin Total Asset Turnover Equity Multiplier

where PVIFAr,t is the present value interest factor of an annuity

Effective Annual Rate (EAR)

where m = the number of times the interest is compounded in a year

See Chapter 6 of your textbook for more information.

Expected Return [E(R)] of Portfolio

where O j = rate of return of the portfolio on the jth outcome

= sum over all j

See Chapter 13 of your textbook for more information.

External Financing Needed (EFN)

See Chapter 4 of your textbook for more information.

The Approximate Fisher Effect

Fixed Asset Turnover

See Chapter 3 of your textbook for more information.

Future Value (FV)

Future Value (FV) Annuity

Future Value (FV) Annuity Due

This equation can be rewritten as

MoneyReceivedfrom selling- MoneyPaid whenbuying

Internal Growth Rate =

ROA = return on assets

See Chapter 4 of your textbook for more information.

where Vu = value of the unlevered firm

See Chapter 16 of your textbook for more information.

M&M Proposition I with Corporate Tax

See Chapter 16 of your textbook for more information

M&M Proposition II without Taxes

See Chapter 16 of your textbook for more information

Market value per share

See Chapter 3 of your textbook for more information.

Net Working Capital (NWC) to Total Assets

Current assets Current liabilities

See Chapter 3 of your textbook for more information.

Net Working Capital (NWC) Turnover

See Chapter 3 of your textbook for more information.

OCF = Sales Costs Taxes

See Chapter 10 of your textbook for more information.

= the sum over all j

x j = portfolio weight for stock j

j = beta for stock j