TIme

period
(e.g., year)

1%

2%

3%

4%

5%

6%

7%

6%

9%

1
2
3
4
5

1.000
2.010
3.030
4.060
5.101

1.000
2.020
3.060
4.122
5.204

1.000
2.030
3.091
4.184
5.309

1.000
2.040
3.122
4.246
5.416

1.000
2.050
3.152
4.310
5.526

1.000
2.060
3.184
4.375
5.637

1.000
2.070
3.215
4.440
5.751

1.000
2.080
3.246
4.506
5.867

1.000
2.090
3.278
4.573
5.985

1.000
2.100
3.310
4.641
6.105

1.000
2.120
a.374
4.770
6.353

1.000
2.140
3.440
4.921
6.610

1.000
2.160
3.506
5.067
6.877

1.000
2.200
3.640
5.368
7.442

6
7
8
9
10

6.152
7.214
8.286
9.369
10.462

6.308
7.434
8.583
9.755
10.950

6.468
7.662
8.892
10.159
11.464

6.633
7.898
9.214
10.583
12.006

6.802
8.142
9.549
11.027
12.578

6.975
8.394
9.897
11.491
13.181

7.153
8.654
10.260
11.978
13.816

7.336
8.923
10.637
12.488
14.487

7.523
9.200
11.028
13.021
15.193

7.716
9.487
11.436
13.579
15.937

8.115
10.089
12.300
14.776
17.549

8.536
10.730
13.23-3
16.085
19.337

8.978
11.413
14.240
17.518
21.321

9.930
12.915
16.499
20.798
25.958

11
12
13
14
15

11.567
12.683
13.809
14.947
16.097

12.169
13.412
14.680
15.974
17.293

12.808
14.192
15.618
17.086
18.599

13.486
15.026
16.627
18.292
20.024

14.207
15.917
17.713
19.599
21.579

14.972
16.870
18.882
21.051
23.276

15.784
17.888
20.141
22.550
25.129

16.645
18.977
21.495
24.215
27.152

17.560
20.141
22.953
26.019
29.361

18.531
21.384
24.523
27.975
31.772

20.655
24.138
28.029
32.393
37 .280

23.044
27.271
32 .089
37.581
43.842

25.732
30.850
36.786
43.672
51.659

32.150
39.580
48.496
59.195
72.035

16
17
18
19
20

17.258
18.430
19.615
20.811
22.019

18.639
20.012
21.412
22.841
24.297

20.157
21.762
23.414
25.117
26.870

21.825
23.698
25 .645
27.671
29.778

23.657 25.673
25.840 28.213
28.132 30.906
30.539 33 .760
33.066 36.786

27.888
30.840
33.999
37 .379
40.995

30 .324
33 .750
37.450
41.446
45.762

33 .003
36 .974
41.301
46.018
51.160

35.950
40.545
45.599
51.159
57.275

42.753
48.884
55.750
63.440
72.052

50.980
59.118
68.934
78.969
91.025

60.925
71.673
84.140
98.603
115.37

87.442
105.93
128.11
154.74
186.68

25

28.243

32 .030

36.459

41.646

47.727

54.865

63.249

73 .106

84.701

98.347

133.33

181.87

249.21

471.98

30

34.785 40.568

47.575

56.085

66.439

79.058

94.461

113.283

136.308

164.494

241 .333

356 .787

530.310

100/0

12'10

14%

16%

20'%

1181.8

TIme
period
(e.g. , year)

1%

2",4

3%

4%

5%

6%

7% ,.'

6%

9% .

10%

12%

14%

16%

18%

20%

24%

28%

32%

38%

1
2
3
4
5

0,990
1.970
2.941
3,902
4,853

0.980
1.942
2.884
3,808
4,713

0,971
1.913
2.829
3.717
4.580

0.962
1.886
2.n5
3.630
4.452 .

0.952
1.859
2,723
3,546
4.329

0.943
1.833
2.673
3.465
4.212

0.935
1.808
2.624
3.387
4.100

0,926
1.783
2,5n
3.312

3.993

0,917,
1.759
2.531
3.240
3.890

0.909
1.736
2.487
3,170
3,791

0.893
1.690
2.402
3.037
3.605

0.8n
1,647
2.322
2.914
3.433

0,862 0.847
1.605 1,566
2.246 2.174
2.798 2.690
3.274 3,127

0.833
1.528
2.106
2.589
2.991

0.806
1.457
1,981
2.404
2,745

0.781
1.392
1.868
2.241
2.532

0.758
1.332
1.766
2.096
2.345

0.735
1.276
1.674
1.966
2.181

6
7
8
9
10

5.795
6,728
7,652
8,566
9.471

5,601
6.472
7.325
8,162
8.983

5.417
6,230
7,020
7.786
8,530

5.242
6.002
6.733
7,435
8,111

5.076
5.786
6.463
7.108
7.722

4.917
5.582
6.210
6.802
7,360

4.766
5,389
5.971
6.515
7.024

4.623
5.206
5.747
. 6,247
6.710

4.486
5,033
5.535
5.985
6.418

4,355
4,868
5,335
5,759
6.145

4,111
4,574
4,968
5.328
5.650

3.889
4.288
4.639
4.948
5,218

3.685
4.039
4.344
4.607
4.833

3.498
3.812
4,078
4.303
4.494

3.326
3 ,605
3.837
4.031
4.193

3.020
3,242
3.421
3.566
3,682

2.759
2.937
3.076
3.184
3.269

2.534
2678
2786
2.868
2 930

2.399
2.455
2.540
2.603
2650

11
12
13
14
15

10.368
11.255
12.134
13.004
13.865

9.787
10,575
11.346
12.106
12.849

9.253
9.954
10,635
11.296
11.938

8.760
9,385
9.966
10.563
11.118

8,306
8.863
9.394
9.699
10.380

7.887
8.384
6.653
9.295
9.712

7.499
7.943
6.358
8.745
9.108

7.139
7.536
7.904
8.244
8.559

6.805
7.161
7.487
7.786
8.060

6.495
6.814
7.103
7.387
7,606

5,988
6,194
6.424
6.628
6,611

5.453
5.660
5.842
6.002
6.142

5.029
5.197
5.342
5.488
5.575

4.656
4.793
4,910
5.008
5.092

4.327
4.439
4.533
4.611
4,675

3.n6
3.851
3.912
3,962
4.001

3.335
3.367
3.427
3.459
3.483

2978
3.013
3.040
3.061
3.076

2683
2708
2727
2.740
2.750

16
17
18
19
20

14.718
' . 15,56&
16.39'8 '
.
17.226
18,046

13.578
1.{292
14.992
15.678
16,351

12.561
-
13.166
13.754
14,324
14,8n

11.652

10.83810.106

9.447

6.851 :> ' 6.312

6,974
7,120
7.250
7.366
7.469 .

6,265
6,373
6,467
6.550
6.623

5.669
5,749
5,818
5.8n
5.929

5.162
5,222
5,273
5.316
5.353

4.7304.003
4,n5 4.059
4.812 4.080
4.844 4.097
4.870 . 4.110

3.503
3.516
3.529
3,539
3.546

3.088
3.097
3.104
3.109
3 113

2.758
2 763
2767
2.770
2.772

22.023

19.523

17,413

15.622

.'

J"

12.659 , ~ tHi.~2 '. i 10 ;~2~ ' , 10.059

13,134 12,085 lr1.l161l ;1,0.33 6
13.690 12.462 ' 11..470" 10,594
.: ~ ,

25" - '

7.624
8.022
9.372 " 8.7?6", 8.201
9.604
8.950 6.365
9,818
9.128 8 .514

1~16~ . 11.274 '10 .477.. '9,.763" ,' 9.122 : ' 8.544

.. .... .

';

14.094 ' f~ :7 83 11 ,654

10.675

9:823

9.0n

7.843

6.873

6.097 5.467

4.948

4.147

3.564

3,122

2.776

11,258

10.274

9.427

8.055

7.003

6.1n 5.517

4.979

4.160

3.569

3.124

2.778

-v-r

30

25.808

22.397

19.600

17.292

15.373

13.765

12.409

....:; ....:........ ~

"''": :. '
TIme
period
(e.g., year) 1%

2% "'3%

.~ 6%

7%

8%

:'7

'.':,

'.

' :-" '~ \

... ...,

' ! .

'r ' "

10% 12% 14% 15% 16% 18% 20% 24% 28% 32% 36%. 40% 50% 60% 70% 80% 90%

9%

1
2
3
4
5

.990
.980
,971
,961
.951

,980
'.961
.942
,924
.906

.971
.943
,915
.889
.863

.962
.925
.889
.855
.822

.952'
.907
.864
,823
.784

,943 .935
.890 .873
.840 ~8 1 6
.792.763
.747 .713

.926 .917
.857 .842
.794 \772
.735,.708
.681 .650

6
7
8
9
10

.942
.933
.923
,914
,905

.888 .838
.871 .813
.853 .789
,837\, .766
,820 .744

.790
.. 760
.731
.703
,676

.746
.711
.677
.645
,614

.705
.665
.627
.592
,558

.666
.623
.582
,544
,508

.630
,583
.540
..500
.463

.596:564
.547 .513
.502 .~~7
.460 .424
.422 .386

11
12
13
14
15

.896
.887
.879 .
.870
.861

,804
.788
.773
;758
.743

.722
.701
.681
.661
.642

,650 .585
.625 .557
.60 1" '.530
,577 .505
.555 ,481

,527
,497
.469
.442
,417

.475
.444
.4 15 .
.388
.362

.429
.397
.368
'.340
.315

.388
.356
.326
.299
,275

'16
17
18
19
20

.853
.844
.836
.828
.820

.728
,714
.700
,686
.673

,623
.605
.587
.570
.554

.534 .458
,513 .436
.494 .416
.475 .396
.456 .377

.394
.371
.350
.331
,312
,

.339
.317
.296'
:276

.292
.270
.250
.232
. .2S8
.215
0:::

.252
,231
.212
.194
.178

25

.780 ,610 .478 .375 .295 .233

:L

,909
:826
.751
.683
.621

.893
.797
.712
.636
.567

,877
.769
.675
.592
.519

,870
.756
,658
.572
,497

:862
.743
.64 1
.552
,476

,847
-71
.609
.516
.437

,833
.694
.579
.482
;402

,806 ,781
.650 ,610
.524 .477
.423.373
,341 ,291

,758
.574
.435"
.329
,250

,735
,541
,398
:292
.215

,714
,510
.364
,260
.186

.667
,444
.296
,198
,132

.507
.452
.404
.361
,322

.456
.400
.35 1
,308
,270

,432
,376
.327
,284
.247

.410
.354
.305
.263
,227

,370
.314
.266
,226
,191

,335
.279
.233
,194
,162

,275
.222
.179
,144
.116

.227
.178
.139
,108
.085

,189
.143
.108
,082
.062

,158
,116
.085
.063
,046

.133
.095
.068
.046
,035

.088
.059
.039
.026
,017

;287
.257
..229
.205
.183

,237
.208
. .182
.160
.140

.215
.187
.163
:141
.123

.,195
,168
.145
.125
,108

.162
.137
.116
.099
.084

.135
.112
.003
,078
.065

',094
.076
.06 1
.049
.040

.066
.052
.040
.032
.025

.047
.036
.027
.021
.016

,034
.025
.018
.014
,010

.025
.018
.cn3
.009
.006

,012
.008
.005
,003
' .002

.218 ;163
.198.146
.180 .130
.164 .116
.149 ; '.104

,123
.108
' .095'
.083
.073

.107
.093
.081
.070
'.061

.093 .071 :054

.080 .060.045
;~9 .051 ,038
..060 '.043 .031
,051 .037 .026

,032
,026
.021
.0 17
,014

.019
.015
.012
.009
,007

.012 '
.009
.007
.005
.004

,007
.005
;004
.003
.002

.005 .002
.003 .001
,002 ,001
.002.000
.001 .000

,625
,391
.244
,153
.095

.588
,346
.204
,120
,070

.555
.309
.171
.095
.053

.526
,277
,146
,0 77
.040

.060
.037
.023
,-01;;
.009

,041
,024
.014
,008
,005

,029
,016
,009
.005
.003

,021
,0 11
,006
.003
.002

,006
,004
.002
,001
.001

,003
.002
.001
.001
.000

.002
.001
,001
.000
.000

.001
.001
.000
.000
,000

.00 1 .000
,000 .000
,000 .000
.000
,000

000

'; . '

'.;...~

._
.

'

~.'"

..~

.350
.319
.290
,263
.239

-, "J. ":'.'

.1e:(.14~ \1E7

i092 '.059 .038 .030 .024 .018 .0 tO .005 .002 ' .00 1 .000 .000' "

. . . ~. ."" }

30

..742 .552 .412 .308 .231 .174 ..131 .099 .,075 .057 .033 .020 .015 .012 .007' .004 .002 .001 .000 ,000
, .. , ~ ..... .

" ."

.~

}'

' \' f:

..' ...,. .

1, '

TIme
period
(e.g., year)

1%

2%

1
2
3
4
5

1.010
1.020
1.030
1.041
1.051

1.020
1.040
1.061
1.082
1.104

6
7
8
9
10

1.062
1.072
1.083
1.094
1.105

11
12
13
14
15

.3%

4%

5%

6%

7%

8%

9%

10%

12%

14%

15%

16%

1.030 1.040
1.061 1.082
1.093 1.125
1.126 1.170
1.159 1.217

1.050
1.102
1.158
1.216
1.276

1.060
1.124
1.191
1.262
1.338

1.070
1.145
1.225
1.311
1.403

1.080
1.166
1.260
1.360
1.469

1.090
1.188
1.295
1.412
1.539

1.100
1.210
1.331
1.464
1.611

1.120
1.254
1.405
1.574
1.762

1.140
1.300
1.482
1.689
1.925

1.150
1.322
1.521
1.749
2.011

1.160
1.346
1.561
1.811
2.100

1.180
1.392
1.643
1.939
2.288

1.200
1.440
1.728
2.074
2.488

1.126
1.149
1.172
1.195
1.219

1.194 1.265
1.230 1.316
1.2671.369
1.305 ' 1.423
1.344 .1.A 80

1.340
1.40('
1.477
1.551
1'.629

1.419
1.504
1.594
1.689
1.791

1.501
1.606
1.718
1.838
1.967

1.587
1.714
1.851
1.999
2.159

1.677
1.828
1.993
2.172
2.367

1.772
1.949
2.144
2.358
2.594

1.974
2.211
2.476
2.773 .
3.106

2.195
2.502
2.853
3.252
3.707

2.313
2.660
3.059
3.518
4.046

2.436
2.826
3.278
3.803
4.411

2.697
3.186
3.759
4.436
5.234

2.986
3.583
4.300
5.160
6.192

1.116
1.127
1.138
1.149
1.161

1.243
1.268
1.294
1.319
1.346

1.384
1.426
1.469
1.513
1.558

1.539
1.601
1.665
1.732
1.801

1.710
1.796
1.886
1.980
2.079

1.898
2.012
2.133
2.261
2.397

2.105
2.252
2.410
2.579
2.759

2.332
2.518
2.720
2.937
3.172

2.580
2.813
3.066
3.342
3.642

2.853
3.138
3.452
3.797:
4.177

3.479
3.896
4.363
4.887
5.474

4.226
4.818
5.492
6.261
7.138

4.652
5.350
6.153
7.076
8.137

5.1 17
5.936
6.886
7.988
9.266

6.176
7.287
8.599
10.147
11.973

7.430
8.916
10.699
12.839
15.407

16
17
18
19
20

1.173
1.184
1.196
1.208
1.220

1.373
1.400
1.428
1.457
1.486

1.605 1.873
1.653 1.948
1.702 2.026
1.754 2.107
1.806 2.191

2.183
2.292
2.407
2.527
2.653

2.540
2.693
2.854
3.026
3.207

2.952
3.159
3.380
3.617
3.870

3.426
3.700
3.996
4.316
4.661

3.970
4.328
4.717
5.142
5.604

4.595
5.054
5.560
6.116
6.728

6.130
6.866
7.690
8.613
9.646

8.137
9.276
10.575
12.056
13.743

9.358
10.761
12.375
14.232
16.367

10.748
12.468
14.463
16.777
19.461

14.129
16.672
19.673
23.214
27.393

18.488
22.186
26.623
31.948
38.337

25

1.282

1.641

2.094 2.666

3.386

4.292

5.427

6.848

8.623

10.835

17.000

26.462

32.919

40.874

62.688

95.396

30

1.348

1.811

2.427

4.322

5.743

7.612

10.063

13.268

17.449

29.960

50.950

66.212

85.850

143.370

237 .370

3.243

I ,

18%

20%

I~e y

E u ations

:hapter 2

6. The total debt ratio:

The balance sheet identity or equ ation :

Assets = Liabilities
+ Sh areh olders' equity

[2,IJ

T he income state ment eq uation:

Revenues - Expenses = Income

!
,I

[3.6J

Debt-equi ty ratio
= Total deb t/Total eq uity

[3.7J
i

8. Th e equity multiplier:

[2.3]

where:

Equ ity multiplie r

= Total asse ts/Total equity

s
i,

[3.8J

ha p t er 3
The cu rrent ratio :
Curre nt assets
C urr ent rat io =

Cu rren t liabili ties

The qui ck or acid-test ratio:

=

Curre nt assets - Inventory

Current lia bilities

---------=-~"--

[3.1]

[3.2 J

"

[3.3]

[3.9]
:

I:
j!

[3.10J

11. Th e cash coverag e ratio:

Cash coverage ratio

EBIT + Depr eciation
Intere st
12. Th e inventory turn over ratio:
In ventory turnover
Cost of goo ds sold
Invent ory
13. Th e ave rage days' sales in inve ntory:
365 days
Inventory turnover

i
i;
t'
;
;

[3.11J

Ii
f(

I
:
,!
.1'
I.

I'

"

I.

[3.12J

t
i,
I

I'

i'

fI"
[3.13]

:'
~.

Re ceiva ble s turno ver

Sal es
Accounts receivable

[3.14J

.15 . The day s' sale s in receivables:

[3.4 J

Interval measure
Curr ent asse ts
Average daily operating cost s

I.

II

14. T he rece ivables turnover ratio :

Th e ratio of net working ca pital to to tal asse ts:

Net worki ng cap ital to total asset s

= Net worki ng capi tal

Total assets

T he interval measure:

10. The times interest earn ed (TIE) ratio :

EBIT
T imes interes t earned rat io = -1- -
nterest

!
fr

Days ' sales in inventory

The cash ratio:

Cash
Cash ra tio = - - -- - -
Curr ent liabilities

Long-term debt ratio

Long-term debt
Long-term deb t + Total equi ty

.,

9. Th e long-term debt ratio:

a . Cash flow from assets = Oper atin g cash flow (OCF)

Net capital spending - Change in net working capital
(NW C)
(l) Opera ting cash flow = Earn ings before interest and
taxes (EBIT ) + Depreci ation - Taxes
(2) Net capital spe nding = End ing n et fixed assets
Beginning net fixed asse ts + Depreciation
(3) Ch ange in net working capital = Ending

NW C - Beginnin g NWC
b. Cash flow to creditors = Interest paid - Net new
borrowing
c. Cash -flow to s tockho lders = D ividends paid
- Net new equity raised

.k .
QUIC ratio

7. The debt-equity ratio:

[2.2 ]

The cas h flow ide ntity:

Cash flow from assets
= Cash flow to creditors
+ Cash flow to stoc kho lders

Total debt ratio

. Total assets - Total equity
Total assets

[3.5J

Days' sales in receivables

365 days
Receivables turn over
16. T he net working capital (NWC) turno ver ratio:
Sale s
NW C turnover = NWC

i '

[3.15J

[3.16J
B-1

B- 2

APPENDIX B

Key Equat ions

Chapter 5

17. The fixed as set turn over ratio:

.
Sales
Fixed asset turnover = - - - --
Net fixed asse ts

[3.17]

1. Th e future value of $ [ inves ted for r periods at rate of r per

per iod:

19. Profit margin :

Net income
.
P rofi t margIn = - --
Sales

[3.19]

3. Th e relati onship betwe en future value and present value

(the basic present value equat ion) :
PV

Net incom e
Return on assets = - - -
Total asset s

[3.2 0]

.
Net inco me
R eturn on equity =
Total equi ty

=C x

Price per sh are

PE ratio = --~---
Earni ngs pe r sh are

[3.22 ]

23. T he m arket -to -book ratio:

=
2.

_ M arket value per share

Book value per share

3.
[3.2 4]

4.

[4.1J

2. Th e internal gro wth rate:

= Ord inary annuity value

[6.3]

1')

[6.4]

Effective ann ual rate (EAR), where 111 is the number of

times the interest is compounded du ring the year :

6.

Effec tive ann ual rate (E AR), where q stands for the
continuously compounded quoted rate:

+ (Quo ted rate/m)] '" - I

= eq

[6.5]

[6.6]

Chapter 7
1.

RO A X b
Inte rnal growt h rate = - - - -
[ - ROA X b

~i
"

[6.2]

5.

EAR

Dividend payout ratio

= Cash divide nds /Net income

[4.2 J

Bo nd value if bond has ( J) a face value of F paid

at maturity, (2) a co upon of C paid per perio d. (3) (peri ods
to ma turity, and (4) a y ield of r per period:
Bon d value

T he sustainable growth rate :

= C X [ I - 1/ (1

RO E X b
Su stainable gro wth rate = - -- - _
I - ROE X b

[4.3]

+ r)'Jlr + F/ O -/- r)'

= Presen t value

of the coupons

. I'
.
.
To tal assets

C apita
mten srty ratio = - - -- Sa les

2.

~4-? :~. : ?:. :-;:.~..... -~

.

. .

Presen t value
of the face amoun t

The Fisher effec t:

Tot al asset turno ver

[7.1J

Bond va lue

T he ca pital intens i ty ra tio:

EAR = [I

C hapter 4

.\

Presen t value for a perpetuity:

1. Th e d ividen d payout rati o:

.I

[6.1]

PV for a perpet uity = C/ r = C X (I / r)

Ret urn on assets

ROE = Profi t margin
X Total ass et turn over

X Equi ty m ul tipl ie r

'~'-'r ;

C (1 . : [ 1/; 1 + r)'J I

An nuity due value

X (I

ROE = Net inco me X _Sale s X Asse ts

Sales
Assets
Equity

I'

Annuit y FV factor
= (Future value facto r - I)/ r
= [(I + r)' - [J/r

[3.23]

24 . T he Du Pon t ident ity:

1 - Present value factor)

(

The future va lue factor for an annuity:

M arke t-to- boo k ratio

[5.3]

+ 1')')

Annui ty present va lue

[3.21]

'

~ ~ f.r1:~ :':~: __ " :' :"'~.~:~~"

[ [ / (1

Chapter 6

22. Th e pr ice-ea rnings (PE) rati o:

r)' = F V,

= FY,/( l + r)' = FV, x

1. Th e present value of an annuity of C dollars per period for

r periods when the rate of re turn or interest rate is r:

21. Return on equ ity (ROE):

PV X ( I

20. Return on as sets (ROA):

4.

[5 .1]

1')'

. 2. Th e present value of $ [ to be receiv ed r periods in the

futu re at a discount rate of r:

[3.18 )
PV = $ [ X [1/(1 + r)'J = $[ / (1 + 1')'
[5.2)

Sal es
Tot al asset turnover = - - -
Tot al asse ts

3.

. Future va lue = $1 X ( I

18. The to tal asset turnover ratio:

. -:._ .; "

+R=

(J

+ /.)

X (I

+ h)

[7.2]

R = I' +h+r Xh

[7.3]

R ~ r+h

[7.4]

_~~ ..,:~ '

'-. . ...:

; +

_ .

::

~.

APPENDIX B

Chapter 8

4.

+ g)

~~

R -g

R- g

Financial break-even level:

where

[8.3]

OCF * = Zero N PV ca sh flow

5.

2. Required ret urn:

R = D1 /Po + g

B-3

Q = (FC + OCF"') /( P - v)

1. The div ide nd gr owt h m odel:

Po = Do x (l

Key Equati ons

De gre e of o perating leverage (DO L) :

DO L = I

[8.5]

[11.4]

FC /OC F

C h apte r 9

Chapter 12

1. Ne t prese nt va lue (NPV) :

1. Variance of returns, Var(R) o r u ":

NPV = Present value of future cas h flows

- Investment cos t

YareR)

= T _I
+

2. Paybac k per iod:

- ?
I [(R , - R)-

+ .. .

[1 2.3]

(Rr - R)2]

2. Standa rd dev iatio n of ret urns, SD(R) or <J:

Payback period = N umber of years that pass

befo re the sum o f an in vestment's ca sh flows

eq ual s the co st of the inv estme nt

SD( R) = VVar(R)

Chapte r 13

3. D isco unted pay back period :

D iscounted payback pe riod = N umber of yea rs tha t
pa ss be fore the su m o f an investme nt's discounted
ca sh flo w s eq ual s the cos t o f the inv es tmen t

1.

Risk premi um = Ex pec ted return

- Risk-free rate

2.

4, The average accounting return (A A R) :

Ri sk premium :

E xpected return on a portfolio:

E(Rp) =

Average net income

AAR = - --="---- -
Average book value

[13. 1J

E(R 1) + X2
X E(Ru )

x
+ X"

XI

E(R 2 )

+ ...

[13.2J

3. The reward-to-r isk ratio :

5. Inte rnal rate of return (IR R) :
Re ward-to-risk ratio = E [R;] - Rf

IRR = Discount rate of req uir ed re turn suc h that

the net present value of an inves tmen t is ze ro

f3i

4. The capita l asse t pricing model (CAP M):

6. Profit abil ity index:

E(R;) = Rf

P V of cas h flo ws
P rofitabili ty index = - - - -- -
Cos t of inves tme nt

[E(RM) - RtJ X

f3i

Valu e of a call option at maturi ty :

= 0 if (S, - E ) ::; 0
b. C 1 = S, - E if (SI - E ) > 0

a. C 1

1. Bottom-up app roa c h to operating ca sh flow (OC F):

OC F = Ne t income

De preciat ion

[10.1]

2. Top-down approach to op eratin g ca sh flo w (OCF) :

OCF = S ale s - C os ts - Taxes

Co::; So

[10 .3]

[14 .2J

[14.3]

b. Lowe r bound :

Co 2: 0 if So - E < 0
Co 2: So - E if So - E 2: 0

3. So = Co + E /(l + Rf )
. Co = So - E /(l + Rf )
A.

Chapt e r I I

[14.1]

2. Bounds on the va lue of a call option :

a. Uppe r bou nd :

[10.2]

3. Tax s hield app roach to o pe rating ca sh flow (OC F) :

OCF = (Sales - Costs) X ( I - T )

+ D epreciatio n x T

[13.7]

C h a p t e r 14
1.

Chapter 10

[14.4]
[14.5]

Value of a call that is ce rtain to finish in-the-money:

Ca ll o ption value

1. Accounting break-e ven le ve l:

Q = (FC + D)/ (P - v)

= Sto ck value

[11.1]

- Pre sent value of the e xe rci se price

Co = So - E/ (l + ~-r

2. Rel ationship between operating cas h flow (OC F) a nd sales

vo lume :

Q = (FC + OCF)/ (P - v)
3. Ca sh break-even level:

Q = FC / (P -

i-)

[11.3]

[1 4. 6 ]

C ha pter 15
1.

Req uired return o n equ ity, RE; (divide nd gro w th model ):

RE; = DJ/P o + g

[15.1)

~-4

"

APPEND IX B

Chapter 20

Requ ired return on eq uity, RE (C APM ):

Rt = Rf +
t.

Key Equatio ns

~E X

(R M

Rf)

[15.2]

Average dai ly floa t =

[15.3]

I. T he weight ed av er age co st o f cap ital (WACC):

WAC C = (EI V)
X ( 1 - Tc)

x R E + (DI V ) X RD

2.

[15.8]

R igh ts o fferings:

a. N umber of ne w sha res :

N umber of new shares
Fun ds to be ra ised
S ubsc ription pri ce

Acco unts receivable

= Aver age dail y sa les X ACP

2. NP V o f sw itching credit term s:

a. Present value of swi tc hing :

[ 17.1]

[17.2 ]

= '!C x D
b . Propo s itio n I:
VL = Vu + '!C X D
c. Prop o sition II:
R = R u + (R u - RD) X (DIE)
X( I - 7C )

[17.3]
[17.4 J

Chapte r 19

2.

[19.4]

Th e cas h cycl e:
Ca sh cycle = Ope rati ng cycle
- Accounts payab le pe riod

".

..

;.

' ';

[20A.If "

[20A.31 .

."

.: :

/.- .

, . ",

"

[20l\ AY'"

[20K.si

:.'

PV = [(P - v)(Q' - Q) J/R

b. Cost of sw itching :
Cos t of sw itching = PQ + v(Q' - Q)
c. NPV of switch ing :
NPV of switching = - [PQ + v(Q' - Q)J
+ (P - v)
X (Q' - Q)I R

[19.5 ]

NPV = - v + (1 - -rr )PI ( 1 + R)

b. With repea t b usiness :
N PV = - v + ( I - -rr )(P - v)I R

4. T he eco no m ic o rde r quantity (EOQ) model :

a. To ta l carry ing cos ts:
Tot al carry ing cos ts
= Aver age inve nto ry
X C arryin g co sts per unit
= (QI2) X CC
b. To tal restockin g cos ts:
Total restockin g co sts
= Fixed cos t per o rder
X Nu mb er o f orders = F X (TI Q)

" - '~;

[2Ll]
. : r.
,

"

[21.4]

[2i4 r "
[21.6.1:

3. NPV of gr an ting credit:

a. With no rep eat busi ness :

1. Th e operating cycl e :
O pe rating cy cle = Invento ry period
+ Acc o unts rece ivable peri od

3. T he Miller -Orr mode l:

a. Th e opt imal cas h balan ce :
I
C" = L + (3/4 X F X a 2I R)I /3
b. T he upper limit:
U* = 3 X C* - 2 X L

.'"

1. Th e size of receiv ables:

"u

Mod igl ian i-M il!er prop osition s (w ith taxes ):

a. Value of the interest tax sh ie ld:
Val ue o f the interest ta x shield
= ('!C X R D X D)I RD

F)I R

. ,' I
~

Chapter 21

:hapter 17

~.

[:ioj]\

[16.2)

c. Valu e of a rig ht:

Value of a right = Rights-on pr ice - Ex- rig hts
pr ice

l. M odi gli ani -M iller Pro posi tions (no taxes):

a. Pr oposit ion I:
VL =
b. Propo sition II :
R = RA + (RA - RD ) X (DI E)

[16.1)

N um be r (If rights needed to buy a share of stoc k

Old shares

Th e Baumol-A llais-Tob in (B AT ) mo del:

a. Opp ortunity cos ts:
Opportu nity costs = (C/2 ) X R
b. Trad ing co sts:
Tr ad ing cos ts = (Ti C) X F
c. Tot al cost:
To ta l cost = Oppo rtuni ty cos ts
+ Tradin g cos ts
d. Th e o ptimal ini tial cash balance:

C* = V(2 T

b. Numb er of righ ts needed:

New shares

-r0ta l float
Total days

-2-:.~':'::"::"::':

Average dail y float

= Average daily receip ts
X Weigh ted averag e dela y

[15.6]

:hapte r 16
I,

. ".;

b. Average daily float:

Weighted av erage flotation co st,fA :

E ,
D
JA= \iX f + V X fD

.'

a. Ave rage daily float:

Requ ired return on preferred stoc k, R:

R p = DIP o

I.

.~

1. Float mea sure men t:

[21.81
[21.9j

[21.101

[21.111

.'

'