FINANCIAL

RATIOS
- SHORT-TERM SOLVENCY (LIQUIDITY) RATIOS

!"##$%& !"#$% =

!"#$% !"#$% =

!"# !"#$% =

!"##$%& !""#$"

- LONG-TERM SOLVENCY (FINANCIAL LEVERAGE) RATIOS

!"##$%& !"#$"%"&"'(
!"##$%& !""#$"!!"#$"%&'($)
!"##$%& !"#$"%!!!"#
!"#!

!"##$%& !"#$"%"&"'(

- TURNOVER (ASSET MANAGEMENT) RATIOS

!"#$

!"#$"%&'( !"#$%&'# =

!"#! ! ! !"#$ !" !"#$"%&'( =

!"#"$%&'(") !"#$%&'# =

!"#! ! ! !"#$ !" !"#"$%&'(") =

!"#"$%&' !"#$%&'# =

!"#! ! ! !"#$!"#" !" !"#"$%&' =

!"#$% !""#$ !"#$%&'# =

!"#$"%&'(
!!"!"!"#$

!"#$%
!"#$!!"#" (!"# !"# !"#$%&'&)

!" !"#$% =

!!"#$% !" !"#$%& (!"#) =

365

!"#$%& !" !"#$%&'$"& !"# =

!"#$%& !"#$%
!""# !"#$% !"# !!!"#

365

!!!"#$ !"#$#%&'(&)
!"#$%& !"#$%

!"#

!"# !"#$%&

!"# !"#$%&

!"#$

!"#$%$&# (!"#$ !"#$%& !"#"$%$&")

!"#$%& !" !""#$" (!"#) =

!"#$!!!!"

!"#$%
!"#$% !""#$"

!"#$% !"#$%$&' !"#$% !"# =

!"#!!"!" !"#$%&'$ =

!"#$%& !"#$%& =

!""#$%& !"#"$%&' (!"#! !"#)

!""#$%& !"#"$%&'

!"#$%$&' !"# !!"# (!"#) =

!""#$"
!"#$
!"#$%&

!""#$%& !"#"$%&'(") (!"#! !"#)

!""#$%& !"#"$%&'("!

!"#$ !" !"#$%& =

365

!"#$
!"#$% (!"# !" !"# !"#$%&'&)

!"#$ !" !""#$" =

- PROFITABILITY RATIOS

- MARKET VALUE RATIOS

!"#$ (!"##$%&)

!"#$%

!"# !"#$%&

!"#$% !""#$"
!"# !"#$%&

!"#$% !"#$%&
!"#$
!"#$%&$' !"#$%"& !

!"#$ ! : !"#$%&$' !"#$%"&:

= !"#$% !"#$% !"!!!" + !"#$% !"##$%& !""#$"
!"#$% !"##$%& !"#$"%"&"'(
= !"#$% !"#$% !""#$" + !"# !"#$%&' !"#$%"&
!"# !"#$%&
!""#$"
!"#$%& !"#$%&%': !"# =

=
!""#$"
!!!"#$
!"#$
= !"# 1 +

!"#$%&
!" !"#$ !"#$%&%' 2:
!"# !"#$%& !"#$% !""#$"
!"# =

=
!"#$%
!""#$" !"#$%&
!"#$
= !"#$%& !"#$%& !"#$%&'# 1 +

!"#$%&

PROPORTIONAL (STATED ANNUAL) AND EQUIVALENT INTEREST RATES

-
-
-

Equivalent rates have the same effective anual rates.

Effective rates take compounding into account.
1 + !"# = (1 + !"#!"# )!

ANNUITIES AND PERPETUITIES

- PERPETUITY

- GROWING PERPETUITY

A constant stream of cash flows that lasts forever.

!
!" =
!

A growing stream of cash flows that lasts forever.

!
!" =

!!

- ANNUITY

- GROWING ANNUITY

A constant stream of cash flows with a fixed maturity.

!
1
!! = 1
= ! !!!
!
(1 + !)!

A growing stream of cash flows with a fixed maturity.

!
1+! !
!" =
1

!!
1+!

Important Remarks:

Annuities and perpetuities are already discounted to the period immediately before they start.
!" =

Installments: !"#$ !"#$% =

!
!,!

(!!!,!)!

!"#$%&&'("$
!

We only discount 2 years.

!
(!!!)!

but if you pay the first installment exactly when you accept the loan, then

you have to discount the PV one period Forward: !"#$ !!"#$ =

!"#$%&&'("$
!

!
!!!

(! + !)! , and so on.

NOTE 1: r and T should always be written according to the compounding period.

NOTE 2: if the first installment is to be paid on the moment you accept the loan, then you dont pay interest in that
first installment (installment = reimbursement)

To calculate how much money you still owe the bank after i periods of time:
!"#$%&&'("$
!
!"#$! =
1
!!! this yields how much of the loan (i.e. the total Reimbursement) you still owe.
!

(!!!)

BOND VALUATION
- BOND VALUE

Present value of expected future cash flows.

- SPECIAL BONDS

y and T must always be written according to compounding period

- Zero-Coupon or Pure Discount bonds dont pay coupons. Their

YTM are spot rates for that period of time.
- Consol bonds: no maturity. Coupons forever. You never get back
the face value.

- BOND CONCEPTS

- BOND MARKET

!" =

!"#$"%
!

(!!!)!

!"#$ !"#$%
(!!!)!

Coupon rate = y, price = par value

Coupon rate > y, price > par value (premium bond)

When coupon rate < y, price < par value (discount bond)
*in order to make this comparison, we must convert the
coupon rate and YTM to the compounding period.

Clean price: % of Face Value

Dirty Price = Clean Price + Accrued Interest (AC)
!"#$ !"#$%!& !"#$% !"#$ !"#$"%
!" =
!"#$"%
!"#$"% !"#$%&

- SPOT AND FORWARD RATES

- Spot rates are determined from YTMs on zero-coupon bonds. Use them to discount according periods of time.
- Forward rates are interest rates set today for a future loan. They are known today but start in the future.
- These are break-even rates, that is, investing at spot rate for two years must be the same as investing at spot rate for 1 year and then at
forward rate 1-2 years: (1 + !!!! )!!! = (1 + !! )! (1 + !!,!!! )! . In general, the forward rate between time T and T+N is given by:
!!,!!! =

(!!!!!! )!!!
(!!!! )!

STOCK VALUATION
- STOCK VALUE

Present value of expected future dividends. 3 possible situations in the dividend discount model:
- ZERO GROWTH: !! =

!!
!

- CONSTANT GROWTH: !! =

- ESTIMATES OF PARAMETERS

!!
!!!

- DIFFERANTIAL GROWTH: First grow at g1

then g2. Grow. annuity and g. perpetuity

!"#$%&

!"#

! = !"#"$#%& !"#$% !"# = 1 !"#$%& !"#

!"#"$#%&$ !"#$% = !"#$%&'( = 1 !"#$%&

=

!"#
!!
!!
!! =
! =
+ ! (= !"#"$%&$ !"!"# + !"#$% !"#$)
!!
!!

- NPVGO MODEL

NPVGO
Calculate first two NPVs to find g:

!! = !"#$ !"# + !"#$%

!!"!
!"# !"#! =
NEXT YEAR EARNINGS NOT DIVIDENDS!

!"#$%&"' !!"! !"#

!
!"#!
!"#!
! =
1 Then, !"#$%! =

!"#! = !"#$%&"' !"#! +

!"#!

!!!

PORTFOLIO THEORY AND CAPM
Portfolio Variance:
(!! !! )! + (!! !! )! + 2!! !! !!,!

Tangency Portfolio
!! =

Minimum Variance Portfolio (MVP)

!!! !!,!
!! = !

!! + !!! 2!!,!

! !! !! !!! ! !! !! !!,!

! !! !! !!! + ! !! !! !!! (! !! !! + ! !! !! )!!,!

Quadratic Preferences
! !! !!
!! =

! !!!
!"#(!! ,!! )

Securities Market Line (SML): ! !! = !! + ! !! !! !!

Beta: !! =

!
!
Idiosyncratic Risk: (!!"
) !!! = !!! !!! + !!"

Above SML: undervalued

Under SML: overvalued

!"#(!! )

Sharpe Ratio: (slope of CAL)

! ! !!

!!
Capital Market Line
(efficiency)
! !! = !! +

! !! !!!
!!

Correlation: !!! ,!! =

!!
!"#(!! ,!! )
!!! !!!

CAPITAL BUDGETING
!"#$%&'() !"#$ !"#$ = !"#$ !"#$% + !"#$"%&'(&)*
!"# !"#$%&' !"#$%"& = !""#$%& !"#"$%&'(")
+ !!"#!$%&'#(
!""#$%& !"#"$%&'
!"#$%&'( !"#$% = !"#$"%& !"#$% !"#$% !"#$%
!"#$"%& !"#$% !"#$% !"#$%
= !"#$ !"#$% (!"#$ !"#$%
!"# !""# !"#$%)!
!"! !""# !"#$% = !"#$!"# !"#$%

!"#$"%&'(&)* !" !"#

DECISION RULES
-NPV: accept if NPV>0, choose highest NPV.
-Payback Period: How long will it take to recover initial investment?
Drawbacks: ignores both time value of money and all cash flows subsequent
to the payback period.
!"#
-Profitability Index:
+ 1. Accept if PI>1.
!"#$#%& !!"#$%&#!%
- Internal Rate of Return: IRR is the discount rate that sets NPV to zero. If
it is higher than discount rate, do project. If it is a financing project, its the
reverse. Dont use IRR if cash flows change sign more than once. To
overcome scale and timing problems, use Incremental Cash Flows: compute
CF of project (A-B) and if IRR>r, choose project A and vice versa.
- Investments with unequal lives: use replacement chain method (repeat
projects until they end at the same time) or Equivalent Annual Cost method
(EAC): !"# = !"#!!! .

!"!!!!
!"#$%#&'$%"# !"#$% =

!!
!"!!!! = !"#$! 1 ! 1 + ! !"# !"#$% !""#$"!
(!"#!)
!
!
WITH DEBT: use one of three methods:
!! = !!
+ !! (1 !)
!!
!!
!
!
!! = !! + !! ! !! !!
-WACC:
!! ! ! +
!!

!!!
!!!

!
Discount unlevered FCFs with this. !! is the cost of levered equity
!! !!! (!!!)
!
!
!! =

!
(expected return on equity), !! is the cost of debt (YTM on bonds). E
!! = !! + (!! !! )(1 !)
!! ! (!!!)
!
is stock price times number of shares. D is bond price times face value.
-APV: APV= NPV + NPVF
-FLOW TO EQUITY (FTE)
NPVF is the NPV of Financing side effects: interest tax
Discount the levered FCFs (a.k.a. LCFs) with !! to obtain E.
shield, issuing costs, costs of financial distress and subsidies !"# = FCF Interest Expenses after Taxes Debt Repayments
to debt financing. Compute Financing CFs for each year and
Attention: we only consider the equity portion of the initial investment!
discount them with !! to find NPVF.
SUMMARY
APV
WACC
FTE
INITIAL INVESTMENT
All
All
Equity Portion
CASH FLOWS
Unlevered
Unlevered
Levered (LCF)
DISCOUNT RATES
!! for NPV, !! for NPVF
WACC
!!
PV OF FINANCING EFFECTS
Yes
No
No

CAPITAL STRUCTURE
MM1. !! = !! + !" !"# !!"#$ = !! + !"
!"#$%&
!"#$% !" !"#$%! =

!!"#$ !"#$#%&'(&)

MM2. !! = !! + (!! !! )(1 !)

!
!""#$% !"#$
#!"#$%&'() !"#$%& =

!!"# !"#$% (!"#$% !""#$ !""#$"%&'&"()