Capital Budgeting process of planning & managing Common-size Statement presents items in % FV amount investment is worth after 1 or more

FV amount investment is worth after 1 or more periods

firms investment in long-term assets Common-base-year Statement presents items relative to base (compound value)
Capital Structure mix of debt & equity maintained by year Compounding accumulating interest in invest. over time to
firm Financial Ratios relationships from financial info used for earn more int.
Working Capital planning & managing firms current comparison Interest on Interest earned on reinvestment of previous
assets & liabilities Liquidity Ratios ability to meet short-term obligations without interest payments
Agency Problem possibility of conflicts of interest undue stress Compound Interest earned on initial principals & int.
between shareholders & management of firm Quick Ratio ST liquidity after removing inventory reinvest. prior periods
Corporate Governance rules for corporate Cash Ratio ability to pay off current liabilities with cash Simple
FV = PVInterest
x (1+r)T earnedCash on original
Flows principal amountAnnuity:
organization & conduct Interval Measure how many days or operating expenses can PV = FV/(1+r)T PV = (C/r) x 1 [1/ Payment =
Money Markets financial markets where short-term current assets cover (1+r)T] annuity end (ordinary)
debt securities are bought & sold Financial Leverage Ratios LT ability to meet obligations FV = C/r x (1+r)T 1 Payment =
Capital Markets financial markets where long-term Equity Multiplier dollar worth of assets each equity $ has claim annuity bgn (due)
debt & equity securities are bought & sold to PV = C/r Mortgage:
Financial Engineering creation of new securities or LT Debt Ratio - %Financial Leverage
of total firm Ratios
capitalization funded by long-term perpetuity C/Y = 2
financial processes Total
debt Debt Ratio = (TA TE)/TA **<.5 Annuity level stream of cash flows for fixed period of time
Derivative Securities options, futures, other Debt/Equity Ratio = TD/TE = EM 1 **<1 Annuity Due cash flows occur at beginning of period
securities whose value derives from price of another Equity Multiplier = TA/TE = TD + (TE/TD) = TD/TE + 1 = Perpetuity annuity in which cash flows continue forever Consol
asset DE Ratio + 1 **<2 type of perpetuity
Regulatory Dialectic pressures financial institutions LT Debt Ratio = LT Debt/(LT Debt + TE) Growing Perpetuity constant stream of cash flow without end
Du Pont
& regulatory bodies exert on each other Times Interest Earned = EBIT/Interest Growing Annuity finite # of growing annual cash flows
Identity
Non-cash Items expenses charged against revenues Cash Coverage Ratio = (EBIT + Depr)/Int Stated/Quoted Interest Rate expressed in terms of interest
ROE = NI/TE
that do not directly affect cash flow (ex. depreciation) Liquidity Ratios Profitability payment made each period
= (NI/Sales)
CFFA total of CF to bondholders/shareholders: OCF, Current Ratio = CA/CL **>1 Ratios
or >2 Effective
Annuity Annual
PV = C xRate (EAR) t]/r}
{[1-1/(1+r) interest rateAnnuity
expressedFVas if it were
Factor =
(Sales/TA)
Capital Spending, NWC (aka free cash flow) Quick Ratio = (CA Inv)/CLPM **>1= NI/Sales (TA/TE) = ((1+r)t 1)/r
OCF cash generated from normal business activities Cash Ratio = Cash/CL ROA = NI/TA (PM)(TAT) Cash Flow = PV x r Annuity PV Factor =
Dividend Tax Credit reduced effective tax rate on NWC = NWC/TA ROE = NI/TE (1/r) x (1-PV Factor)
dividends Market Value PVCoupon
of Growing stated interest payment
Perpetuity = C/(r-g)made on PVbond
of Growing Annuity =
Interval Measure = CA/Avg Daily
Capital Gains increase in value of investment over its Ratios Face/Par Value principal amount of bond repaid at end of term
Op Costs
purchase price Price-Earnings Ratio = Coupon Rate annual coupon divided by face value of bond
OR Asset Turnover Ratios Share $/EPS Maturity Date date when principal amount of bond is paid
Loss Carry-forward,CFFA Carry-back using years capital
Interest paid on LT debt Inventory Turnover = COGS/Inv Market-to-book Ratio = Yield to Maturity (YTM) market interest rate that equates bonds
losses
EBIT to offset capital gains + in past/future years
NI Days Sales in Inv = 365/Inv MVPS/BVPS PV of interest payments & principal repayments with its price
+ Depreciation - Change in LT debt Turnover EV/EBITDA = [MV of Equity +Indenture written agreement between corp. & lender detailing
- Taxes - Change in total equity Days Sales in Rec = 365/Rec Net Invest in FA = (NFA END
terms of debt
= Operating Cash Flow = CFFA Turnover NFABEG) + Depr
Debenture unsecured debt, maturity of 10+ years Note
Ending Fixed Assets OR Receivables Turnover = Sales/A/R TD = CL + LTD
maturity -10 years
- Beginning Fixed Assets Interest paid on LT debt Days Sales in Pay = 365/Pay BVPS = TE/Shares
Sinking Fund account managed by bond trustee for early bond
+ Depreciation - Net cash from financing Turnover SPS = Sales/Shares
redemption
= Net Capital Spending = CFFA Pay Turnover = COGS/A/P Price-Sales Ratio = Share $/SPS
Call Provision option to repurchase bond at specified price before
Ending NWC % of Sales Method NWC Turnover = Sales/NWC EPS = NI/Shares
maturity
- Beginning NWC 1. everything on IS by g FA Turnover = Sales/Net FA
Planning Horizon long-range time period financial planning Call Premium amount by which call exceeds par value of bond
= Change in NWC 2. ST A & L (not N/P) by g Deferred Call call provision prohibiting company from redeeming
processes focuses on
Operating Cash Flow 3. g=(1+g)(x) x = bond early
Aggregation small invest. proposals of each operational unit are
- Net Capital Spending %capacity Call Protected bond during period in which cannot be redeemed
added, treated as 1 project
- Change in NWC a) if g < 1, FA stay at % of Sales Approach accounts are projected depending on by issuer
= CFFA current value Canada Plus Call compensates bond investors for interest
predicted sales level
b) if g > 1, multiply FA by Plug Variable adjusted to make sure pro forma balance sheet differential
amount balances Retractable Bond may be sold back to issuer before maturity
External Financing Needed (EFN) amount of financing to Clean
TotalPrice price
Dollar of bond
Return net of accrued
= Dividend Incomeinterest (quoted)
+ Capital Gain (loss)
CF to Creditors = interest paid net new LTD balance both sides of BS Dirty Price>coupon
If YTM price of rate,
bond including
bond priceaccrued
< int.,
par buyer pays
= Increase in Price + Coupon Payment
CF to Shareholders = dividends paid net new equity Dividend Payout Ratio = Cash Div/NI Div = NI Change in(full/invoice
value price)
(DISCOUNT)
Total Cash if Stock is Sold = Initial Investment + Total Return
CFFA CF to Creditors + CF to Shareholders E Plug Variable If YTM < coupon
Dividend Yield = rate,
Dt/Pt par value < bond
NI = dividends + addition to retained Retention/Plowback Ratio = RE/NI Div = Payout Ratio x price (PREMIUM)
BondCapital
Value Gains
= C x Yield = (Ptt+1
(1-1/(1+r) )/r +PF/(1+r)
t)/Pt t
Current Yield =
Earnings OR EBT EBT x tax rate New NI Fixed PR
% Total Return = Dividend Yield + Capital Gains Yield
Net Capital Spending = FA bought FA sold Full Capacity Sales = Current Sales/Capacity % of FA = CPN/PRC
F4: Bond Calculation = (Pt+1 + Dt)/Pt price = 100
*quoted Cap. Gains
Net Acquisitions = total installed cost of capital FA/Full Capacity Sales
acquisitions adjusted cost of disposals Max Sales Growth = (Full Capacity Sales/Current Sales) 1 Var(R)
Yield = YTM = (1/(T-1))
Cur. x
Yield[(R 1- R )2++(RT- R )2] *use sx for
Terminal Loss
Dividend Growth= UCC adjusted
Model cost ofcurrent
determines disposalsprice of Common Shares
Incremental Cash=Flows
TA L difference
RE b/w firms future CFs with d1 = current date
standard deviation PRC = clean price Fisher
Recaptured CCA adjusted cost of disposal UCC
stock Internal
project & Growth
without Rate = (ROA x R)/([1-[ROA x R]) Effect = 1+R =Average
Arithmetic (1+r)(1+h) = Sum of Returns/# of Returns = x
AverageGains
Capital Tax Rate
Yield=total
rate taxes/total taxable
at which value income
of investment Sustainable Growth
Stand-Alone Principle Rate = (ROE xbased
evaluation R)/([1-[ROE x R]) **AKA
on incremental CFs d2 = maturity date
under F1:1VAR
YLD = YTM OR R
grows max % sales increase
Sunk Cost incurred & cannot be removed, should not be Geometric Average = [(1+R1) x (1+R2) xx (1+RT)] 1 1/T

Common Stock equity without priority for dividends or considered Nominal Return = Total $ Return/Original Price
in bankruptcy Opportunity Cost most valuable alternative given up *use Fisher equation for real return & risk-free rate (R =
Common Stock Cash Constant Dividend Growth OCF
Flows PO = D1/(r-g) = DO x (1+g)/(r- Basic Approach = EBIT+D-Taxes
PO = (D1+P1)/(1+r) g) Top-Down Approach = Sales-Costs-Taxes
F3: Cash Flows, I% = r *will be paid *Just been Bottom-Up Approach = NI+D
Constant paid Tax Shield Approach = (S-C) x (1-TC) + (D x TC)
Dividend F2: Compound Interest
PO = D/r n=99999 I%=(r-g)/(1+g) PV Tax Shield on CCA = ([IdTc]/d+k) x ([1+0.5k]/1+k) PV
F2: Compound PMT=D1/(1+g) OR [DO x ([SndTC]/d+k) x (1/[1+k]n) Salvage
Interest (1+g)]/(1+g) Value Expected Return return on risky asset expected in future
n=99999 Expected Divided: DT = DO x Remaining Tax Shield = (UCC-S) x d x TCPortfolio
/(d+k)
T
group of assets (ex. stocks & bonds) held by
(1+g) Straight-Line Depreciation = (Initial Cost Gross Salvage
investor
Expected Stock Price: PT = PO Value)/Years Portfolio Weights - % of portfolios total value in asset
Non-Constant Growth x (1+g)T TC corporate tax rateDeclining Balance (CCA) = d x UCC Systematic Risk influences large # of assets (aka market
1. Compute dividends before constant growth I total investment capital risk)
DT = DO x (1+g)t added to pool Unsystematic Risk affects small # of assets (unique/asset-
2. Find expected FV of stock at time of constant d CCA rate EXAMPLES TO FIND specific risk)
growth k discount rate NPV:
Principle of Diversification spreading investment across #
PT = D1 x (1+g)t/(r-g) OR PT = DT/(r-g) Sn salvage value of assets eliminates some of risk
F2: Compound Interest OR Int Rate: Mn asset life in years Systematic Risk Principle amount of systematic risk
n=99999 I%=(r-g)/(1+g) n=4 present in risky asset relative to average risky asset
P/Y=1 P/C=1 Security Market Line (SML) positively sloped straight line
PMT = dividends before growth PV=-1 FV=1+r displaying relationship between expected mean and beta
*ex. compounded Market Risk Premium slope of SML (difference between
quarterly expected return on market portfolio and risk-free rate)
3. Compute current PV of stock Capital Asset Pricing Model (CAPM) equation of SML
t
PO = (D1 + PT)/(1+r) showing relationship between expected return Rate
and beta
Risk Premium = Expected Return Risk-free
F3: Cash
Stock Flow, I%=r
Valuation Using OR GrowthF2: Opportunities
Compound Interest
= E(R) - Rf
Multiples EPS = Div Expected Return = E(R ) = jRj x Pj
Pt = benchmark PE ratio x Value of share = EPS/r = Div/r Return Variance = 2 = j [(Rj E(R)]2 x Pj
Stock price after project = Portfolio Expected Return = E(Rp) = [x1 x E(R1)] + [x2 x E(R2)]
NPV difference between investment market value and
(EPS/r) + NPVGO ++ [xn x E(Rn)]
cost
Portfolio Variance = 2p = (x21 x 21) + (w22 x 22) + 2 x w1 x w2
Discounted Cash Flow Valuation (DCF) valuing
investment by discounting future cash flows x p x 1 x 2
Discounted Payback Period time for investments DCFs Total Return = Expected Return + Unexpected Return
to equal initial cost (Systematic + Unsystematic)
Internal Rate of Return (IRR) discount rate that makes = R = E(R) + U (m + )
NPV 0 Beta = I = piM x (i/M)
NPV Profile graph of relationship between NPVs and Beta of Portfolio = p = wj x j
discount rates Reward-to-risk Ratio = [E(RA) - Rf]/A (aka slope)
Multiple Rates of Return problem in using IRR CAPM = E(Ri) = rf + i[E(RM) rf]
NPV Payback Period Average Accounting *Find CCATS then input
F3: Cash Flow F3: Cash Flow Return cash Premium
Risk flows excess return required from investment in Arbitrage Pricing Theory (multiple) = rf + 1 x (E(R1) rf] +
I% = required rate I% = 0% AAR = Avg. NI/Avg. BV risky asset over risk-free environment 2 x (E(R2) rf] ++K x (E(RK) rf]
List 1 = cost, cash List 1 = cost, cash Avg. BV = Cost/2 Variance average squared deviation between actual return &
flows flows *accept if AAR > pre- average return
*if NPV > 0, *accept if PBP < Standard Deviation positive square root of variance
invest pre-set limit Normal Distribution symmetric, bell-shaped frequency
Discounted Payback IRR distribution defined by mean & standard deviation
Period F3: Cash Flow Value at Risk (VaR) maximum loss used by banks to
F3: Cash Flow I% = required rate manage risk exposures
I% = required rate List 1: cost, cash flows Geometric Average Return average compound return
List 1 = cost, cash flows *accept if IRR > earned per year over multi-year period *always lower
*accept if pays back on required return Arithmetic Average Return return earned in average year
discounted basis within *If signs change twice, 2 over multi-year period *nominal return
Profitability Index
Efficient Capital Market security prices reflect available
PI = 1+(NPV/initial investment) =
Benefit/Cost Ratio