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Annual rate of return reqd by investor

2. Market Value of Business Future annual cash flow

Cost of Capital

3. Future value PV(1+i)ⁿ

4. Present Value Future Value

(1+i)ⁿ

5. Future value of regular annuity A (1+i)ⁿ - 1

i

6. Present value of regular annuity A 1- 1

i (1+i)ⁿ

7. Future value of annuity due F.V. of regular annuity(1+i)

8. Present value of annuity due P.V. of regular annuity(1+i)

9. Present value of Perpetuity A

(it is an annuity continue forever) i

10. At IRR P.V. of cash inflows = P.V. of cash outflow

We find IRR by following methods

Interpolation = A + (L-I) * (B-A)

(L-H)

NPV falls by Rs. 1109 when D.F. increases by 2 %

NPV falls by Re 1 when D.F. increases by 2

1109

NPV falls by Rs. 1176 when D.F. increases by 2 * 1176

1109

12 – i = NPV at 12% - actual return

13-12 NPV at 13% - NPV at 12%

11. Kd ( Cost of Debt)

When only int rate is given ( Irredeemable Debenture)

Kd = I(1-t)

When floatation cost is given along with redemption value (Redeemable Debenture)

Kd = I(1-t) + RP - IP

n

------------------

RP + IP

2

n

---------------------------

RP+NP

2

P0 =D & P0 = D1 [D1 = D0(1+g)]

Ke Ke – g

[g = b(retension ratio) * r(return on equity)]

Ke is nothing but reciprocal of P.E. Ratio

ROE = PAT

EQ

14. Value of Growth Opportunities (Vg)

Vg = share price with growth – share price without growth

Vg = D1 - EPS/DPS OR Vg = P0 - EPS

Ke - g Ke Ke

15. Ko = WeKe + Wdkd

16. vL = vuL + P.V. of interest tax shield Sales xxx

Vd * Tax Rate)

(P.V. of interest tax shield = (-)V. cost xxx

17. Leverage (Basically it is how will you manage your fixed cost) Contribution xxx

(-) F. cost xxx

Operating Leverage = Contribution

PBIT xxx

PBIT

(-) Int (Fin) xxx

PBT xxx

Financial Leverage = PBIT (-) Tax xxx

PBT PAT xxx

Combined Leverage = Operating Leverage * Financial Leverage (-) Pref Divd xxx

18. Cash Flow = PAT + Depreciation Or, PATES xxx

PBDT (1-t) + Dep. Tax Shield (Dep. Tax shield = dep * tax rate)

19. Accounting rate of return = PAT

Net Investment

20. NPV = P.V. of cash inflow – P.V. of cash outflow

21. Profitability index = P.V. of cash inflow

P.V. of cash outflow

22. Annualized NPV (A.E.B.) = NPV

P.V. of annuity factor Both Formula is used when project

23. Annualized equivalent cost = P.V. of total outflow lives are unequal

P.V. of annuity factor

24. Point of view

Long term

• Take outflow as Total Outflow (investment in eq + long term funds)

• Take inflow as PBIT(1-t) + depreciation

Equity point of view

• Take outflow as Investment in Equity

• Take inflow as (PBIT-int) (1-t) + depreciation

25. Modified NPV

Calculate future value of cash inflow using the reinvestment rate given.

Calculate the present value of resultant figure using cost of capital.

26. Modified IRR = While calculating IRR the intermediate cash flows are being reinvested at IRR

but if it is not so (i.e. the intermediate cash flow are reinvested other than IRR then we need to

calculate Modified IRR)

Calculate future value of cash inflow using the reinvestment rate given.

Calculate the present value of resultant figure using cost of capital.

Find IRR by Interpolation

27. Adjusted Present Value (APV) = Base case NPV + Side effects of financing charges

Base case NPV = P.V. of cash flow before interest discounted at cost of unlevered equity.

Side effects of financing charges = P.V. of interest tax shield (discounted at cost of debt)

Here cash flow = EBIT(1-t) + depreciation

Take 1 assumption that project under evaluation is financed by equity only.

28. Risk Analysis

Risk adjusted discount rate = risk free rate + risk premium

A. Here risk free rate = cost of capital

29. certainity equivalent approach (denoted by alpha or K)

We have to calculate certain cash flow & discount it with risk free rate of return.

1 indicating NO RISK & 0 indicating EXREME RISK

Higher the risk lower the value of alpha

30. Statistical Distribution = Here we measures RISK using Standard Deviation ( σ)

Steps

Calculate mean of NPV/Return i.e.

Find deviation i.e. X -

Find (X - )² * P = Variance

σ = √variance

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