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Kelly's Finance Cheat Sheet V6

Kelly's Finance Cheat Sheet V6

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Published by Kelly Koh

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Published by: Kelly Koh on Mar 06, 2012
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06/10/2015

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Chapter 2: Financial Statements, Taxes & Cash Flow
 
Income
= Revenue
 –
Expenses
 
Earnings per share
= NI/total shares outstanding
 
Dividend/Share
= Total dividends/total shares o.
 
Cash flow from assets
= OCF - NCS -
NWC
=
Cash flow to creditors + CF to stockholders
 
CF to creditors
= Interest
 –
net new borrowings
 
CF to stockholders =
Dividends
 –
net new equity
 
OCF
= EBIT + Depreciation
 –
TaxesBottom-up = Net Income + Depreciation +
Interest 
Top-down = Sales
 –
Cost - TaxesTax Shield = (Sales
 –
cost)(1
 –
T) + (Depr x T) + (
Interest 
+ T)
 
NCS
= End net fixed assets
 –
Begin NFA + Depre
 
NWC
= Ending NWC
 –
Beginning NWC= End (CA
 –
CL)
 –
Begin (CA-CL)
 
Avg tax rate
= Tax/taxable income
 
Marginal tax rate
= Tax payable on next dollar earned
Chapter 3: Ratios
ST Solvency
 
Current ratio
= Current assets/Current liabilities
o
 
To creditor
 –
high ratio better, but maybe inefficient cash useLow ratio - not a bad sign for company with large reserve of untapped borrowing power
 
Quick ratio
= (CA-Inventory)
 –
CL
Cash ratio
= Cash/CL
o
 
Large, slow-moving inventory
ST trouble
 
NWC to total assets
= NWC/TA
 
Interval measure
= CA/Avg daily operating costLT Solvency
 
Total debt ratio
= (TA
 –
TE)/TA
o
 
x% of assets financed by debt, rest by equity
o
 
Debt-equity ratio
= TD/TE = TD ratio/(1- TD ratio)
o
 
Equity Multiplier
= TA/TE = (TE + TD)/TE = 1 + D/E
 
LT Debt ratio
= LT Debt/(LT Debt + TE)Coverage Ratio (likelihood of default)
 
Times Interest Earned ratio
= EBIT/Interest
 
Cash coverage
= (EBIT + Depre)/InterestTurnover Ratios
 
Inventory turnover
= COGS/Inventory
 
Receivables turnover
= Credit sales/Acct receiv
 
Payable turnover
= COGS/Acct payable
 
Days’ sales in
 ___
= 365 days/___ turnov.Asset Turnover Ratios
 
NWC turnover
= Sales/NWC
 
Fixed asset turnover
= Sales/Net fixed asset
 
Total asset turnover
= Sales/TA
o
 
Every $1 in TA generate $x in salesProfitability Ratios
 
Profit margin
= Net income/Sales
 
ROA
= Net income/TA
ROE
= NI/TE = ROA x EMMarket Value Ratios
 
Market-to-book ratio
= Mkt value per share ÷ bk value per share
 
Price-sales ratio
= Price per share/Sales per share
 
PEG ratio
= Price-earnings ratio/earnings growth rate
 
Price-earnings ratio
= Price/share ÷ earnings/shareDu Pont Identity
 
ROE
= Profit Margin (operating efficiency) x TAT (asset useefficiency) x Equity Multiplier (financial leverage)
o
 
(NI/sales) x (sales/assets) x (TA/TE)
 
Chapter 4: LT Financial Planning & Growth
 
Internal growth rate
=
    
 
o
 
b
= plowback (retention) ratio
o
 
b
= 1- dividend payout ratio
o
 
b
= addition to retained earnings/NI
o
 
Max. growth rate attain with no ext. financing
 
Sustainable growth rate
=
    
 
o
 
Max. growth rate attain with no ext. equity financing whilemaintaining a constant D/E ratio
Chapter 5/6: TVM
 

,
 


, PV factor = 1/(1 + r)
t
 
 
Rule of 72
: Time taken to double $ = 72/r%
 
Annuit
y,



 
=

 
 
 
Annuity due
= start of each period
 
= Ordinary annuity x (1 + r)
 
Growing annuity
,
 
Perpetuity,

 
Growing perpetuity
,


 
 
EAR =


 
APR
=
 


 
 
APR/quoted rate
= period rate x no. of periods/year
 
Continuous compound
g
,
 


 
 
Partial Amortization
 
 –
Balloon payment (PV of remaining)
Chapter 8: Interest Rates & Bonds
 
Coupon rate (pmt)
= Annual coupon/Face value ($1000)
 
YTM (r)
= Rate required in mkt for bond (find r on fin cal.)
o
 
Current Yield + Capital Gains Yield
o
 
Affected by i/r, default, inflation, taxability, liquiditypremiums / bond values move inversely with interest r
 
Interest payments are tax deductible (1 - tax rate) x payment
 
Current yield
= (Coupon/current price)
YTM
 
Capital gain yield
= (New price
 –
original price)/original price
 
Effective current yield = EAR
 
 
Bond value (pv)
=
 



 
o
 
= PV of coupons + PV of face amount
 
Bonds of similar risk will be priced to yield a similar returnregardless of coupon rate / interest rate decline buy zero, LT
 
Bonds selling at par can have any length of maturity
 
Longer time to mature
greater interest rate risk
 
Lower coupon rate
greater interest rate risk
 
Zero coupon bonds
 
need to sell more bonds and incurgreater repayment but has yearly cash inflow(in the form of interest tax shield of debt) instead of outflow
 
Interest payt of zero
 
P
1
 
 –
P
0 ,
CF (in)
 
No. of bonds sold x taxrate x interest payment of zero bond
 
CF (out) of cupn bds:
No. of bonds x coupon payt x (1
 –
tax rate)
 
Holding Period Yield:
r of new FV (sale price) & N (holding time)
 
Inflation
 –
Fisher Effect
(1 + Nominal rate) = (1 + real rate) x (1 +expected inflation rate)
 
 
Know P
a
, estimate YTM
a
use it to find P
b
 
o
 
Dirty price
 
 –
price actually paid to buy
o
 
Clean price
 
 –
 
price ‘quoted’ in mkt
 = Dirty price
 –
accrued interest (of coupon)
Chapter 8: Stock Valuation
 
Stock price
= PV of future dividends, R = required return
 
 
Dividend growth model
,

 
 
Cost of preferred stock
= dividend yield = D
1
/P
0
 
 
P
t
= D
0
x (1 + g)
t+1
/ ( R
 –
g ) = P
0
x (1 + g)
t
 
 
Required return
, R =capital gains yield + dividend yield
 
 
Capital gains yield =
g
Dividend yield =
D
1
/P
0
 
 
Supernormal
, Dividend grows steadily aft t periods,
 



 
 
   
 
Chapter 9: Investment Decisions
 
Payback period / Discounted payback period
o
 
(+)tmv, easy to understand, reject (-) NPV
o
 
(-) arb pt, ignore CF aft, +NPV rej. cos too long
 
Avg Accounting Return
(Avg NI/Avg Book Value)
 
o
 
(+) easy to calculate, info available
o
 
(-) no tmv, bk value, not mkt or cashflow
o
 
Avg bk value = (initial + end)/2
 
IRR
(acpt if > required return or WACC) , NPV=0
 
o
 
(-) Nonconventional cash flow & Mutually exclusive projects
o
 
Crossover rate = IRR of NPV (B-A)
o
 
(+) related to NPV, easy to understand
 
Profitability Index
(NPV/Initial investment)
 
o
 
> 1 for +NPV, < 1 for
 –
NPV
Chapter 10: Capital Budgeting (Investment decisions)
 
Pro forma (Sales, VC, FC, Depre, EBIT, T, NI)
 
X Sunk cost ,
Opportunity cost, Erosion Good prj, NPV > 0
 
EAC
= NPV cost on annual basis (PMT)
 
Aft tax salvage value = S x (1-T)
 
NWC returns to the firm at the end (depends on qn)
Chapter 12: Some Lessons from History
 
Risk premium
: excess return required from risky asset overrequired from risk-free investment (1: Risky asset earn riskpremium; reward for bearing risk) (2: Greater potential reward,greater the risk
 
Var(R) =
1/(T
 –
1) x [(R
1
 
 –
 
Mean)
2
 
+ … + (R
T
 
 –
Mean)
2
]
 
Arithmetic avg return
(R
1
+ R
2
 
+ … R
T
)/T (>Geometric)
 
Geometric avg return
[(1 + R
1
) x (1 + R
2
) x … x (1 + R
T
)]
1/T
 
 –
1
o
 
What actually earned per year on avg, compounded annually
o
 
AAR
too high for longer period, GAR
too low for shorter
 
Efficient capital mkt
: security prices reflect available info
 
Efficient mkts hypothesis
: actual capital mkt are efficient
 –
NPVof projects are 0 (mkt value of investment & cost = 0)
 
Chapter 13: Return, Risk and SML
 
Expected return, E(R)
= Weighted avg of possible returns
 
Risk premium
= Expected return of stock
 –
risk-free rate (R
)
 
Variance
,
= E[(R
 –
E[R])
2
] =
 
 
 
Standard dev,
=
  
 
- measures volatility or total risk
 
Portfolio exp return =
weighted returns from each stock
 



 
 
Portfolio weights
,
     
 
 
Variance of 2-stock portfolio
,





 
 
Covar. btw returns R
1
and R
2
,
Cov 
(R
x
,R
y
)
=
E[ 
(R
x
 
 –
E[R
x
]) (R
y
 
 –
E[R
y
])
 ] =

 
 
Correl. btw returns R
1
& R
2
,





 
 
Variance of N-stock portfolio
,







 
 
Variance of equally-weighted N-stock portfolio
,
 

 
    
    
 
 
Unless all stocks in portfolio hv perfect positive correlation of +1, risk of portfolio < weighted avg volatility of individual stocks
 
Diversification
unsystematic risks for each stock avged out
 
Portfolio with R
asset,
[
R
 xp
] = (1
 –
 
 x 
)
 f 
+
 xE 
[
R
 p
]=
 f 
+
 x 
(
[
R
 p
]
 –
 
 f 
)
 
SD
[
R
 xp
] =




 =
 

 
 
 
Efficient portfolio
: no way to reduce portfolio volatility w/olowering expected return;
inefficient
: possible find another way
 
Efficient frontier
: set of efficient portfolios, those offeringhighest possible E(R) for given volatility, northwest edge of curve
 
Long
: positive investment
Short
: negative investment
 
Short sale
: sell a stock tt not owned then buy tt stock back later
 
Short sales
volatility of portfolio > volatility of stocks within
 
Sharpe ratio =
 

/
 
Reward-to-volatility ratio
 
Optimal portfolio:
Tangent to efficient frontier of risky invest.
 
Investor will determine how much to invest along the tangent orthe
capital market line
depending on taste of risk
 
CAPM
=

 

 
 


  









- measuresystematic risk.
Beta of a portfolio,
 
 
Assumptions:
buy&sell at competitive mkt prices + borrow/lendat risk-free interest rate; only efficient portfolios are held for agiven volatility; homogeneous expectations regarding future
 demand same efficient portfolio (not possible in real life)
 
SML
 –
 
linear r/s between a stock’s
beta
 
and it’s
expected return
 
 
Chapter 15: Cost of Capital = cost of (equity + debt + pref stock)
 
Cost of equity
, Dividend Approach,
R
= (
D
1
/
P
0
) +
g
 
 
SML Approach,
(
R
) =
R
 f 
+
β
x [
(
R
M
)
 –
 
R
 f 
]
 
 
Use
average
of SML and Dividend approach if cannot decide
 
Cost of debt
, YTM on bonds / Cost of Pref Stock, R
P
= D/P
0
 
 
WACC
=
(E/V)(R
E
) + (D/V)(R
D
)(1
 –
T
C
)
+ (P/V)(R
P
 )
 
 
Tend to accept unprofitable investments w/ risk > than firm
 
Reject some +NPV & accept some
 –
NPV projects
 
Pure play approach
 
 –
use of WACC tt unique to particular prj
 
Avg floatation cost,
A
= (E/V) x f 
E
+ (D/V) X f 
D
 
True cost = Amount needed / (1
 –
floatation cost%)
Chapter 17: Financial Leverage & Capital Structure Policy
 
M&M I:
Value of levered firm is equal to unlevered firm
 
V
L
= V
U
 
> 1.firm’
s capt. struct. irrelevant 2.firm WACC is same
 
M&M I - Homemade leverage:
borrow & lend on their own
 
Since R
 
D
< R
 
E
, as D/V
, WACC
, V
Equity = EBIT/R
u
 
M&M II:
cost of equity,
R
E
= R
A
+ (R
A
 
 –
R
D
) x (D/E),
R
A
-WACC
 
 
1.Cost of equ rises as debt use increase 2.risk of equ depends oni. Business risk (R
A
) ii.financial risk [(R
A
 
 –
R
D
) x (D/E)]
 
 
Required return rate on firm’s asset R
A
, cost of debt R
D
and D/E
 
Solve for R
E
, calculate WACC -> remains same for diff D/E ratio
 
 
R
E
= R
U
+ (R
U
 –
R
D
) x (D/E),
when R
U
= R
E
= WACC, interest r > R
D
 
 
M&M I w/ taxes,
 
V
L
= V
U
+ (T
C
x D)
> 1. debt fin is v advantag,optimal capital structure is 100% 2.lower WACC w/ more debt
 
 
PV of interest tax shield =
(T
C
x D x R
D
)/R
D
= T
C
x D
 
 
M&M II w/ taxes, R
E
= R
A
+ (R
A
 
 –
R
D
) x (D/E) x (1
 –
T
C
) >
same
 
V
U
= (EBIT
 –
Taxes )/R
U
= [EBIT x (1-T
C
)] /R
U
V
L
= V
U
+ T
C
x D
 
 
E = VL
 –
D, find E/D, find RE using M&MII w/ taxes, find WACC
 
 
Static theory:
Too much debt increase prob. of fin distress dueto bankruptcy (optimal: tax benefit of debt = cost of distress)
 
 
Chapter 18: Dividends & Dividend Policy
 
Declaration date
: declares payment;
ex-dividend date
: 2business days before date of record
 –
buy on day or after nodividend;
date of record
: holder of stock determined;
 
Capital mkt imperfection
:
Low-payout
(personal income tax +floatation cost + dividend restrictions)
High-payout
(Corp tax +institutional investing requmt + transact. costs + current income)
 
Clientele effect
Payout does not matter assuming equilibrium
 
Residual dividend approach:
payout
 
aftr meeting invest. needsand maintain desired D/E ratio (Dividend stability consideration)
 
Compromise dividend approach:
 
Stock repurchase:
prefer repurchase
 
(akin a cash dividendprogram provided no taxes or other imperf.) homemade divide.
 
Stock dividend/stock split:
no change in equity (trading range)
 
Dividend policy does not matter
 –
firm reinvest capital > payhigher dividends in the future bt offset of lower PV factorassociated w/ CF
Homemade dividends policy w/ perfect mkt
 ),( )( )(
 common toisriskthats
of Fractionof Risk Totalheldof Amountportfoliotheof volatility theon tocontributis
Security
Piiiii piiiP
R RCorr  RSD x RSD
        

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