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You are on page 1of 4

Class attendance Home review with notes final review and re-doing exercises & CSs in the slide & last intake’s

exam by calculator:

- Read all slides: 1 day

- Do exercises: 3 days

- Do final exam: 1 days

- Group review = 2 days

1.1. The interest rate

- The simple interest method for investment period < 1 year:

+ FVn = Capital * (1 + interest rate * n)

+ FVn = Capital * (1 + interest rate)n

- Financial year = 360 days, month = 30 days. But for long-term bond, the calendar year is used

- Overview of compound interests:

One cash flow (CF) Annuity

Capitalization (present future) FVn = CF * (1 + i)n FVn = Annuity * {[(1 + i)n-1]/i}

Discounting (future present) PV = CF / (1 + i)n PV = Annuity * {[1 - (1 + i)-n]/i}

- Proportional rates: iA = 2iS = 4iQ = 12iM

- Equivalent rates: 1 + iA = (1 + iM)12

- Opportunity cost: the best available expected return offered in the market on an investment

𝑛

𝐶𝐹𝑡

- 𝐍𝐏𝐕 = ∑ (1+𝑖) 𝑡 − 𝐈𝟎

𝑡=1

+ Invest if NPV > 0 and do not invest if NPV < 0

+ NPV does not depend on accounting method

+ NPV(A + B) = NPV(A) + NPV(B)

- Payback investment rule: giving the number of years to pay back the initial investment

+ Simple payback: ignoring the time value of money

+ Discounted payback: counting the time value of money with a discount rate

- The internal rate of return (IRR): is the discount rate that sets initial investment equal to the PV of

future cash-flows:

𝑛

𝐂𝐅𝐭

𝐂𝐅𝟎 = ∑

(1 + 𝐈𝐑𝐑)𝑡

𝑡=1

+ Invest if IRR > other alternatives with equivalent risk and maturity

+ IRR determined by the linear interpolation method:

0 − VA(i1)

𝐈𝐑𝐑 ≈ i1 + (i2 − i1) ∗

VA(i2) − VA(i1)

n n

𝐂𝐅𝐭 𝐂𝐅𝐭

VA(i1) = ∑ (1+𝐢𝟏) t − 𝐂𝐅𝟎 > 0 , VA(i2) = ∑ (1+𝐢𝟐)t − 𝐂𝐅𝟎 < 0

t=1 t=1

- Cash flow (CF) = the difference b/w operating CF and CAPEX net of fixed assets disposals

Or the difference b/w the money collected and given by the firm:

+ How to calculate (case of Labonevance)

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3. Debt financing

3.1. Loan financing

- Bullet payment: loan is repaid in one single payment of maturity

- Repayment by annuity: the same amount total payment = annuity for each payment

- Repayment by tranches: the same amount of principal for each payment

- Amortization schedule of the loan:

Beginning balance Interest payment (IP) Principal payment (PP) Total payment (TP) Remaining balance

Bullet X =X*i 0 (/ X if maturity) = IP + PP = X - PP

Annuity X =X*i = TP - IP Annuity = X - PP

Tranches X =X*i X / no of period = IP + PP = X - PP

1 Calculation of the annuity (A) A = P * i / [1 - (1 + i)-n]

2 Calculation of the amount received (AR) AR = loan – filing fee

𝑛

3 Determination of the equation 𝐀

𝐀𝐑 = ∑

(1 + 𝐎𝐄𝐑)𝑡

𝑡=1

5 Estimate of the solution using a linear interpolation 𝟎 − 𝐕𝐀(𝐢𝟏)

𝐎𝐄𝐑 ≈ 𝐢𝟏 + (𝐢𝟐 − 𝐢𝟏) ∗

𝐕𝐀(𝐢𝟐) − 𝐕𝐀(𝐢𝟏)

- Acquisition financed by a loan:

Beginning Interest Principal payment Total payment Remaining Tax saving related Net cash-flow

balance payment (PP) (TP) balance to interest paid (TS) (NCF)

(IP)

Bullet X =X*i 0 (/ X if maturity) = IP + PP = X - PP = IP * i = TP - TS

Annuity X =X*i = TP - IP Annuity = X - PP = IP * i = TP – TS

Tranches X =X*i X / no of period = IP + PP = X - PP = IP * i = TP - TS

𝑛

𝐍𝐂𝐅𝐭

𝐋𝐨𝐚𝐧 = ∑

(1 + 𝐢)𝑡

𝑡=1

0 − VA(i1)

→ 𝐀𝐟𝐭𝐞𝐫 𝐭𝐚𝐱 𝐜𝐨𝐬𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐥𝐨𝐚𝐧 = i1 + (i2 − i1) ∗

VA(i2) − VA(i1)

- Leasing:

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Year Rent Tax saving associated to After tax rent Machine Tax saving loss related to Net cash-flow (NCF)

the rent (TS) (ATR) depreciation (D) depreciation (TSL)

1 =X =X*i = X - TS =D =D*i = ATR + TSL

𝑛

𝐍𝐂𝐅𝐭

𝐋𝐞𝐚𝐬𝐞 = ∑

(1 + 𝐢)𝑡

𝑡=1

0 − VA(i1)

→ 𝐋𝐞𝐚𝐬𝐞 𝐜𝐨𝐬𝐭 = i1 + (i2 − i1) ∗

VA(i2) − VA(i1)

3.4. Bond financing

- Theoretical price of a zero-coupon bond:

+ Simple interest: P = FV / (1 + i*n), FV: Face value

+ Compound interest: P = FV / (1 + i)n

- Theoretical price of a bullet bond: using linear interpolation solver

𝑛

𝐂𝐭 𝐅𝐕

𝐓𝐡𝐞𝐨𝐫𝐞𝐭𝐢𝐜𝐚𝐥 𝐩𝐫𝐢𝐜𝐞 = ∑ + , 𝐶: 𝑏𝑢𝑙𝑙𝑒𝑡 𝑐𝑜𝑢𝑝𝑜𝑛

(1 + 𝐢)𝑡 (1 + 𝐢)𝑛

𝑡=1

- The yield to maturity (YTM): is the discount rate that sets the present value of the promised bond

payment equal to the current market price of the bond.

+ YTM of a zero-coupon bond: P = FV / (1 + YTM)n

+ YTM of a bullet bond: P = C * {[1 - (1 + YTM)-n]/YTM} + FV / (1 + YTM)n Using linear

interpolation solver

4. Stock financing

4.1. Capital increase

- Earning Per Share (EPS) = earnings / # share

- Preferential subscription rights (PSR) = right attached to each existing share allowing its holder to

subscribe to the new share issue on a pro rata of the number of shares held.

N0 P0 +Ni Pi nP0 +Pi

- P1 = =

N0 + Ni 𝑛+ 1

P0 −Pi P1 −Pi

- P𝑃𝑆𝑅 = P0 − P1 = =

𝑛+ 1 𝑛

n = N0 / Ni: the new rights issue ratio, N0, Ni are # existing shares and new shares

P0, Pi, P1: Stock price of existing share, new share and after the capital increase

- Multi period model: Just to know the calculation logic of 03 below models

H

𝐃𝐭 𝐏𝐇

𝐏𝟎 = ∑ +

(1 + 𝐫)t (1 + 𝐫)H

t=1

- Price Earning Ratio (PER) model: PER = Stock price / EPS = Market value of equity / total earnings

+ PER is an expensiveness indicator: firm’s PER is lower than the industry cheaper buy and vice versus

PER > PER industry overvalued, PER < PER industry undervalued, else fairly priced

- Gordon-Shapiro model: P0 = D1 / (r – g) , g: constant growth rate of dividend

+ If P0 > current price undervalued, if P0 < current price overvalued, else fairly priced

- Capital Asset Pricing Model (CAPM): E(Ri) = Rf + β(Rm – Rf)

E(Ri): The expected return on the capital market, Rf: the risk-fee rate (AAA), Rm: The expected return

of the market, β: Risk coefficient of the asset

+ If E(Ri) > analyst overvalued, if E(Ri) < analyst undervalued, else fairly priced

t n

FCFt Vn

V0

Firm’s value: t 1 (1 r ) (1 r ) n

t

D E

WACC i (1 ) R

DE DE

With i - the cost of debt; τ - the tax rate, D - the market value of Debt, E - the market value of Equity, R -

the cost of equity.

Page 3 of 4

Final exam notes

Chapter 1:

Value theory: will not give formulas

Chapter 2:

Rule: NPV, Payback, IRR

Linear interpolation formula will be given and the boundaries

Cash-flow calculation

Chapter 3:

Debt financing:

- Bullet, annuity, tranches

- Cost of a loan

Chapter 4:

Have not to remember formulas, just know how to use

Chapter 5:

Have to apply the steps, not formulas and steps

Page 4 of 4

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