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Method to study & review

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. The value theory


1.1. The interest rate
- The simple interest method for investment period < 1 year:
+ FVn = Capital * (1 + interest rate * n)

- The compound interest method for investment period >= 1 year:


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

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

1.2. The time value of money


- 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

2. Investment decision rules


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

3.2. Loan cost = Overall Effective Rate (OER)

Step Description How to do


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

4 Use of the present value of an annuity formula A * OER / [1 - (1 + OER)-n] – AR = 0


5 Estimate of the solution using a linear interpolation 𝟎 − 𝐕𝐀(𝐢𝟏)
𝐎𝐄𝐑 ≈ 𝐢𝟏 + (𝐢𝟐 − 𝐢𝟏) ∗
𝐕𝐀(𝐢𝟐) − 𝐕𝐀(𝐢𝟏)

3.3. Comparison b/w leasing and loan


- 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

4.2. Stock evaluation


- 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

5. Firm’s valuation (case of Electrosign)


t n
FCFt Vn
V0   
Firm’s value: t 1 (1  r ) (1  r ) n
t

D E
WACC  i  (1   )   R
DE DE
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.

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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

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