Formulas BUS241

Div 1 +P1 −P 0
r E=
Stocks: Holding Period Yield (Return): P0

Discounted dividend model (DDM, also applies for the two stage DDM model:
Div 1 Div 2 Div N PN
P0 = + 2
+ .. .+ N
+
1+r E ( 1+ r E ) (1+ r E ) ( 1+r E ) N
Div 1
P0 =
Constant Growth DDM model r E −g

Earnings Growth Rate = Retention Rate X Return on New Investment (ROE)

Where Retention Rate = 1 – Payout rate
If earnings growth rate is the same as the dividend growth rate, then
G = Retention Rate X Return on New Investment

Project Evaluation: NPV = PV(Benefits) – PV(Costs). This is the most accurate method
IRR is the discount rate that sets NPV = 0
Profitability index = Value Created/Resource Consumed = NPV/Resource consumed
Payback period is the number of periods to pay back the initial investment

Capital Budgeting

Incremental Earnings = (Incremental Revenues – Incremental Cost – Depreciation) X (1-Tax Rate)

Free Cash Flow = (Revenues – Costs – Depreciation) X (1 – Tax Rate) + Depreciation – CapEx –
Change in NWC
After-Tax Cash Flow from Asset Sale = Sale Price – (Tax Rate X Capital Gain)
NPV of the project is the Discounted Cash Flow of the projects.
Accounting breakeven: set EBIT=0 to calculate the parameter value interested
NPV breakeven: set NPV=0 to calculate the parameter value interested
Scenario analysis vs Sensitivity analysis

Discounted Cash Flow (DCF) Model for Stock Valuation

Enterprise Value (Vo) = Market Value of Equity + Debt – Cash = PV(Future Free Cash Flow of Firm)

V 0 +Cash0 −Debt 0
P0 =
Share Price: Shares Outstanding

FCF 1 FCF 2 FCF N VN

V 0= + 2
+. . .+ N
+
DCF Intrinsic Value of the Firm:
1+ r WACC (1+ r WACC ) (1+ r WACC ) ( 1+ r WACC )N

FCF N+1 1+g FCF

Constant growth model of DCF:

VN= =
(
r WACC −g FCF r WACC−g FCF
×FCF N
)