BUSS384: Equations for the final exam

Cash flow from assets = Cash flow to creditors

+ Cash flow to stockholders
Where
a. Cash flow from assets = Operating cash flow (OCF) −
Net capital spending − Change in net working capital (NWC)
(1) Operating cash flow = EBIT + Depreciation − Taxes
(2) Net capital spending = Ending net fixed assets −
1 Cash flow identity
Beginning net fixed assets + Depreciation
(3) Change in net working capital = Ending NWC −
Beginning NWC
b. Cash flow to creditors = Interest paid − Net new borrowing
c. Cash flow to stockholder = Dividend paid −
Net new equity raised

2 Net working capital (NWC) Net working capital = current assets – current liabilities
Relationship between future
3 𝐹𝑉𝑡 = PV × (1 + 𝑟)𝑡 or PV = 𝐹𝑉𝑡 ⁄(1 + 𝑟)𝑡
value and present value
Present value of an annuity of C 1 − [1⁄(1 + 𝑟)𝑡 ]
4 dollars per period for t periods PV for an annuity = C × { }
with a discount rate r 𝑟
Present value for a perpetuity of
5 PV for a perpetuity = C⁄r
C dollars with a discount rate r
Present value for a growing
perpetuity of C1 dollars in the
6 PV for a growing perpetuity = 𝐶1 ⁄(r − g)
first period with a discount rate
r and a growth rate of g
Bond value if bond has (1) a
face value of F, (2) a coupon of Bond value = 𝐶 × [1⁄𝑟 − 1⁄(𝑟(1 + 𝑟)𝑡 )] + 𝐹 ⁄(1 + 𝑟)𝑡
7 Present value Present value
C, (3) t periods to maturity, and Bond value = +
(4) a yield of r per period of the coupons of the fact amount
Dividend discount model: price
8 𝑃0 = D/R
of stocks with zero growth
Dividend discount model: price 𝐷0 × (1 + 𝑔) 𝐷1
9 of stocks with constant growth 𝑃0 = =
(g) 𝑅−𝑔 𝑅−𝑔
Dividend discount model: price 𝐷𝑡 × (1 + 𝑔) 𝐷𝑡+1
10 of stocks with constant growth 𝑃𝑡 = =
(g) in Period t 𝑅−𝑔 𝑅−𝑔
E(𝑅𝑖 ) = 𝑅𝑓 + [E(𝑅𝑀 ) − 𝑅𝑓 ] 𝜷𝑖
Capital asset pricing model 𝑤ℎ𝑒𝑟𝑒 𝑅𝑀 : Market portfolio return or Market return
11
(CAPM): 𝑅𝑓 : Risk free return
𝛽𝑖 : Beta of Stock 𝑖
12 Levering (Unlevering) beta β𝑒𝑞𝑢𝑖𝑡𝑦 = β𝐴𝑠𝑠𝑒𝑡 [1 + (1 − 𝑇𝑐 ) 𝐷𝑒𝑏𝑡⁄𝐸𝑞𝑢𝑖𝑡𝑦]
1. Without Preferred stock:
𝑅𝑊𝐴𝐶𝐶 = (𝐸/𝑉) × 𝑅𝐸 + (𝐷/𝑉) × 𝑅𝐷 × (1 − 𝑇𝐶 ),
where V = E + D
Weighted average cost of
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capital (WACC)
2. With Preferred stock
𝑅𝑊𝐴𝐶𝐶 = (𝐸/𝑉) × 𝑅𝐸 + (𝐷/𝑉) × 𝑅𝐷 × (1 − 𝑇𝐶 ) + (𝑃/𝑉) × 𝑅𝑃
where V = E + D + P
14 Market value of equity Market value of equity = # of shares outstanding x stock price per share
Modigliani & Miller Proposition
15 VL = VU
I without taxes
r = r + (D/E) × (r0 – rD),
Modigliani & Miller Proposition E 0
16 where r0 = cost of equity capital for an all-equity-financed firm
II without taxes
rE = cost of equity capital for firm with D in debt
Modigliani & Miller Proposition
17 VL = VU + TcD
I with taxes
r = r + (D/E) × (1-Tc) × (r0 – rD),
Modigliani & Miller Proposition E 0
18 where r0 = cost of equity capital for an all-equity-financed firm
II with taxes
rE = cost of equity capital for firm with D in debt
(1−𝑇𝐶 )×(1−𝑇𝐸 )
VL = VU + [1 − 1−𝑇𝐷
]×D,
19 Miller model where TE = personal income tax rate on equity income
TD = personal income tax rate on interest income
𝑈𝐶𝐹
APV = ∑𝑇𝑡=1 (1+𝑟 𝑡)𝑡 − 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 + 𝑁𝑃𝑉 𝑜𝑓 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑛𝑔 𝑠𝑖𝑑𝑒 𝑒𝑓𝑓𝑒𝑐𝑡𝑠,
NPV: Adjusted present value 0
20 where UCFt = unlevered cash flow at time t
(APV) method
r0 = cost of equity capital for an all-equity-financed firm
𝐿𝐶𝐹𝑡
NPV = ∑𝑇𝑡=1 𝑡 − (𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 − 𝑎𝑚𝑜𝑢𝑛𝑡 𝑏𝑜𝑟𝑟𝑜𝑤𝑒𝑑),
NPV: Flow to equity (FTE) (1+𝑟𝐸 )
21 where LCFt = levered cash flow at time t
method
rE = cost of equity capital for firm with D in debt
𝑈𝐶𝐹
NPV = ∑𝑇𝑡=1 (1+𝑟 𝑡 )𝑡 − 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡,
22 NPV: WACC method 𝑊𝐴𝐶𝐶
where UCFt = unlevered cash flow at time t
Synergy gain = VAB – (VA + VB),
where VAB = value of a combined firm
23 Synergy gain from merger
VA = value of firm A as a stand-alone firm
VB = value of firm B as a stand-alone firm
NPV of a target firm (Firm B) in NPVB = cash payment - VB,
24
a cash acquisition where VB = value of firm B (target) as a stand-alone firm
NPVA = VAB – VA – cash payment,
NPV of a bidder firm (Firm A)
25 where VAB = value of a combined firm
in a cash acquisition
VA = value of firm A (bidder) as a stand-alone firm
NPVB = αVAB - VB,
NPV of a target firm (Firm B) in where α = fraction of the combined firm’s equity paid to Firm B (target)
26
a stock acquisition VAB = value of a combined firm
VB = value of firm B (target) as a stand-alone firm
NPVA = (1-α)VAB - VA,
NPV of a bidder firm (Firm A) where α = fraction of the combined firm’s equity paid to Firm B (target)
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in a stock acquisition VAB = value of a combined firm
VA = value of firm A (bidder) as a stand-alone firm