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**CAPM / Cost of Equity:
**

Market risk premium: rm - rf

Unlevered/Levered Beta:

After tax cost of debt (rd) = Before-tax cost of debt * (1-t)

After tax cost of debt (rd) = BTrd * (1-t)

After tax cost of debt (rd) = YTM * (1-t)

After Tax Cost of debt = (Treasury yield + spread) * (1-t)

Interest Coverage Ratio = EBIT / Interest Expenses

Cost of Preferred Stock:

,

_

¸

¸

+ +

+

,

_

¸

¸

+ +

+

,

_

¸

¸

+ +

· ·

PS D E

PS

r

PS D E

D

r

PS D E

E

r WACC tal Costofcapi

ps d e

Cash Flows:

Straight line depreciation: (Original asset value – salvage value) / number of years to be depreciated

EBIT=Rev – Operating expenses (COGS) – SGA Exp – Other allocated expenses - Depr.&Amort.

Cash flow to firm = EBIT(1-t) + Depr.&Amort. – Chg in WC – Cap Exp.

Leases:

Operating lease cash flows: lease payments * (1 – t)

Buy/borrow cash flows: Interest expense (after tax), Principal payment, Maintenance expenses (after tax),

Depreciation tax benefit, Salvage value (after tax)

The net advantage to leasing : NPV of lease option – NPV of buy option

Convertible Bonds:

Conversion option = Convertible bond price – value of straight bond component

Value of a bond

Conversion ratio = # of shares for which each bond may be exchanged

Conversion value = current value of shares for which the bonds can be exchanged

Conversion premium = bond price – conversion value

( )( ) E D t

L

u

/ 1 1 − +

·

β

β

ps

ps

ps

P

D

r ·

( )

f m f e

r r r r − + · β

n

r

incipal

) 1 (

Pr

r

r) + (1

1

- 1

C =

n

+

+

1

1

1

1

]

1

¸

**Venture Capital Method:
**

Exit or terminal value = P/E multiple * forecasted earnings

Discounted terminal value =

( )

n

etreturn t

xitvalue Estimatede

arg 1+

VC ownership proportion = Capital provided / discounted terminal value

IPO Underpricing:

Underpricing (return) = (first day closing price – offer price) / offer price

Rights offerings:

Rights required to purchase one share = # of original shares

# of shares issued in RO

Value of the right = rights-on price – subscription price

n + 1

OR rights-on price – ex-rights price

Ex-rights price = New value of equity

New number of shares

Benefits/Costs of debt:

Yearly tax benefit from debt = Tax Rate * Interest Payment

Cost of Capital Approach to Optimal Capital Structure:

Implied growth rate assuming constant growth model:

Firm Value (Stable growth) = CF to Firm (1 + g) / (WACC -g)

Firm Value opt WACC- Firm Value orig WACC

Dividend policy:

Relationship between prices, dividends and tax rates around ex-dividend day:

Free cash flow to equity = Net Income + Depr&Amort – Chg in WC – Cap Exp

+ (New Debt Issue – Debt Repay) – Pref. Dividends

Estimated FCFE = Net Income - (1- δ ) (Capital Expenditures - Depreciation)

- (1- δ ) (Chg in WC) – Preferred Dividends

where δ is the debt ratio (D / (D+E) and

Chg in WC = WCt – WCt-1

where WC = Non-cash current assets – non-debt current liabilities

CF to stockholders to FCFE Ratio = (Dividends + Buybacks) / FCFE

) 1 (

) 1 (

0

cg

A B

t

t

D

P P

−

−

·

−

V CF

CF WACC V

g

+

−

·

*

Valuation:

Relative valuation (P/E, P/BV, P/S):

Firm value = Comparable multiple * Firm-specific denominator value

PEG = (P/E)/ Growth

P = stock price

E = Net Income adjusted for transitory components

BV (of equity) = total shareholders equity – preferred stock

Profit margin = Net income/Sales

Retention ratio = 1 – Dividends/Earnings

DCF valuation:

N

e

r

alValue Ter

) 1 (

min

) r + (1

Equity to CF

= Equity of Value

N = t

1 = t

t

e

t

+

+

∑

Terminal value:

g = b * ROE

Stock value using constant (stable) growth model:

PV equations:

Present value of multiple cash flows:

Present value of a perpetuity:

r

CF

PV ·

Present value of single future cash flow:

t

r

FV

PV

) 1 ( +

·

1

1

1

1

]

1

¸

r

r) + (1

1

- 1

A = n) r, PV(A, = Annuity an of

n

PV

( )

∑

·

+

·

n

t

t

t

r

CF

PV

1

1

∑

n = t

1 = t

t

e

t

) k + (1

Equity to CF

= Equity of Value

s e

s N

g r

g CFtoEquity

−

+ ) 1 ( *

g r

g CF

e

−

+ ) 1 ( *

0

(1.δ ) (Chg in WC) – Preferred Dividends where δ is the debt ratio (D / (D+E) and Chg in WC = WCt – WCt-1 where WC = Non-cash current assets – non-debt current liabilities CF to stockholders to FCFE Ratio = (Dividends + Buybacks) / FCFE .(1.δ ) (Capital Expenditures .Firm Value orig WACC Dividend policy: Relationship between prices.Depreciation) .Venture Capital Method: Exit or terminal value = P/E multiple * forecasted earnings Estimatede xitvalue n Discounted terminal value = (1 + t arg etreturn ) VC ownership proportion = Capital provided / discounted terminal value IPO Underpricing: Underpricing (return) = (first day closing price – offer price) / offer price Rights offerings: Rights required to purchase one share = # of original shares # of shares issued in RO Value of the right = rights-on price – subscription price n+1 OR rights-on price – ex-rights price Ex-rights price = New value of equity New number of shares Benefits/Costs of debt: Yearly tax benefit from debt = Tax Rate * Interest Payment Cost of Capital Approach to Optimal Capital Structure: Implied growth rate assuming constant growth model: g= V *WACC − CF CF +V Firm Value (Stable growth) = CF to Firm (1 + g) / (WACC -g) Firm Value opt WACC. dividends and tax rates around ex-dividend day: PB − PA (1 − t 0 ) = D (1 − tcg ) Free cash flow to equity = Net Income + Depr&Amort – Chg in WC – Cap Exp + (New Debt Issue – Debt Repay) – Pref. Dividends Estimated FCFE = Net Income .

P/S): Firm value = Comparable multiple * Firm-specific denominator value PEG = (P/E)/ Growth P = stock price E = Net Income adjusted for transitory components BV (of equity) = total shareholders equity – preferred stock Profit margin = Net income/Sales Retention ratio = 1 – Dividends/Earnings DCF valuation: Value of Equity = ∑ Value of Equity = ∑ Terminal value: g = b * ROE t=N t =n CF to Equity t (1 + k e ) t t =1 CF to Equity t Ter min alValue + (1 + re ) t (1 + re ) N t =1 CFtoEquity N * (1 + g s ) re − g s CF 0 * (1 + g ) re − g Stock value using constant (stable) growth model: PV equations: Present value of multiple cash flows: PV = ∑ t =1 n CF Present value of a perpetuity: PV = r Present value of single future cash flow: PV = CFt (1 + r ) t FV (1 + r )t P o an A n ity V f nu = P (A V . 1 1 . P/BV.(1 + r) n r.Valuation: Relative valuation (P/E. n = A ) r .

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