Financial management fiche

BOND :

What price did you pay for the bond ?

Periodic coupon payment : per value * coupon bond rate

payment∗1−( 1+YTM )−n Par value
Purchase Price of bond: Periodic coupon + n
YTM ( 1+YTM )

What is the rate of return ?

Current Yield = Annual Coupon Payment / new Purchase price (Beginning Value)

Capital Gains Yield = Change in Price / Original Price

Total Rate of Return = Current Yield + Capital Cains Yield

STOCK & their valuation :

Recommendation to buy stock or not? What is stock worth ?

Required Rate of Return (RRR) = risk-free rate + (beta * market risk premium) (best one)

Or RRR = (Expected dividend payment / Share Price) + Forecasted dividend growth rate

THEN PV of dividends:

D0 (1+ g)
P 0=
RR−g

D0 = current dividend price

g = constant growth rate of dividend
ks = stock’s required rate of return

Should enter a new line of business ?

Required Rate of Return (RRR) = risk-free rate + (beta * market risk premium)

Then PV of dividends :
D0 (1+ g)
P 0=
ks−g

Case 1 with old infos

Case 2 with new infos from analysts
ANALYST STOCK VALUE with dividend growth :
D0: Current dividend per share
D1: D0 * (1 + Annual Dividend Growth Rate)
D2: D1 * (1 + Annual Dividend Growth Rate)
D3: D2 * (1 + Annual Dividend Growth Rate)
D4: D3 * (1 + Annual Dividend Growth Rate constant growth rate)

Expected Dividend 1
Constant Growth Stock Value=
RRR−Constant Growth Rate

P3 = D4 /(RRR – g constant growth rate)

P0 = PV(D1) + PV(D2) + PV(D3) + PV(P3) = __
CF0 = Cf 1 (D1) + Cf 2 (D2) + Cf3 (D3) + P3
 Discount NPV of CF0 :
D1 D2 D3 P3
 + + +
( 1+ RRR ) ( 1+ RRR ) ( 1+ RRR ) ( 1+ RRR )3
1 2 3

Stock value for constant growth rate:

Calculate D1 dividend of year 1. Then:

Expected Dividend 1
Constant Growth Stock Value=
RRR−Constant Growth Rate

If analyst value < market value = then not buy.

Find annual growth rate with given stock price in equilibrium:

Do equation, replacing constant growth stock value with assumed recent price, and Constant
growth rate as X.

Dividend∗(1+Constant growth rate)

Constant Growth Stock Value=
RRR−Constant Growth Rate
WACC Problem Investment:

Weighted Average Cost of Capital (WACC) = Weight of Debt * After-tax Cost of Debt +
Weight of Equity * Cost of Equity

Debt ¿ Asset Ratio(D/ A)=Debt ¿ Equity Ratio ¿ Equity Ratio¿

1+ Debt ¿
(D/A) = Weight of Debt
Weight of Equity=1−D/ A

Adjusted WACC : WACC + adjustment factor

Y 1 Cash Flow
Maximum Cost =
WACC adjusted −g

PAYBACK :

Calculate cumulative CF for all CF.

Cumulative CV of that Year
Payback Period=Year before Breakeven+
Cash Flow∈ Recovery Year

Discounted payback period :

PV(Cash flow) with discount rate = discounted cash flows

Cash Flow 1
( 1+ Discount rat )n

 Do cumulative discounted cash flows

 Discounted Payback Period=¿
Discounted Cumulative CV of that Year
Year before Breakeven+
Discounted Cash Flow∈Recovery Year

The payback period of cashflows must be lower than cuttoff.

CAPITAL Budgeting:

Problem without WACC

If given RRR and first Cash flow growing at constant rate forever:
Cash Flow Y 1
Net Present Value(NPV )= −Initial Investment
RRR −g

If given investment growing for number of years:

Net Present Value ( NPV )=PMT x 1−¿ ¿
IRR + WACC PROBLEM

Sunk costs are irrelevant // Opportunity costs are relevant

Initial Cash flow (cost of investment)

Cash Flow T 0 =Cost of Plant+ Initial Operational Investment + opportunity costs

Calculate appropriate discount rate to evaluate ABC project:

IF Company use intenal funds (retained earnings):

WACC = risk-free rate + (beta * market risk premium)

Discount rate : WACC + adjustment factor

OR if they use debt etc ->

Discount Rate=(Weight of Debt∗After taxCost of Debt)+(Weight of Equity∗Cost of Equity)+ Adjustment Fa

Market Value of Debt=nb of Bonds∗(Par Value∗Current Selling Price %)

Market Value of Equity/Common Stock=nb of Shares∗Current Selling Price

Total Market Value of Firm=Market Value of Debt + Market Value of Equity

Market Value of Debt

Weight of Debt=
Total Market Value of Firm

Market Value of Equity

Weight of Equity=
Total Market Value of Firm

After-tax cost of debt: Pre taxCost of Debt∗(1−Tax Rate)

Pre tax cost of debt : find R in FV = PMT x 1−¿ ¿

Cost of Equity=Risk free Rate +Beta∗Market risk Premium

Discount Rate=(Weight of Debt∗After taxCost of Debt)+(Weight of Equity∗Cost of Equity)+ Adjustment Fa

Then we have discount rate.

Annual depreciation with straight line method:

Cost of Plant∧Equipment −Residual Value

Annual Depreciation=
Useful Life

What is the annual operating cash flow ?

Annual Operating Cash Flow (OCF):

EBT = Sales value - variable costs - fixed costs- depreciation

EAT = EBT – taxes /// taxes = EAT * Tax rate
OCF = EAT + depreciation

Additional Terminal Cash flow : salvage value (or scrapped value) + tax on salvage value +
Recovery of opportunity cost

FIND IRR & NPV :

Show cashflows:
Y0 : Cash Flow T 0 =Cost of Plant+ Initial Operational Investment + opportunity costs
Y1: Annual Operating Cash Flow (OCF)
Y2: Annual Operating Cash Flow (OCF)
Y3: Annual Operating Cash Flow (OCF)
Y4: Annual Operating Cash Flow (OCF)
Y5: Annual Operating Cash Flow (OCF) + Additional Terminal Cash flow

IRR → Minimum rate of return acceptable for a project

Cash Flow Y 1 Cash Flow Y 2 Cash Flow Y 3

NPV =Cash Flow Y 0 + 1
¿+ 2
+ 3
+
(1+ Discount Rate∨discounted wacc)¿ (1+ Discount Rate) (1+ Discount Rate)

IF IRR > RRR then good investment.

FV (Positive cash flow x WACC )

MIRR : ¿ n(ex :2)√ -1
PV (initial outlays−financing cost)

1 2
Cash flow 1∗(1+WACC ) +Cashflow 2∗( 1+WACC )
MIRR : ¿ n(ex :2)√ -1
initial outlays∨investment−financing cost
 ( )
1 /2
FV ( Positive cash flow x WACC )
 -1
PV ( initial outlays−financing cost )

compare mutually exclusive projects with unequal lives.

equivalent annuity cash flow : interest or discount rate per period * NPV / (1 - (1 + r)-n )