Chapter 1:

We need to address :
enoughay
lotmore is notgood

My
1. net working capital (NWC): current assets - current liabilities >0
a
pi not efficientbecause

itis notgeneratingmoney
2. Capital budgeting: investing in fixed assets

3. Debt/equity: capital structure

Sales
4 from income statement
cost ydividents
I
much dividents
investeratives
s
retainedequity
how taxes NI
should thecompanyput RIE

Organizational chart soleproprietorship

Forms of business organizations (pros and cons)
partnership

corporation

sole proprietorship partnership

personal taxrate
unlimited liabilities
personal taxrate unlimited liabilities
limited access general partnership
easy easy
to capital unlimited for
the generalpartre
limited life limitedaccess to
capital
limited life
Corporation
limitedliabilities double taxation

easyaccessto noteasy to
capital start
unlimited life
Importance of cash flows:
from the financial markets
cash flows frow the firm should exceed the cash flows
Goal of financial management

share
maximize the currentvalue per
oftheexistingstock

Chapter 3:
liquidityratiost
currentratio CA CL 71
quick ratio CA inventory CL weremoveinventorybecauseitisnotasliquidaswethink

cash ratio cash CL weare onlyinterested if thefirmisnearbankropsy

total debtratio ITA TE TA

giggngegratiost 331 nottoolow
debtequityratio TD TE

equity multiplier TAITE ItDIE

22 or 3
www.y
cash coverage EBITt depreciation interest 22

inventoryt.gggyejuycost of goods
sold inventory
inventoryratiost

in inventory 365 inventoryturnover

dayssaleslower
the thebetter

receivablesratiost receivables turnover sales accountsreceivable

receivables 356 receivables turnover

dayssales in
aslowaspossible

totalassetturnover
sales totalassets
 popyabilitymeasures
netincome sales
P
EBITDA margin EBITDAsales
return onassetspop netincome total assets
return on equitypoc winsome totaledits

ratio share earningpershare

marketvalvemeasures price earnings
markettobook ratio marketvalue share bookvaluepershare
per
sharesoutstanding
Market capitalization per share x
price

enterprisevalue marketvalueofinterestbearingdebt
market capitalization

enterprise value multiple EV EBITDA

Ratios are not very helpful by themselves: they need to be compared to something

• time trend analysis

• peer group analysis

Dupontidertity ROE PM XT AT X E M L
total assets equity
pro multiplier
margin turnover
financial leverage
operating efficiency asset
useefficiency

Cheats
Neu
EE
cumulative Cf around 0
payback period interpolation
Iep internal rateof return r thatsets NPV 0 Toaccept
I o reject

profitability index
Pu withoutinitialinvestment
pI initialinvestment y accept
L reject
ChapterG
Operating
cash flow Oct

I OCF E BIT Dep taxes

2OCF WI Dep ignore interest expenses
3 Ocf sales cash costs taxes down top approach
6 Ocf sales costs I I t Dept te taxshield approach

Modified Accelerated lost recovery system Macks

asset is classified is subject to a pertain depriciation schedule
every
for tax purposes table
After tax salvage value

if I liquidate
my
assets I pay taxes Ian leftwitha Cf thatshould be par

profit MV ta Mr Bu full te it Bro

loss MV tt Br MV

special cases i cost cutting proposals savings

fie
PVof this
saving

NPV0 calculate
2 Setting the bid price

3 investements of unequal lives

µ
equivalent annual cost
EAC
inflation it nominalrate I real interestrate I t inflationrate
Chapter 7
ofsuccessx Payoff givensuccess offailurex Payoff givenfailure
expected off
pay
Probability
Probability

Rev2 RevI
Revenues
sensitivity analysis Ren
INE
NPra Npr
FANPV I
NprI

Scenario analysis
variation ofsensivity analysis
contribution
breakeven analysis accounting BE saleprice variablecost pretax margin

fixed cost depreciation

contribution
pretax margin

CashBE Ocf O p
p saleprice ignoring
taxes
re
p

1
fa fixedcost
re variablecost
a deprivation with taxes pp.mg eedy do
Q quantity

T taxrate

option to abandon
Marketvalue NPV Opt

option to wait
NPVt Novo
year cost PV
choose NPV Pro
stating stating
now
to be highest
Chapter8

par
value
coupon

coupon
rate
last

payment
bond value
YI f Emptgym
yielttomaturity rate

aurentyield animated
price in
one gear price
capital gainyield
price
Lind YMT N
Pu negative IN Ymt annual

U G YI semiannual

payment

discount bonds Zero coupon

pure
time to maturity maturitydate today

puffy
altertax yield YMt l Tel
bondmarkets cleanprice dirtyprice
accured
interest
next
payment next
paymer
period
young

inflation GRT L try thjinelation

Chapters
3 types of stocks
constant dividers
zero growth
Po DI
Constant growth
DatDn Itg
Po
Ig at
differential growth nonconstantgrowth phases
followed
by a cutoffpointwhere whereit becomes

Po I IF L
estimation of parameters
retained earnings
retentionratio xreturn x return on
g
pershare
price
price earningsratio
EPS

enterprisevalueratios EV MV equity t MV debt cash

EV
ratio
Enterprisevalue EBITDA

Formulas used CHAPter 13:

WACC = (weight of market value of first bond*after tax cost of first bond) + (weight of market
value of second bond*after tax cost of second bond) + (weight of equity*cost of equity)

After-tax cost of bond = cost of bond*(1-Tax rate)

Cost of bond has been calculated using YIELD function, as shown in the screenshot above.

Cost of equity = (current dividend*(1+growth rate)/current price) + growth rate

Total capital = (market value of first bond + market value of second bond + market value of
equity)

Weight of first bond = market value of first bond/Total capital

Weight of second bond = market value of second bond/Total capital

Weight of equity = market value of equity/Total capital

A stock is currently selling for $73 per share. A call option with an exercise price of $70
sells for $5.27 and expires in three months. If the risk-free rate of interest is 2.6 percent
per year, compounded continuously, what is the price of a put option with the same
exercise price? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g., 32.16.)
Solution :

Current price of a stock (S0) =$73

Annual risk free rate (r) = 2.6% or 0.026
Put premium (P) = ??
Call premium (C) = $5.27
time (t) = 3 months / 12 months = 1/4
Strike price (X) = $70
Call put parity equation
C + X / e^(rt) = S0 +P
$5.27 + $70 / e^(0.026 *1/4 ) = $73 + P
$5.27 + $70 / e^(0.0065 ) - $73 = P
$5.27 + $70 / 1.006522 - $73 = P
$5.27 + $69.55 - $73 = P
$1.82 = P
value of Put option = $1.82

Note :

How to solve e^(0.0065)

Step 1: multiply e power i.e 0.0065 by 0.00024417206
Step 2: add 1 in the above result
step 3 : press x= 12 times
Cost of X contracts = number of contracts*contract size*cost of one option

payoff per option = stock - strike = 5

Total investment worth = payoff*number of shares

Maximum gain will occur if stock price at expiry is 0.

payoff = strike*number of contracts*contract size
Maximum gain = payoff - cost

Net gain = total investment worth - cost

premium earned = premium per share*number of contracts*contract size

net loss for the seller = premium - total payoff

If stock price at expiry is 41 then put option won't be exercised at stock price > strike
price, so total payoff will be zero.
Net gain for the seller = premium earned = 3,560

Breakeven price is the price at which the trade will break even for which
strike price - stock price = premium