APPENDIX C

Selected Equations and Data

CHAPTER 1
FCF1 FCF2 FCF3 …þ FCF∞
Value ¼ 1þ 2þ 3þ
ð1 þ WACCÞ ð1 þ WACCÞ ð1 þ WACCÞ ð1 þ WACCÞ∞

CHAPTER 2
EBIT ¼ Earnings before interest and taxes ¼ Sales revenues − Operating costs
EBITDA ¼ Earnings before interest; taxes; depreciation and amortization
¼ EBIT þ Depreciation þ Amortization

Net cash flow ¼ Net income þ Depreciation and amortization

NOWC ¼ Net operating working capital
¼ Operating current assets − Operating current liabilities



¼ Cash þ Accounts receivable −
Accounts payable
þ Inventories þ Accruals

Total net operating capital ¼ Net operating working capital þ Operating long-term assets
NOPAT ¼ Net operating profit after taxes ¼ EBIT(1 − Tax rate)
Free cash flow ðFCFÞ ¼ NOPAT − Net

investment in operating capital 
Current year’s total Previous year’s total
¼ NOPAT − −
net operating capital net operating capital

Operating cash flow ¼ NOPAT þ Depreciation and amortization

Gross investment in Net investment
¼ þ Depreciation
operating capital in operating capital

1071
1072 Appendix C: Selected Equations and Data

Gross investment
FCF ¼ Operating cash flow −
in operating capital

NOPAT
Return on invested capital ðROICÞ ¼
Total net operating capital

MVA ¼ Market value of stock − Equity capital supplied by shareholders

¼ ðShares outstandingÞðStock priceÞ − Total common equity
MVA ¼ Total market value − Total investor-supplied capital

Market value of stock 
¼ þ Market value of debt − Total investor-supplied capital

 

Net operating profit
EVA ¼ − After-tax dollar cost of capital
after taxesðNOPATÞ used to support operations

¼ EBITð1−Tax rateÞ − ðTotal net operating capitalÞðWACCÞ

EVA ¼ ðTotal net operating capitalÞðROIC − WACCÞ

CHAPTER 3
Current assets
Current ratio ¼
Current liabilities
Current assets − Inventories
Quick; or acid test; ratio ¼
Current liabilities
Sales
Inventory turnover ratio ¼
Inventories
Receivables Receivables
DSO ¼ Days sales outstanding ¼ ¼
Average sales per day Annual sales=365

Sales
Fixed assets turnover ratio ¼
Net fixed assets
Sales
Total assets turnover ratio ¼
Total assets
Total liabilities
Debt ratio ¼
Total assets
Total liabilities
Market debt ratio ¼
Total liabilities þ Market value of equity
Total liabilities
Debt-to-equity ratio ¼
Total assets − Total liabilities
Debt ratio Debt-to-equity
Debt-to-equity ¼ and Debt ratio ¼
1 − Debt ratio 1 þ Debt-to-equity
Total assets
Equity multiplier ¼
Common equity
 Appendix C: Selected Equations and Data 1073

1
Debt ratio ¼ 1 −
Equity multiplier
EBIT
Times-interest-earned ðTIEÞ ratio ¼
Interest charges
EBITDA þ Lease payments
EBITDA coverage ratio ¼
Interest þ Principal payments þ Lease payments
Net income available to common stockholders
Net profit margin ¼
Sales
EBIT
Operating profit margin ¼
Sales
Sales − Cost of goods sold
Gross profit margin ¼
Sales
Net income available to common stockholders
Return on total assets ðROAÞ ¼
Total assets
EBIT
Basic earning power ðBEPÞ ratio ¼
Total assets
Net income Sales
ROA ¼ Profit margin × Total assets turnover ¼ ×
Sales Total assets
Net income available to common stockholders
Return on common equity ðROEÞ ¼
Common equity

ROE ¼ ROA × Equity multiplier

¼ Profit margin × Total assets turnover × Equity multiplier
Net income Sales Total assets
¼ × ×
Sales Total assets Common equity
Price per share
Price=earnings ðP=EÞ ratio ¼
Earnings per share
Price per share
Price=cash flow ratio ¼
Cash flow per share
Common equity
Book value per share ¼
Shares outstanding
Market price per share
Market=book ðM=BÞ ratio ¼
Book value per share

CHAPTER 4
FVN ¼ PV(1 + I)N
FVN
PV ¼
ð1 þ IÞN
1074 Appendix C: Selected Equations and Data

" # " #
ð1 þ IÞN 1 ð1 þ IÞN −1
FVAN ¼ PMT − ¼ PMT
I I I
FVAdue ¼ FVAordinary ð1 þ IÞ
2 1 3
" # 1−
1 1 6 ð1 þ IÞN 7
PVAN ¼ PMT − ¼ PMT6
4
7
5
I Ið1 þ IÞN I

PVADue ¼ PVAOrdinary ð1 þ IÞ
PMT
PV of a perpetuity ¼
I
XN
CFt
PVUneven stream ¼ t
t¼1 ð1 þ IÞ
X
N
FVUneven stream ¼ CFt ð1 þ IÞN−t
t¼1
INOM
IPER ¼
M

APR ¼ (IPER)M
Number of periods ¼ NM

INOM MN
FVN ¼ PVð1 þ IPER ÞNumber of periods
¼ PV 1 þ
M

M
INOM
EFF% ¼ 1þ − 1:0
M

CHAPTER 5
X
N
INT M
VB ¼ tþ
t¼1 ð1 þ rd Þ ð1 þ rd ÞN
X
2N
INT=2 M
Semiannual payments : VB ¼ t þ
t¼1 ð1 þ rd =2Þ ð1 þ rd =2Þ2N
X
N
INT M
Yield to maturity : Bond price ¼ þ
t¼1 ð1 þ YTMÞt ð1 þ YTMÞN
X
N
INT Call price
Price of callable bond ðif called at NÞ ¼ þ
t¼1 ð1 þ rd Þt ð1 þ rd ÞN
Annual interest
Current yield ¼
Bond’s current price
Current yield + Capital gains yield ¼ Yield to maturity

rd ¼ r* + IP + DRP + LP + MRP
rRF ¼ r* + IP
rd ¼ rRF + DRP + LP + MRP
I1 þ I2 þ … þ IN
IPN ¼
N
 Appendix C: Selected Equations and Data 1075

CHAPTER 6
X
n
Expected rate of return ¼ ^
r¼ Pi ri
i¼1
X
n
r̄ t
t¼1
Historical average; r̄ Avg ¼
n
X
n
Variance ¼ σ2 ¼ ðri − ^rÞ2 Pi
i¼1
sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
X n
Standard deviation ¼ σ ¼ ðri − ^rÞ2 Pi
vffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
i¼1
uX n
u
u ðr̄ t − r̄ Avg Þ2
t t¼1
Historical estimated σ ¼ S ¼
n−1

CV ¼ σ=^r
X
n
^
rp ¼ wi ^ri
i¼1
s ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
X n
σp ¼ ðrpi −^rp Þ2 Pi
i¼1
X
n
ðr̄ i;t − r̄ i;Avg Þðr̄ j;t − r̄ j;Avg Þ
t¼1
Estimated ρ ¼ R ¼ sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
X n X n
ðr̄ i;t − r̄ i;Avg Þ2 ðr̄ j;t − r̄ j;Avg Þ2
t¼1 t¼1

COViM ¼ ρiMσiσM


σi COViM
bi ¼ ρiM ¼
σM σ2M
X
n
bp ¼ wi bi
i¼1

Required return on stock market ¼ rM

Market risk premium ¼ RPM ¼ rM − rRF
RPi ¼ (rM − rRF)bi ¼ (RPM)bi
SML ¼ ri ¼ rRF + (rM − rRF)bi ¼ rRF + RPMbi

CHAPTER 7
^ ¼ PV of expected future dividends ¼ X
∞
Dt
P 0
t¼1 ð1 þ rs Þt

^ ¼ D0 ð1 þ gÞ ¼ D1
Constant growth: P 0
rs − g rs − g
1076 Appendix C: Selected Equations and Data

^r ¼ D1 þ g
s
P0
^ −P
P 1 0
Capital gains yield ¼
P0
D1
Dividend yield ¼
P0
^ ¼D
For a zero growth stock, P 0
rs

^ ¼ DNþ1
Horizon value ¼ Terminal value ¼ P N
rs − g
Dps
Vps ¼
rps
^r ¼ Dps
ps
Vps
r̄ s ¼ Actual dividend yield þ Actual capital gains yield

CHAPTER 8
Exercise value ¼ MAX[Current price of stock − Strike price, 0]
Cu − Cd
Number of stock shares in hedged portfolio ¼ N ¼
Pu − Pd

VC ¼ P½Nðd1 Þ − Xe−rRF t ½Nðd2 Þ

lnðP=XÞ þ ½rRF þ ðσ2 =2Þt

d1 ¼ pffi
pffi σ t
d2 ¼ d1 − σ t

Put–call parity: Put option ¼ VC − P + Xe−rRFt

V of put ¼ P½Nðd1 Þ − 1 − Xe−rRF t ½Nðd2 Þ − 1

CHAPTER 9
After-tax component cost of debt ¼ rd(1 − T)
XN
INTð1 − TÞ M
Mð1−FÞ ¼ tþ
t¼1 ½1 þ rd ð1 − TÞ ½1 þ rd ð1 − TÞN
Dps
rps ¼
Pps ð1 − FÞ

Expected D1 Required ;
Market equilibrium: ¼ ^rM ¼ þ g ¼ rRF þ RPM ¼ rM ¼
rate of return P0 rate of return
where D1, P0, and g are for the market, not an individual company
 Appendix C: Selected Equations and Data 1077

Rep/Div ¼ ratio of payouts via repurchases to payouts via dividends

D1
rM ¼ ^rM ¼ ð1 þ Rep=DivÞ þ g, where g is long-term growth rate in total payouts for the market and
P0
where D1 and P0 are for the market, not an individual company

CAPM: rs ¼ rRF + bi(RPM)

D1 + Expected g in dividends per share
DCF: rs ¼ ^rs ¼
P0

Company’s own Judgmental

rs ¼ þ
bond yield risk premium

g ¼ (Retention rate)(ROE) ¼ (1.0 − Payout rate)(ROE)

D1
re ¼ ^re ¼ þg
P0 ð1−FÞ

WACC ¼ wdrd(1 − T) + wpsrps + wsrs

CHAPTER 10
CF1 CF2 … þ CFN
NPV ¼ CF0 þ 1þ 2þ
ð1 þ rÞ ð1 þ rÞ ð1 þ rÞN
X N
CFt
¼ t
t¼0 ð1 þ rÞ
CF1 CF2 …þ CFN
IRR: CF0 þ 1þ 2þ ¼ 0
ð1 þ IRRÞ ð1 þ IRRÞ ð1 þ IRRÞN
XN
CFt
NPV ¼ ¼ 0
t¼0 ð1 þ IRRÞt
MIRR: PV of costs ¼ PV of terminal value
XN
CIFt ð1 þ rÞN−t
X N
COFt t¼0
t ¼
t¼0 ð1 þ rÞ ð1 þ MIRRÞN

Terminal value
PV of costs ¼
ð1 þ MIRRÞN

XN
CFt
PV of future cash flows ð1 þ rÞt
PI ¼ ¼ t¼1
Initial cost CF0
Unrecovered cost
Number of
at start of year
Payback ¼ years prior to þ
Cash flow during
full recovery
full recovery year
1078 Appendix C: Selected Equations and Data

CHAPTER 11
Investment outlay Operating NOWC Salvage
Project cash flow ¼ FCF ¼ þ þ þ
cash flow cash flow cash flow cash flow
X
n
Expected NPV ¼ Pi ðNPVi Þ
i¼1
sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
X n
σNPV ¼ Pi ðNPVi − Expected NPVÞ2
i¼1

σNPV
CVNPV ¼
EðNPVÞ

CHAPTER 12
Additional Required Spontaneous Increase in
funds ¼ asset − liability − retained
needed increase increase earnings

AFN ¼ ðA =S0 ÞΔS − ðL =S0 ÞΔS − MS1 ð1 − Payout ratioÞ

Full
Actual sales
capacity ¼
Percentage of capacity
sales
at which fixed assets
were operated
Actual fixed assets
Target fixed assets=Sales ¼
Full capacity sales

Required level
¼ ðTarget fixed assets=SalesÞðProjected salesÞ
of fixed assets

CHAPTER 13
Vop ¼ Value of operations
¼ PV of expected future free cash flows
X
∞
FCF1
¼
t¼1 ð1 þ WACCÞt
FCFNþ1 FCFN ð1 þ gÞ
Horizon value: Vopðat time NÞ ¼ ¼
WACC − g WACC − g

Total value ¼ Vop + Value of nonoperating assets

Value of equity ¼ Total value − Preferred stock − Debt
Operating profitability (OP) ¼ NOPAT/Sales
Capital requirements (CR) ¼ Operating capital/Sales
 Appendix C: Selected Equations and Data 1079

EROICt ¼ Expected return on invested capital

¼ NOPATtþ1 =Capitalt
¼ NOPATt ð1 þ gÞ=Capitalt
¼ OPtþ1 =CRt

For constant growth:  


SalesN ð1 þ gÞ CR
Vopðat time NÞ ¼ CapitalN þ OP − WACC
WACC − g 1þg
CapitalN ðEROICN − WACCÞ
¼ CapitalN þ
WACC − g


OPNþ1
CapitalN − WACC
CRN
¼ CapitalN þ
WACC − g

CHAPTER 14
Residual distribution ¼ Net income − [(Target equity ratio)(Total capital budget)]
CashRep
Number of shares repurchased ¼ nPrior − nPost ¼
PPrior


CashRep CashRep CashRep
nPost ¼ nPrior − ¼ nPrior − ¼ nPrior 1 −
PPrior SPrior =nPrior SPrior

CHAPTER 15
X
∞
FCFt
Vop ¼
t¼1 ð1 þ WACCÞt

WACC ¼ wd(1 − T)rd + wsrs

NOPAT EBITð1 − TÞ
ROIC ¼ ¼
Capital Capital

EBIT ¼ PQ − VQ − F

F
QBE ¼
P−V

VL ¼ D + S

MM, no taxes: VL ¼ VU
MM, corporate taxes: VL ¼ VU + TD  
ð1 − Tc Þð1 − Ts Þ
Miller, corporate and personal taxes: VL ¼ VU þ 1 − D
ð1 − Td Þ

b ¼ bU[1 + (1 − T)(D/S)]
bU ¼ b/[1 + (1 − T)(D/S)]
rs ¼ rRF + RPM(b)