BA 440 Final Formula Sheet

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 +

ps
ps
ps
P
D
r
( )
f m f e
r r r r +
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- ) (Capital Expenditures - Depreciation)
- (1- ) (Chg in WC) Preferred Dividends
where 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