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Corporate Finance Cheatsheet

Net Present Value (NPV) CF1 CFn N PV = CF 0 + + .. . . 1 (1 + r) (1 + r)n Average Accounting Rate of Return (AAR) Average Net Income Average Book Value

Internal Rate of Return (IRR) SU M (CFt) = 0 OR the discount rate at which NPV = 0. Invest if: IRR > r (1 + I RR)t Do not invest if: IRR< r Profitability Index (PI) NPV PI = PV of future Cash flows = 1 + Initial Investment Initial Investment

Weighted Average Cost of Capital (WACC) wd * rd * (1 t) + wp * rp + we * re.where wd = target debt proportion in total capital. rd = the margin cost of debt. t = the companys marginal tax rate. wp = target preferred stock proportion in total capital. rp = the marginal cost of preferred stock. re = the marginal cost of equity. we = target common stock proportion in total capital Capital Asses Pricing Model Approach E (Ri) = Rf + b(E (Rm) Rf ).where b = the return correlation of stock i to changes in the market return . E (Rm) = the expected return on the market. E (Rm) Rf = the expected market risk premium Dividend Discount Model D1 D2 V0 = + ...whereV 0 = the intrinsic value of a share. Dt = (1 + re) (1 + re) the shares dividend at the end of period t. re = the cost of equity Cost of Preferred Stock The cost of preferred stock is the preferred stock dividend divided by the D current preferred stock price:rp = p Pp Growth Rate - Dividend Discount Model We can estimate the growth rate in the dividend discount model by using published forecasts of analysts or by the sustainable growth rate:g = 1 D * ROE E PS Asset Beta basset = bequity *

((

1+

D ((1 t)( E ))) ) 1

Current Ratio Current Assets Current Liabilities Quick Ratio Cash + Short-term marketable investments + Receivables Current Liabilities Accounts receivable turnover Credit Sales Average Receivables Inventory turnover Cost of Goods Sold Average Inventory Number of days of receivables Accounts Receivable Average Days sales on credit

Operating Cycle Number of days of inventory + Number of days of receivables

Net Operating Cycle Number of days of inventory + Number of days of receivables - Number of days of payables Cost of trade credit

Money Market Yield Face Value - Purchase Price Purchase Price

360 ) * (Days to Maturity)

Bond Market Yield

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Discount (1 + (1 Discount) )

365 days beyond discount period

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- Purchase Price 365 (Face Value ) * (Days to Purchase Price Maturity) Discount-Basis Yield - Purchase Price * 360 (Face Value ) (Days to Face Value Maturity) Portfolio Standard Deviation s=

Return on Equity (ROE) Net Income Average Shareholders Equity Standard Deviation s=

SU M (Ri E (Ri))

* Pi

w1

* s 12 + w22 * s 22 + 2 * w1 * w2 * s 1 * s 2 * Corr(1, 2)

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