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# |  

   

## Present value of future cash flow

a
 
×2  r n

r = discount rate
n = number of periods

## Discounting: calculation of present values

Compounding: calculation of future values
|  
   

Gnnuities

n n n n n

CF0 CFt
|  
   

## IRR is that unique discount

rate which, when applied to
a series of future cash
flows, yields a net present
value of 0.
|  
   

## Financial management rate of return

Serie A Serie B Serie    !"#\$%%
F 
 
 

F1  
 
   & | '( ) *&+( (
F2  
 

F3  
 
 | (  '&  ( +
F4  
 

F5 
 
 
 , \$%%(& "(

 
 
 , (  '&  ( &   **" 
-  .   \$%%-+- . '&/
, ( ) *&+( ( '& 
**" & . \$%%

\$%% 01%%
2. '*  +3  + 4-+  
 '&4  &   **"  &"* \$%% + 
  
1 ) *&+( (
\$%% % '(  
 '& 

|  
   

## Financial management rate of return

PV¶ed at safe rate

 

PV FV




 


## auture valued at re-investment rate

a  > re-
re-investment rate for worthwhile investments
|  
   

Ëurdle rates

## The earnings you forego

by deploying capital in a
different way

## The rate you must get on an

investment for the deal to
make sense

## uf hurdle rate < u NPV is positive

|  
   

Ôensitivity analysis
\$+6%9\$%% 
7 8

## \$+"&*" "*  + 5 6%

&. 7 8   8 "
+' ++ &

856% '
*"  " '

a8
8 
×2 r n

": +."
* *"  (, . ; +(  ;
|  
   

Recourse debt

@-

%*"  *"

## <)* =  

|  
   

Compounded interest

\$ 
\$-  5

## ?% \$   ?% \$  

,   &  **" +"  & ,    + **" 
|  
   

## Capital asset pricing model

Cost of capital = Risk-free return + compensation for additional risk beyond a UÔ bond
Cost of capital = Risk free return + (ȕ x market risk premium)
Cost of capital = Risk free return + (ȕ x margin by which stock market exceeds risk-free return

  
  J 

## Cost of Co-variance Gverage rate of return

capital Risk-free of returns against on common stocks
return the portfolio (ÔP 00)
UÔ securities
(departure from the average)
< , security is safer than ÔP 00 average
> , security is riskier than ÔP 00 average

## Cost of equity capital = return expected on firm¶s common stock

|  
   

ease financing

B   

     |      

    A  A B    
 D     
B     
          
        
      
B C    
    
       
     
|  
   

Income statement
ota e en es
|   
    E  
|   ' 
    ' 
  ' 
E I D
   
E I
 
E
 
Ea n n s o com m on & e e e
   '  
Ea n n s o com m on & e e e
  
n est cte ea n n s
|  
   

## oethods of inventory valuation

          

I O LI O
a           
+    +   

|  
   

## aenefits of FIF and IF

Met od
FIF IF
*     *    
e ni e
   *  *       *
*  *    *  *   

Inf ationa
*      1 *     
   
ono

## *  *    *  *   

ef ationa
1 *      *     
   

ust use the same method for financial & tax accounting
|  
   

## FIF and IF calculations

Yea Yea Yea
I FIF IF FIF IF FIF IF
Cost C Cost Cost C Cost Cost C Cost
G oss evenues                  
| F               
"                
| .              
  .              
| .                
G oss inco e       G G      

Facts
ales
H         
                
u chases
H         
          
pening invento
H         
          
Closing invento
H         
          

## a ket p ice @ end o ea   

; &a a|   .         " &- "& |
|  
   

epreciation methods

      

     

          

= Cost-salvage value
Useful life
            

n(n+ )

## Keyed off the remaining balance in each year GFT R depreciation

oes N T use salvage value
|  
   

## Ôtraight line  sum of the years depreciation

ear epreciation pense
    

  
 
 
 

acts
|  
8   
   

## alculation sum of the years epreciation

ear (   
em aining years enom inator oefficient ase pense
  
   
 
   
 
   
  
    

acts
|  
8   
   
|  
   

## % ethod ouble declining balance ethod

oe icient alculation oe icient alculation
ear
e ul epreciation e aining e ul epreciation e aining
% oe icient % oe icient
li e r e pen e balance li e r e pen e balance
  
  
   
 
  
  
   
  
 
 
  
   
  

  I I
I  
   
  
I I
I  
  
  

Fact
++ 
|  
   

\$ , . 7 =\$ ,
|  
   

epreciation graphs

etho s of epreciation

 
 
a e of asset

     
     
 @       
 @       


 
ear
|  
   

  

##   |   

 
     
|    
         
    
       
    

##      

   
|  
   

oerger accounting

  

##        

 +     
      
      

   +   +
      

Defeat hostile takeovers by ensuring the combination doesn¶t qualify for pooling
|  
   

Pooling method
X o p o p
et i biliite et i biliite
|                 
       
quit quit
|     |   
    

## ot l    ot l    ot l    ot l   

F t
F o '
        a>         
   

ning
K  
?   

K     

## X o p te qui ition  X o p te qui ition X o p on olid ted

et i biliite et i biliite et i biliite
|          |          |         
               
    quit ?    quit     quit
|         |     |    
        

## Pooling: Uses book value A inherits T¶s retained earnings

|  
   

Purchase method
Corp Corp
ssets iabiliites ssets iabiliites
|     @     \$      @  
         
quit quit
|((    |((  
%    %  

## otal    otal    otal    otal   

Facts
Fo o 's
\$       * (   a1 
    

arnings
 
  

*((   

## Corp a ter acquisition  Corp a ter acquisition Corp consolidated

ssets iabiliites ssets iabiliites ssets iabiliites
|     @     |     @     |     @    
\$ (     \$      \$     
     quit       quit      quit
|((         |((        |((   
%        %    %   

otal    otal    otal    otal    otal    otal   

## Purchase: Uses a V A doesn¶t inherit T¶s retained earnings

|  
   

oodwill
F 

       
         

##               

   

         

o
    i o   
             
a    i   
       
            


  

o 
|  
   

## Ôtock and dividend issuance


Ôcena io  (pa stock issued) Ôcena io (no-pa stock issued)
Gssets iabiiites Gssets iabi iites
 
|    |   

quit quit
   
*  
 *  

 & *    
   
Tota   Tota   Tota   Tota  

Facts
   
   & " : &"   ' "  .   
  M   &-"   .    
     
   & " : &"  A   *A         .&-"& &'& & A& & A
 
G 
 M    .      
  

 MG   &&* &'& &     |'-&-* 

## Ôcena io  (ea nings of \$000  epo  ted) Ôcena io (div of \$000)

Gssets iabiiites Gssets iabi iites
 
|    |   
 
|    |   

quit quit
   
*  
 * 
 
 & *      &  *    
   
  &   .     &   .  
   
Tota   Tota   Tota   Tota  

Ôcena io  ( !oa d bu s a an "ogh) Ôcena io 6a ( an "ogh dist  ibuted as div - "dee # ed sae")
Gssets iabiiites Gssets iabi iites
 
|    |   
 
|    |   
   
   .   quit  &*    quit
   
*  
 * 
 
 & *      &  *    
   
  &   .     &   .  
   
Tota   Tota   Tota   Tota  

## Ôcena io 6b ( an "ogh dist  ibuted as div - "dee # ed sae")

Gssets iabiiites

|   

|   

quit
 
*  


 & *    
 
  &   .  

 
Tota   Tota  

Ôcena io 8: conve  tib e debt (befo  e) Ôcena io 8: conve  tib e debt (afte  )
Gssets iabiiites Gssets iabi iites
   
|    -    |    - 
|  | 

quit quit
   
*    *  
   
Tota   Tota   Tota   Tota  

o # pan has 00 outstanding sha es of \$ pa vaue co # # on
\$ !u s back t  easu  sha es fo  \$ 0

## Gssets iabiiites Gssets iabi iites

   
|   -  G
 |    - G

quit quit
   
*  
 * 
 
 & *    
   &  *   
   
  &   .  G
   &   . G
 
 "     
   
Tota  Tota  
  Tota   Tota  

&
%nitia condition o # pan deca es a stock dividend of 0 sha es
\$ \$6/sha e
Gssets iabiiites Gssets iabi iites
   
|    -  |    - 
|  
   

iquidity ratios

## Current Current assets

=
ratio Current liabilities

## Quick Current assets - inventory

=
ratio Current liabilities

Cash flow
Cash flow from operations*
liquidity =
Current liabilities
ratio
*From the cash flow statement
|  
   

everage ratios

ebt iabilities
=
ratio Gssets

=
ratio Net worth
|  
   

## Financial leverage index

\$ *(  & .' ' .
\$

- . . *     "

## Financial Return on equity

leverage =
Gdjusted return on assets
index

## = Net earnings* equity**

[ arnings + interest ( -tax rate)] assets

## * Note this does not include pfd div

** r market cap
|  
   

Gctivity ratios

Gccounts
Net sales*
receivable =
Gccounts receivable
turnover

Gccounts
Total expenses*
payable =
Gccounts payable
turnover

Inventory C Ô*
=
turnover Inventory
*From the income statement
|  
   

üperating cycle
Capital
infusion
\$

Gccounts Inventory
receivable

Ôale

## Gvg. amount of time inventory is outstanding

üperating
= +
cycle
Gvg. amount of time receivables are outstanding
|  
   

## Cash conversion cycle

Capital
infusion
\$
Gccounts
payable
Gccounts Inventory
receivable (Payment)

Ôale

## Gvg. amount of time inventory is outstanding

Cash +
conversion = Gvg. amount of time receivables are outstanding
cycle -
(Gvg. amount of time payables are outstanding)
|  
   

Profitability ratios

## ross profit ross profit

=
margin ross sales

## , '("* &' -'  -* *+.&&

'  & , *"&&

1 "+ -

## A business can be profitable and still trade negatively on its leverage

|  
   

P ratio
Ôtock price per share
P ratio =
arnings per share

## rowth stock Value stock

6.  <    < 

## Return on arnings + interest

=
total assets Gssets