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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
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Gnnuities

n n n n n

In advance PmT PmT PmT PmT PmT

In arrears PmT PmT PmT PmT PmT

CF0 CFt
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Internal rate of return

IRR is that unique discount


rate which, when applied to
a series of future cash
flows, yields a net present
value of 0.
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Financial management rate of return


Serie A Serie B Serie    !"#$%%
F 
 
 

F1  
 
   & | '( ) *&+( (
F2  
 

F3  
 
 | (  '&  ( +
F4  
 

F5 
 
 
 , $%%(& "(

 
 
 , (  '&  ( &   **" 
-  .   $%%-+- . '&/
, ( ) *&+( ( '& 
**" & . $%%

$%% 01%%
2. '*  +3  + 4-+  
 '&4  &   **"  &"* $%% + 
  
1 ) *&+( (
$%% % '(  
 '& 

a  bifurcates negative and positive cash flows


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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
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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


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Ôensitivity analysis
$+6%9$%% 
7 8

$+"&*" "*  + 5 6%


&. 7 8   8 "
+' ++ & 

856% '
*"  " '

a8
8 
×2 r n

 ": +."
* *"  (, . ; +(  ;
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Recourse debt

@-

%*"  *"

|&* "&-+   &      -

1. -*"& (.   1"-*"&    >   .

1* &-*" ?"* "++ "&" * ' * *

<)* =  


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Compounded interest

$ 
$-  5

( |(" &

?% $   ?% $  


,   &  **" +"  & ,    + **" 
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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 (ÔP 00)
UÔ securities
(departure from the average)
< , security is safer than ÔP 00 average
> , security is riskier than ÔP 00 average

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


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ease financing

B   

     |      

    A  A B    
 D     
B     
          
        
      
B C    
    
       
     
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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
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oethods of inventory valuation

          

I O LI O
a           
+    +   

 +*   | | ?


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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
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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|   .         " &- "& |
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epreciation methods

      

     

          

= Cost-salvage value
Useful life
            

= Cost-salvage value * remaining years of useful life


n(n+ )

Keyed off the remaining balance in each year GFT R depreciation


oes N T use salvage value
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Ôtraight line  sum of the years depreciation


ear epreciation pense
    

  
 
 
 

acts
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8   
   

alculation sum of the years epreciation


ear (   
em aining years enom inator oefficient ase pense
  
   
 
   
 
   
  
    

acts
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8   
   
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eclining balance depreciation

% 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
++ 
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$ , . 7 =$ ,
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epreciation graphs

etho s of epreciation

 
 
a e of asset

     
     
 @       
 @       


 
ear
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Capitalization vs. expenses

  

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|    
         
    
       
    

     


   
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oerger accounting

  +   +      

  

   J       +     

       


 +     
      
      

   +   +
      

Defeat hostile takeovers by ensuring the combination doesn¶t qualify for pooling
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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  
?   

on ide tion o X' qui ition o


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
|         |     |    
        

ot l    ot l    ot l    ot l    ot l    ot l   

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


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Purchase method
Corp Corp
ssets iabiliites ssets iabiliites
|     @     $      @  
         
quit quit
|((    |((  
%    %  

otal    otal    otal    otal   

Facts
Fo o 's
$       * (   a1 
    

arnings
 
  

Consideration or 's acquisition o


*((   

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


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oodwill
F 

       
         

|            

              

              

    

         

o
    i o   
             
a    i   
       
            


  

d ii l     La L   


o 
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Ôtock and dividend issuance



Ôcena io  (pa stock issued) Ôcena io (no-pa stock issued)
Gssets iabiiites Gssets iabi iites
 
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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 iabiiites 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 sae")
Gssets iabiiites Gssets iabi iites
 
|    |   
 
|    |   
    
   .   quit  &*    quit
   
*  
 * 
 
 & *      &  *    
   
  &   .     &   .  
   
Tota   Tota   Tota   Tota  

Ôcena io 6b ( an "ogh dist  ibuted as div - "dee # ed sae")


Gssets iabiiites

|   

|   

quit
 
*  


 & *    
 
  &   .  

 
Tota   Tota  

Ôcena io 8: conve  tib e debt (befo  e) Ôcena io 8: conve  tib e debt (afte  )
Gssets iabiiites Gssets iabi iites
   
|    -    |    - 
|  | 
 
quit quit
   
*    *  
   
Tota   Tota   Tota   Tota  

  
o # pan has 00 outstanding sha es of $ pa vaue co # # on
$ !u s back t  easu  sha es fo  $ 0

Gssets iabiiites Gssets iabi iites


   
|   -  G
 |    - G

 
quit quit
   
*  
 * 
 
 & *    
   &  *   
   
  &   .  G
   &   . G
 
 "     
   
Tota  Tota  
  Tota   Tota  

 &
%nitia condition o # pan deca es a stock dividend of 0 sha es
$ $6/sha e
Gssets iabiiites Gssets iabi iites
   
|    -  |    - 
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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
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everage ratios

ebt iabilities
=
ratio Gssets

ebt equity iabilities


=
ratio Net worth
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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
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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
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üperating cycle
Capital
infusion
$

Gccounts Inventory
receivable

Ôale

Gvg. amount of time inventory is outstanding


üperating
= +
cycle
Gvg. amount of time receivables are outstanding
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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)
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Profitability ratios

ross profit ross profit


=
margin ross sales

, '("* &' -'  -* *+.&&


'  & , *"&&

1 "+ -

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


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

rowth stock Value stock


6.  <    < 

Return on arnings + interest


=
total assets Gssets