Finance Cheat Sheet (1)

Capital Budgeting – process of planning & managing firm’s investment in long-term assets Capital Structure – mix of debt & equity maintained by firm Working Capital – planning & managing firm’s current assets & liabilities Agency Problem – possibility of conflicts of interest between shareholders & management of firm Corporate Governance – rules for corporate organization & conduct Money Markets – financial markets where short-term debt securities are bought & sold Capital Markets – financial markets where long-term debt & equity securities are bought & sold Financial Engineering – creation of new securities or financial processes Derivative Securities – options, futures, other securities whose value derives from price of another asset Regulatory Dialectic – pressures financial institutions & regulatory bodies exert on each other Non-cash Items – expenses charged against revenues that do not directly affect cash flow (ex. depreciation) CFFA – total of CF to bondholders/shareholders: OCF, Capital Spending, NWC (aka free cash flow) OCF – cash generated from normal business activities Dividend Tax Credit – reduced effective tax rate on dividends Capital Gains – increase in value of investment over its purchase price OR Loss Carry-forward, – using year’s capital CFFA Carry-back Interest paid on LT debt losses in past/future years EBIT to offset capital gains + NI + Depreciation - Change in LT debt - Taxes - Change in total equity = Operating Cash Flow = CFFA Ending Fixed Assets OR - Beginning Fixed Assets Interest paid on LT debt + Depreciation - Net cash from financing = Net Capital Spending = CFFA Ending NWC % of Sales Method - Beginning NWC 1.  everything on IS by g = Change in NWC 2.  ST A & L (not N/P) by g Operating Cash Flow 3. g’=(1+g)(x)  x = - Net Capital Spending %capacity - Change in NWC a) if g’ < 1, FA stay at = CFFA current value b) if g’ > 1, multiply FA by amount

Common-size Statement – presents items in % FV – amount investment is worth after 1 or more periods Common-base-year Statement – presents items relative to base (compound value) year Compounding – accumulating interest in invest. over time to Financial Ratios – relationships from financial info used for earn more int. comparison Interest on Interest – earned on reinvestment of previous Liquidity Ratios – ability to meet short-term obligations without interest payments undue stress Compound Interest – earned on initial principals & int. Quick Ratio – ST liquidity after removing inventory reinvest. prior periods Cash Ratio – ability to pay off current liabilities with cash Simple on original FV = PVInterest x (1+r)T – earnedCash Flows principal amount Annuity: Interval Measure – how many days or operating expenses can Payment = PV = FV/(1+r)T PV = (C/r) x 1 – [1/ current assets cover (1+r)T]  annuity end (ordinary) Financial Leverage Ratios – LT ability to meet obligations FV = C/r x (1+r)T – 1 Payment = Equity Multiplier – dollar worth of assets each equity $ has claim  annuity bgn (due) to Mortgage: PV = C/r  Leverage Ratios LT Debt Ratio - %Financial of total firm capitalization funded by long-term perpetuity C/Y = 2 Annuity – level stream of cash flows for fixed period of time Total Debt Ratio = (TA – TE)/TA **<.5 debt Annuity Due – cash flows occur at beginning of period Debt/Equity Ratio = TD/TE = EM – 1 **<1 Perpetuity – annuity in which cash flows continue forever Consol – Equity Multiplier = TA/TE = TD + (TE/TD) = TD/TE + 1 = type of perpetuity DE Ratio + 1 **<2 Growing Perpetuity – constant stream of cash flow without end LT Debt Ratio = LT Debt/(LT Debt + TE) Du Pont Growing Annuity – finite # of growing annual cash flows Times Interest Earned = EBIT/Interest Identity Stated/Quoted Interest Rate – expressed in terms of interest Cash Coverage Ratio = (EBIT + Depr)/Int ROE = NI/TE payment made each period Liquidity Ratios Profitability = (NI/Sales) Effective (EAR) –t]/r} interest rateAnnuity expressed if it were Annuity Annual PV = C xRate {[1-1/(1+r) FVas Factor = Current Ratio = CA/CL **>1 Ratios or >2 (Sales/TA) ((1+r)t – 1)/r Quick Ratio = (CA – Inv)/CLPM **>1 = NI/Sales (TA/TE) = Cash Flow = PV x r Annuity PV Factor = Cash Ratio = Cash/CL ROA = NI/TA (PM)(TAT) (1/r) x (1-PV Factor) NWC = NWC/TA ROE = NI/TE Coupon – stated interest payment Market Value PV of Growing Perpetuity = C/(r-g)made on PVbond of Growing Annuity = Interval Measure = CA/Avg Daily Face/Par Value – principal amount of bond repaid at end of term Ratios Op Costs Coupon Rate – annual coupon divided by face value of bond Price-Earnings Ratio = Asset Turnover Ratios Share $/EPS Maturity Date – date when principal amount of bond is paid Inventory Turnover = COGS/Inv Market-to-book Ratio = Yield to Maturity (YTM) – market interest rate that equates bond’s Days’ Sales in Inv = 365/Inv PV of interest payments & principal repayments with its price MVPS/BVPS Turnover EV/EBITDA = [MV of Equity +Indenture – written agreement between corp. & lender detailing Net Invest in FA = (NFA – END Days’ Sales in Rec = 365/Rec terms of debt NFABEG) + Depr Turnover Debenture – unsecured debt, maturity of 10+ years Note – TD = CL + LTD Receivables Turnover = Sales/A/R maturity -10 years BVPS = TE/Shares Days’ Sales in Pay = 365/Pay Sinking Fund – account managed by bond trustee for early bond SPS = Sales/Shares Turnover redemption Price-Sales Ratio = Share $/SPS Pay Turnover = COGS/A/P Call Provision – option to repurchase bond at specified price before EPS = NI/Shares NWC Turnover = Sales/NWC maturity FA Turnover = Sales/Net FA Planning Horizon – long-range time period financial planning Call Premium – amount by which call exceeds par value of bond Deferred Call – call provision prohibiting company from redeeming processes focuses on bond early Aggregation – small invest. proposals of each operational unit are Call Protected – bond during period in which cannot be redeemed added, treated as 1 project % of Sales Approach – accounts are projected depending on by issuer Canada Plus Call – compensates bond investors for interest predicted sales level Plug Variable – adjusted to make sure pro forma balance sheet differential Retractable Bond – may be sold back to issuer before maturity balances Clean Price – price of bond net of accrued (quoted) External Financing Needed (EFN) – amount of financing to Total Dollar Return = Dividend Incomeinterest + Capital Gain (loss) CF to Creditors = interest paid – net new LTD Dirty Price>–coupon price of rate, bond including accrued int., buyer pays If YTM bond price < par balance both sides of BS = Increase in Price + Coupon Payment CF to Shareholders = dividends paid – net new equity Dividend Payout Ratio = Cash Div/NI Div = NI – Change in(full/invoice price) value (DISCOUNT) Total Cash if Stock is Sold = Initial Investment + Total Return CFFA – CF to Creditors + CF to Shareholders E  Plug Variable If YTM < coupon Dividend Yield = rate, Dt/Pt par value < bond NI = dividends + addition to retained Retention/Plowback Ratio = RE/NI Div = Payout Ratio x price (PREMIUM) t Capital Gains Yield = (Ptt+1 t)/Pt Bond Value = C x (1-1/(1+r) )/r –+PF/(1+r) Current Yield = Earnings OR EBT – EBT x tax rate New NI  Fixed PR % Total Return = Dividend Yield + Capital Gains Yield Net Capital Spending = FA bought – FA sold Full Capacity Sales = Current Sales/Capacity % of FA = CPN/PRC = (Pt+1 + Dt)/Pt price = 100 F4: Bond Calculation *quoted Cap. Gains Net Acquisitions = total installed cost of capital FA/Full Capacity Sales Var(R) = (1/(T-1)) x [(R Yield = YTM – Cur. Yield 1R )2+…+(RT- R )2] *use sx for acquisitions – adjusted cost of disposals Max Sales Growth = (Full Capacity Sales/Current Sales) – 1 d1 = current date PRC = clean price Fisher standard deviation Terminal Loss = UCC – adjusted cost ofcurrent disposals Common Shares TA – L –– difference RE Incremental Cash=Flows b/w firm’s future CFs with Dividend Growth Model – determines price of Effect = 1+R =Average (1+r)(1+h) Recaptured CCA – adjusted cost of disposal – UCC Internal Arithmetic = Sum of Returns/# of Returns = x project & Growth without Rate = (ROA x R)/([1-[ROA x R]) stock maturity date YLD = YTM OR R AverageGains Tax Rate taxable income Sustainable Growth Rate = (ROE xbased R)/([1-[ROE x R]) **AKA Stand-Alone Principle – evaluation on incremental CFs d2 = Capital Yield=–total rate taxes/total at which value of investment under F1:1VAR max % sales increase 1/T Sunk Cost – incurred & cannot be removed, should not be grows Geometric Average = [(1+R1) x (1+R2) x…x (1+RT)] – 1 Common Stock – equity without priority for dividends or considered Nominal Return = Total $ Return/Original Price Opportunity Cost – most valuable alternative given up in bankruptcy *use Fisher equation for real return & risk-free rate (R =

Constant Dividend Growth OCF PO = D1/(r-g) = DO x (1+g)/(rBasic Approach = EBIT+D-Taxes g) Top-Down Approach = Sales-Costs-Taxes *will be paid *Just been Bottom-Up Approach = NI+D Constant paid Tax Shield Approach = (S-C) x (1-TC) + (D x TC) Dividend F2: Compound Interest PO = D/r n=99999 I%=(r-g)/(1+g) PV Tax Shield on CCA = ([IdTc]/d+k) x ([1+0.5k]/1+k)  PV F2: Compound PMT=D1/(1+g) OR [DO x – ([SndTC]/d+k) x (1/[1+k]n)  Salvage Interest (1+g)]/(1+g) Value Expected Return – return on risky asset expected in future n=99999 Expected Divided: DT = DO x Remaining Tax Shield = (UCC-S) x d x TCPortfolio /(d+k) – group of assets (ex. stocks & bonds) held by T (1+g) Straight-Line Depreciation = (Initial Cost – Gross Salvage investor Expected Stock Price: PT = PO Value)/Years Portfolio Weights - % of portfolio’s total value in asset x (1+g)T TC  corporate tax rateDeclining Balance (CCA) = d x UCC Non-Constant Growth Systematic Risk – influences large # of assets (aka market I  total investment capital 1. Compute dividends before constant growth risk) added to pool DT = DO x (1+g)t Unsystematic Risk – affects small # of assets (unique/assetEXAMPLES TO FIND d  CCA rate 2. Find expected FV of stock at time of constant specific risk) NPV: k  discount rate growth Principle of Diversification – spreading investment across # Sn  salvage value PT = D1 x (1+g)t/(r-g) OR PT = DT/(r-g) of assets eliminates some of risk Mn  asset life in years F2: Compound Interest OR Int Rate: Systematic Risk Principle – amount of systematic risk n=99999 I%=(r-g)/(1+g) n=4 present in risky asset relative to average risky asset P/Y=1 P/C=1 Security Market Line (SML) – positively sloped straight line PMT = dividends before growth PV=-1 FV=1+r displaying relationship between expected mean and beta *ex. compounded Market Risk Premium – slope of SML (difference between quarterly expected return on market portfolio and risk-free rate) 3. Compute current PV of stock Capital Asset Pricing Model (CAPM) – equation of SML t PO = (D1 + PT)/(1+r) showing relationship between expected return Rate and beta Risk Premium = Expected Return – Risk-free F3: Cash Flow, I%=r F2: Opportunities Compound Interest Stock Valuation Using OR Growth = E(R) - Rf Multiples EPS = Div Expected Return = E(R ) = jRj x Pj Pt = benchmark PE ratio x Value of share = EPS/r = Div/r Return Variance = 2 = j [(Rj – E(R)]2 x Pj Stock price after project = Portfolio Expected Return = E(Rp) = [x1 x E(R1)] + [x2 x E(R2)] NPV – difference between investment market value and (EPS/r) + NPVGO +…+ [xn x E(Rn)] cost Portfolio Variance = 2p = (x21 x 21) + (w22 x 22) + 2 x w1 x w2 Discounted Cash Flow Valuation (DCF) – valuing x p x 1 x 2 investment by discounting future cash flows Total Return = Expected Return + Unexpected Return Discounted Payback Period –time for investment’s DCFs (Systematic + Unsystematic) to equal initial cost = R = E(R) + U (m + ) Internal Rate of Return (IRR) – discount rate that makes Beta = I = piM x (i/M) NPV 0 Beta of Portfolio = p = wj x j NPV Profile – graph of relationship between NPVs and discount rates Reward-to-risk Ratio = [E(RA) - Rf]/A (aka slope) Multiple Rates of Return – problem in using IRR CAPM = E(Ri) = rf + i[E(RM) – rf] NPV Payback Period Average Accounting *Find CCATS then input cash Premium flows Risk – excess return required from investment in Arbitrage Pricing Theory (multiple) = rf + 1 x (E(R1) – rf] + F3: Cash Flow F3: Cash Flow Return 2 x (E(R2) – rf] +…+K x (E(RK) – rf] I% = required rate I% = 0% AAR = Avg. NI/Avg. BV risky asset over risk-free environment Variance – average squared deviation between actual return & List 1 = cost, cash List 1 = cost, cash Avg. BV = Cost/2 flows flows *accept if AAR > pre- average return Standard Deviation – positive square root of variance *if NPV > 0, *accept if PBP < Normal Distribution – symmetric, bell-shaped frequency invest pre-set limit Discounted Payback IRR distribution defined by mean & standard deviation Period F3: Cash Flow Value at Risk (VaR) – maximum loss used by banks to F3: Cash Flow I% = required rate manage risk exposures I% = required rate List 1: cost, cash flows Geometric Average Return – average compound return List 1 = cost, cash flows *accept if IRR > earned per year over multi-year period *always lower *accept if pays back on required return Arithmetic Average Return – return earned in average year discounted basis within *If signs change twice, 2 over multi-year period *nominal return Profitability Index Efficient Capital Market – security prices reflect available PI = 1+(NPV/initial investment) = Benefit/Cost Ratio

Common Stock Cash Flows PO = (D1+P1)/(1+r) F3: Cash Flows, I% = r