Weighted Average Cost of Capital
- ***(Cost of equity /sum of total debt+equity x %equity capital) + (Weighted average cost of debt / sum of total debt + equity x (1- tax rate) x % debt in capital structure)
- ** tax rate only applied to the cost of debt
net cost of debt
basis points x 1/100 x risk free rate x income tax rate
Cost of retained earnings
common stock selling price/earnings per share-amt underpriced-floatation costs
Or
**Cost of retained earnings = (Common stock dividends x (1 + growth rate) / market price) + growth rate
expected rate of return
yearly dividend/ current market price
Weighted Average Cost of Debt
*****. Weighted average interest rate = Effective annual interest payments / Debt outstanding
After tax Cost of Debt
*****. Pretax cost of debt x (1 - Tax rate)
Pre tax cost of debt = interest expense/debt
Cost of Preferred Stock
*****. Preferred stock dividends / Net proceeds of preferred stock
Preferred stock dividends. = par value x % stock issued
Net proceeds of preferred stock = net proceeds- net of floatation costs-stock underpricing
Net proceeds is the selling price
Floatation costs is the cost of issuing the stock
If dividend paid not given, then par value x % issued
Expected rate or return on preferred stock
annual dividends/current market price
Cost of funds from retained earnings
common stock dividend/current market price
CAPM (cost of retained earnings)
risk free rate + [beta x (market return - risk free rate)]
DCF (cost of retained earnings)
**D1/P0 + g **
G = net income/equity x (1-rate)
D1 = dividend per share expecting at the end of one year P0 = current market value or price of the outstanding common stock G = the constant rate of growth in dividends
To go from D0 to D1
* D0 x (1+g) ***
Bond Yield Risk Premium
Pretax cost of long term debt + market risk premium
Growth rate
= retention ratio x return on equity***
Retention ratio = 1 - dividend payout %
ROI
Net income/invested capital
Invested capital = assets - operating liabilities
ROA
Net Income/Assets
ROE
Net income/Shareholder’s equity
Shareholder’s equity = Assets - liabilities
Operating Leverage
* % chg EBIT/% chg sales*
% chg sales x DOL = % chg EBIT
Another op leverage formula
* FC/VC*
Financial Leverage
***% chg EBT (EPS)/% chg EBIT **
%chg Earnings = % chg EBIT x DFL
Or
Total Assets/Equity
debt to total capital
= total debt/total capital ***
Total capital = Debt + equity = total assets
Indicates long term paying ability. The lower the better
Debt to Equity Ratio
***total Debt / total shareholder equity
If debt to equity ratio given, for example 1.75, then there is 1.75 of debt for every $1
Indicates the DOL used
The lower, the lower risk involved
Times Interest Earned Ratio
** EBIT/ interest expense **
Measures the ability of a company to pay its interest charges
Current Ratio
*Current assets/current liabilities
Quick (Acid-Test) Ratio
**(cash+marketable securities+receivables)/current liabilities ***
Cash Ratio
**(Cash+cash equivalents+marketable securities)/Current Liabilities
Cash Conversion Cycle
***Inventory conversion period + Receivables collection period - Payables deferral period **
Inventory Conversion Period
= 365 x avg inventory cogs
AR turnover
credit sales/avg AR***
Receivables collection period
Days sales outstanding = 365 x avg ar/credit sales
Inv turnover savings
= (budgeted cost of sales/inventory turnover) - (budgeted sales/inventory turnover) =inventory increase or decrease * interest rate = cost savings
AP turnover
COGS/Avg AP
AP deferral period
365 x avg AP/cogs
Working Capital Turnover
Sales / Avg Working capital
Working capital = current assets-current liabilities
expected cost savings
budgeted sales /sales turnover - budgeted cost of sales/ sales turnover * rate
Reorder point
Safety stock + (Lead time x Sales during lead time)***
To get lead time may have to divide widgets per year by the number of weeks in the year
EOQ
sqrt (2x annual sales in units x cost per purchase order / annual carrying cost per unit **
Apr of quick payment discount
= (360/pay period -discount period) x (Discount / 100-Discount %)
AR turnover
the # of times per year a company is converting its receivables into cash
AR turnover = Credit sales / Avg AR
Days Sales Outstanding
how many days on avg it takes a company to convert its credit sales into cash
***Days Sales Outstanding = (Avg AR/Credit Sales) x # of days in the period
OR 365/AR Turnover
Cost of factoring
***AR submitted x fee x 360/30 = y
(AR submitted - Amount withheld) x annual rate= w
Y+w = z
Z-how much saved outsource = net cost
Net cost/(Ar submitted-amount not factored) = cost of financing(borrowing)
The cost of carrying an additional investment in AR
**amt of sales * variable rate% * ar% * 36/360=y
Amt of new sales * new variable rate * new Ar%* 36/360 = w
Y+w= z
PV of annuity
c x 1-(1/(1+r)^t)/r **
C = amount of annuity R = rate of return T = number of years
Perpetuities
Per share valuation = P = D/R*
P = stock price D = dividend R = required return
Gordon Growth DDM
***Economic return = (chg in price “growth” + dividend income)/beg price **
Per share valuation with assumed growth
= Pt = D(t+1)/(R-G)**
Pt = Current price at period t D(t+1) = Dividend one year after period t R = Required return G = (Sustainable) growth rate
TO determine D1 the numerator of formula becomes D0(1+G)
To determine R, use CAPM
**risk free rate + (beta (market rate - risk free rate) **
Price Earnings ratio
**P/E ratio = P0/E1 ***
P0 = Stock price or value today
E1 =EPS expected in one year (next 4 quarters)
Earnings per share = net income/preferred dividends
E1 = earnings per share * growth rate
Forward P/E
If P/E ratio is given, then (P0/E1) x E1 it determine the expected value
Trailing P/E
P0/E0
PEG Ratio
***PEG = (P0/E1)/G
Valuing Equity with the PEG ratio
To determine the current price of stock
P0 = PEGxE1xG*
Price to sales ratio
= P0/S1**
Valuing with equity with price to sales ratio
**P0 = (P0/S1)
P/CF = P0/CF1
Valuing Equity with the PCF Ratio
P0 = (P0/CF1)*
Cash flow = cash flow/shares
Valuing Equity with the P/B Ratio
***P0 = (P0/B1)
Book value of common equity = assets-liabilities -preferred stock
Or
Book value of common equity = common stock + Additional paid in capital+ Retained earnings
Book value of common equity per share = book value of common equity / common shares outstanding
***Formula take the bond face value x annual interest rate to get annual interest payment, then annual interest payment / (1+market rate), for each year: ex: year 2 is Annual interest rate / (1+market rate)^2 and so. For the final year take (annual interest payment +bond face value)/(1+market rate)^final year, then add year 1, year 2, and year 3 together
Payback period
Net initial investment/Annual net after-tax cash flow**
PV of $1
The factor of the PV of $1 to be received two years in the future at an interest rate of 6%
PV = FV/(1+r)^n
= 1/1.06^2 =0.890
PV of an Annuity
The factor of the PV of $1 to be received in each of the next three years at an interest rate of 6%
PV = 1x(1-(1/1.06)^3)/0.06 = 2.673 2.673
EBIT Margin
EBIT / Sales
Interest Burden.
EBT/EBIT
Tax Burden
Net Income/EBT
Asset turnover
Sales / Total assets