This document provides definitions and formulas for various corporate finance and portfolio management, derivatives, alternative investments, equity and fixed income concepts. Some of the key concepts defined include net present value, internal rate of return, weighted average cost of capital, capital asset pricing model, dividend discount model, bond yields, option pricing, and financial statement ratios such as return on equity, profit margins, and liquidity ratios.
This document discusses capital budgeting and provides an overview of key concepts and methods used to evaluate long-term investment projects. It defines capital budgeting, outlines the steps, and distinguishes between independent and mutually exclusive projects. It then describes five decision criteria - net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), payback period, and discounted payback period. For each method, it provides the calculation and discusses strengths and weaknesses. The document concludes that NPV is the best single criterion but notes that the various methods provide different perspectives on project profitability and liquidity.
This document discusses and compares three capital budgeting techniques: internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI). It defines each technique, provides their formulas, and lists their advantages and disadvantages. IRR is the discount rate that sets the net present value equal to zero. MIRR accounts for the practical reinvestment rate. PI is the ratio of a project's present value of cash flows to initial investment. Each technique considers the time value of money but they differ in their calculations and how they evaluate projects.
This document discusses three capital budgeting techniques: net present value, payback period, and internal rate of return. Net present value calculates the present value of future cash flows from a project minus the initial investment. Payback period is the time needed for a project's cash inflows to recover its initial cash outflow. Internal rate of return is the discount rate that results in a net present value of zero for a project's cash flows.
This document provides an overview of key capital budgeting concepts like internal rate of return (IRR), net present value (NPV), and modified internal rate of return (MIRR). It defines IRR as the discount rate at which NPV equals zero and explains that multiple IRRs can exist. It also discusses limitations of IRR and defines MIRR as an improved method that uses different rates for financing and reinvesting cash flows. The document uses examples to illustrate concepts of NPV, IRR, multiple IRRs, and how MIRR addresses shortcomings of IRR.
The document discusses Net Present Value (NPV) as a capital budgeting decision rule. It defines NPV as the sum of the present values of all cash flows from a project over its lifetime, discounted using the cost of capital. It notes that NPV is additive, intermediate cash flows are reinvested at the cost of capital, and discount rates can vary over time. The document also discusses limitations of NPV, such as it being expressed in absolute rather than relative terms, and not considering project life.
The document provides an overview of capital budgeting techniques, including the payback period method, net present value method, and internal rate of return method. It then works through an example of evaluating a potential capital project for Basket Wonders using each of these methods. For the payback period method, it calculates the payback period as 3.3 years and determines the project meets the acceptance criterion of less than 3.5 years. For the internal rate of return method, it calculates the IRR as 11.57% which is below the required rate of 13%, so the project is rejected. For the net present value method at a discount rate of 13%, it calculates the NPV as negative $1,428, so the
Julie Miller is evaluating an independent project for cash flows of $10,000, $12,000, $15,000, $10,000 and $7,000 over 5 years with an initial cash outlay of $40,000. She will use the payback period, internal rate of return, net present value, and profitability index to evaluate the project. Based on the company's criteria, the project is rejected as it does not meet the payback, IRR, NPV or profitability index requirements.
This document discusses capital budgeting and provides an overview of key concepts and methods used to evaluate long-term investment projects. It defines capital budgeting, outlines the steps, and distinguishes between independent and mutually exclusive projects. It then describes five decision criteria - net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), payback period, and discounted payback period. For each method, it provides the calculation and discusses strengths and weaknesses. The document concludes that NPV is the best single criterion but notes that the various methods provide different perspectives on project profitability and liquidity.
This document discusses and compares three capital budgeting techniques: internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI). It defines each technique, provides their formulas, and lists their advantages and disadvantages. IRR is the discount rate that sets the net present value equal to zero. MIRR accounts for the practical reinvestment rate. PI is the ratio of a project's present value of cash flows to initial investment. Each technique considers the time value of money but they differ in their calculations and how they evaluate projects.
This document discusses three capital budgeting techniques: net present value, payback period, and internal rate of return. Net present value calculates the present value of future cash flows from a project minus the initial investment. Payback period is the time needed for a project's cash inflows to recover its initial cash outflow. Internal rate of return is the discount rate that results in a net present value of zero for a project's cash flows.
This document provides an overview of key capital budgeting concepts like internal rate of return (IRR), net present value (NPV), and modified internal rate of return (MIRR). It defines IRR as the discount rate at which NPV equals zero and explains that multiple IRRs can exist. It also discusses limitations of IRR and defines MIRR as an improved method that uses different rates for financing and reinvesting cash flows. The document uses examples to illustrate concepts of NPV, IRR, multiple IRRs, and how MIRR addresses shortcomings of IRR.
The document discusses Net Present Value (NPV) as a capital budgeting decision rule. It defines NPV as the sum of the present values of all cash flows from a project over its lifetime, discounted using the cost of capital. It notes that NPV is additive, intermediate cash flows are reinvested at the cost of capital, and discount rates can vary over time. The document also discusses limitations of NPV, such as it being expressed in absolute rather than relative terms, and not considering project life.
The document provides an overview of capital budgeting techniques, including the payback period method, net present value method, and internal rate of return method. It then works through an example of evaluating a potential capital project for Basket Wonders using each of these methods. For the payback period method, it calculates the payback period as 3.3 years and determines the project meets the acceptance criterion of less than 3.5 years. For the internal rate of return method, it calculates the IRR as 11.57% which is below the required rate of 13%, so the project is rejected. For the net present value method at a discount rate of 13%, it calculates the NPV as negative $1,428, so the
Julie Miller is evaluating an independent project for cash flows of $10,000, $12,000, $15,000, $10,000 and $7,000 over 5 years with an initial cash outlay of $40,000. She will use the payback period, internal rate of return, net present value, and profitability index to evaluate the project. Based on the company's criteria, the project is rejected as it does not meet the payback, IRR, NPV or profitability index requirements.
This document discusses several capital budgeting techniques:
1) The payback period measures the number of years to recover the initial investment of a project. However, it ignores cash flows beyond the payback period.
2) The book rate of return measures average income divided by average book value of assets. It does not consider the time value of money.
3) The internal rate of return (IRR) is the discount rate that sets the net present value (NPV) of a project to zero. It is commonly used but can be problematic for multi-period projects or when projects have different scales.
4) The profitability index is the NPV divided by initial investment. It generally agrees with NPV
Financial appraisal is an objective evaluation of the profitability and financial strength of a business unit used for capital budgeting and long-term investment decisions. It is measured using both non-discounting cash flow methods like payback period and rate of return, as well as discounting cash flow methods like net present value, internal rate of return, and annual equivalent method. The internal rate of return calculates the discount rate that makes the net present value of all cash flows equal to zero, and is important for planning future growth. Financial appraisal helps make judicial decisions about how much and when to invest using metrics like cost-benefit analysis.
This document discusses capital budgeting techniques used to evaluate long-term investment projects. It describes various methods like payback period, net present value, internal rate of return, and profitability index. These techniques are used to analyze projects, compare alternatives, and determine whether to accept or reject projects based on criteria like NPV being positive or IRR exceeding the hurdle rate. The document also discusses potential issues that can arise with ranking projects under conditions of capital rationing or mutually exclusive choices.
The document discusses capital budgeting methods, focusing on the net present value (NPV) method. It provides details on calculating NPV, including the formulas and acceptance rules. The key points are:
1) Capital budgeting is the process of evaluating long-term investments and NPV is a discounted cash flow method used.
2) With NPV, future cash flows of a project are discounted to give their present value, and the project's NPV is calculated as the present value of cash inflows minus the initial investment.
3) A project should be accepted if it has a positive NPV, as that means it is expected to increase shareholder value.
The document discusses various capital budgeting techniques used to evaluate investment projects, including payback period, net present value, internal rate of return, and profitability index. It provides examples of calculating each measure and acceptance criteria. The examples analyze a potential project for Basket Wonders using cash flow data over 5 years. While the project has a payback period under 3.5 years, it is rejected based on its IRR being below the required rate, negative NPV, and PI below 1.
This document discusses various methods for evaluating investment projects, including net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR). It defines each measure and explains their appropriate uses and limitations. NPV measures the present value of incremental cash flows, while IRR is the discount rate that makes NPV equal to zero. MIRR accounts for reinvestment at the cost of capital rather than the project rate. The document recommends using NPV to choose between mutually exclusive projects of different sizes, as IRR can provide erroneous results in some cases.
The document discusses various capital budgeting techniques for evaluating investment projects. It outlines steps for estimating cash flows, including determining net cash outflows, annual cash flows, and final year cash flows. It then explains several evaluation techniques like average rate of return, payback period, discounted payback period, net present value, internal rate of return, and profitability index. The techniques consider factors like time value of money, risk, and whether the technique is consistent with maximizing shareholder wealth. NPV is highlighted as the preferred technique, though others provide supplementary insights into risk, costs, and returns.
NPV is superior to IRR for evaluating investment projects. NPV considers the time value of money and all cash flows, providing a direct measure of whether a project increases shareholder wealth. It is more accurate when cash flows fluctuate or the discount rate changes. While IRR indicates return rate, it does not measure wealth effects and can be misleading when cash flows vary or multiple internal rates of return exist. NPV is therefore a better measure for capital budgeting decisions.
The document discusses net present value (NPV) as a capital budgeting technique that discounts cash inflows and outflows to account for the time value of money. NPV is calculated as the present value of cash inflows minus the present value of cash outflows. If NPV is positive, the investment proposal is acceptable as it adds value. If NPV is negative, the proposal is rejected. The example calculates NPV of $283.51 for an investment of $9,000 with expected cash flows over four years, indicating it is a positive NPV and acceptable project.
The document provides an overview of various capital budgeting techniques including payback period, net present value (NPV), internal rate of return (IRR), profitability index, and modified internal rate of return (MIRR). It discusses how to apply these methods to evaluate independent and mutually exclusive projects. It also covers topics like capital rationing, increasing marginal cost of capital, and choosing the optimal economic life of a project.
This document provides an overview of corporate valuation and the discounted cash flow (DCF) valuation method. It discusses key steps in the valuation process, including historical analysis of the industry and company, forecasting future projections, discounting post-projection cash flows, and calculating terminal value. The document also covers discounting factors like weighted average cost of capital (WACC) and cost of equity/debt. It describes how to calculate free cash flows to the firm and equity and limitations of the DCF approach. The goal is to determine the economic worth of a company based on its business model, financials, and industry environment.
The document discusses various topics related to investment decisions and capital budgeting. It defines capital expenditures and discusses factors like cost of acquisition, addition/expansion costs, and R&D costs. It also summarizes various capital budgeting techniques like payback period, accounting rate of return, net present value, internal rate of return, and profitability index. Key evaluation criteria for investment decisions include NPV, IRR, and reconsider assumptions. The document also highlights potential conflicts between NPV and IRR methods.
iZenBridge's PMP® Math Series: Project Selection : PV , NPV, IRR, BCR and Pay...Saket Bansal
Video of this presentation can be found at :
http://youtu.be/yIMMy8hh0WQ
In this presentation we have introduced some of the techniques used while performing project selection, we have seen people getting questions related to PV, NPV , IRR , BCR and Payback period in their PMP exam.
Project Selection falls under Project Integration Management Knowledge Area and it get executed before Project Charter get prepared.
This document discusses key concepts for evaluating investments:
1. ROI (Return on Investment) measures the profit or return from an investment compared to the cost of the investment. A higher percentage ROI means a more profitable investment.
2. NPV (Net Present Value) discounts future cash flows from an investment to determine if it has a positive or negative value today. A positive NPV means the investment should be accepted.
3. Payback Period is the number of years for an investment to recover its initial cost from cash flows. Shorter payback periods are preferable.
The document provides formulas and examples to calculate ROI, NPV, and Payback Period to evaluate potential investments. References are also
The presentation discusses the profitability index (PI), which is a capital budgeting technique used to evaluate investment projects based on their profitability. The PI is calculated as the discounted cash inflows divided by the initial cash outflow. A PI greater than or equal to 1 indicates the project is profitable. The presentation provides an example calculation of the PI for a project with an initial investment of $200,000 and cash flows of $40,000, $30,000, $50,000 and $20,000 over 4 years with a 10% discount rate, resulting in a PI of 1.1235.
Net present value (NPV) is used to analyze the profitability of investments by discounting future cash flows to their present value and comparing them to the initial investment amount. A positive NPV means the investment increases firm value and is acceptable, while a negative NPV means it decreases firm value and is unacceptable. To calculate NPV, an analyst estimates future cash flows, the required return, the timing of cash flows, and discounts the cash flows to find their present value minus the initial investment. NPV considers the time value of money and all cash inflows to determine if an investment maximizes firm value and owner welfare. However, NPV is limited by the accuracy of estimating future cash flows and discount rates, does not
The document discusses various capital budgeting methods used to evaluate investment projects. It describes the net present value (NPV) and profitability index (PI) methods. For NPV, a project is accepted if NPV is positive and rejected if negative. PI is the ratio of present value of cash inflows to outflows; a project is accepted if PI is greater than 1 and rejected if less than 1. An example NPV calculation is shown. The document also lists advantages and disadvantages of the NPV method.
The document provides information on calculating various financial ratios from a company's financial statements. It includes the formulas and calculations for ratios such as: gross profit ratio, net profit ratio, return on capital employed ratio, return on equity ratio, debt-to-equity ratio, current ratio, and inventory turnover ratio. It also defines key terms needed to compute the ratios, such as determining current assets, current liabilities, equity, assets, gross profit, net profit, and capital employed.
This document defines 44 financial ratios that are commonly used in financial analysis. It notes that ratios may be defined differently in some cases and instructs candidates to use the definitions provided in the list for examination purposes. The ratios cover liquidity, asset management, debt management, profitability, investment returns, and equity valuation.
This document contains definitions and formulas for various financial ratios and concepts related to ratio analysis, working capital management, financing decisions, investment decisions, and time value of money. Some of the key ratios and concepts covered include current ratio, quick ratio, debt-equity ratio, return on equity, net present value, internal rate of return, payback period, cost of debt, cost of equity, weighted average cost of capital, DuPont analysis, and leverage. Formulas are provided for calculation of these various ratios, costs, and financial metrics.
This document discusses several capital budgeting techniques:
1) The payback period measures the number of years to recover the initial investment of a project. However, it ignores cash flows beyond the payback period.
2) The book rate of return measures average income divided by average book value of assets. It does not consider the time value of money.
3) The internal rate of return (IRR) is the discount rate that sets the net present value (NPV) of a project to zero. It is commonly used but can be problematic for multi-period projects or when projects have different scales.
4) The profitability index is the NPV divided by initial investment. It generally agrees with NPV
Financial appraisal is an objective evaluation of the profitability and financial strength of a business unit used for capital budgeting and long-term investment decisions. It is measured using both non-discounting cash flow methods like payback period and rate of return, as well as discounting cash flow methods like net present value, internal rate of return, and annual equivalent method. The internal rate of return calculates the discount rate that makes the net present value of all cash flows equal to zero, and is important for planning future growth. Financial appraisal helps make judicial decisions about how much and when to invest using metrics like cost-benefit analysis.
This document discusses capital budgeting techniques used to evaluate long-term investment projects. It describes various methods like payback period, net present value, internal rate of return, and profitability index. These techniques are used to analyze projects, compare alternatives, and determine whether to accept or reject projects based on criteria like NPV being positive or IRR exceeding the hurdle rate. The document also discusses potential issues that can arise with ranking projects under conditions of capital rationing or mutually exclusive choices.
The document discusses capital budgeting methods, focusing on the net present value (NPV) method. It provides details on calculating NPV, including the formulas and acceptance rules. The key points are:
1) Capital budgeting is the process of evaluating long-term investments and NPV is a discounted cash flow method used.
2) With NPV, future cash flows of a project are discounted to give their present value, and the project's NPV is calculated as the present value of cash inflows minus the initial investment.
3) A project should be accepted if it has a positive NPV, as that means it is expected to increase shareholder value.
The document discusses various capital budgeting techniques used to evaluate investment projects, including payback period, net present value, internal rate of return, and profitability index. It provides examples of calculating each measure and acceptance criteria. The examples analyze a potential project for Basket Wonders using cash flow data over 5 years. While the project has a payback period under 3.5 years, it is rejected based on its IRR being below the required rate, negative NPV, and PI below 1.
This document discusses various methods for evaluating investment projects, including net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR). It defines each measure and explains their appropriate uses and limitations. NPV measures the present value of incremental cash flows, while IRR is the discount rate that makes NPV equal to zero. MIRR accounts for reinvestment at the cost of capital rather than the project rate. The document recommends using NPV to choose between mutually exclusive projects of different sizes, as IRR can provide erroneous results in some cases.
The document discusses various capital budgeting techniques for evaluating investment projects. It outlines steps for estimating cash flows, including determining net cash outflows, annual cash flows, and final year cash flows. It then explains several evaluation techniques like average rate of return, payback period, discounted payback period, net present value, internal rate of return, and profitability index. The techniques consider factors like time value of money, risk, and whether the technique is consistent with maximizing shareholder wealth. NPV is highlighted as the preferred technique, though others provide supplementary insights into risk, costs, and returns.
NPV is superior to IRR for evaluating investment projects. NPV considers the time value of money and all cash flows, providing a direct measure of whether a project increases shareholder wealth. It is more accurate when cash flows fluctuate or the discount rate changes. While IRR indicates return rate, it does not measure wealth effects and can be misleading when cash flows vary or multiple internal rates of return exist. NPV is therefore a better measure for capital budgeting decisions.
The document discusses net present value (NPV) as a capital budgeting technique that discounts cash inflows and outflows to account for the time value of money. NPV is calculated as the present value of cash inflows minus the present value of cash outflows. If NPV is positive, the investment proposal is acceptable as it adds value. If NPV is negative, the proposal is rejected. The example calculates NPV of $283.51 for an investment of $9,000 with expected cash flows over four years, indicating it is a positive NPV and acceptable project.
The document provides an overview of various capital budgeting techniques including payback period, net present value (NPV), internal rate of return (IRR), profitability index, and modified internal rate of return (MIRR). It discusses how to apply these methods to evaluate independent and mutually exclusive projects. It also covers topics like capital rationing, increasing marginal cost of capital, and choosing the optimal economic life of a project.
This document provides an overview of corporate valuation and the discounted cash flow (DCF) valuation method. It discusses key steps in the valuation process, including historical analysis of the industry and company, forecasting future projections, discounting post-projection cash flows, and calculating terminal value. The document also covers discounting factors like weighted average cost of capital (WACC) and cost of equity/debt. It describes how to calculate free cash flows to the firm and equity and limitations of the DCF approach. The goal is to determine the economic worth of a company based on its business model, financials, and industry environment.
The document discusses various topics related to investment decisions and capital budgeting. It defines capital expenditures and discusses factors like cost of acquisition, addition/expansion costs, and R&D costs. It also summarizes various capital budgeting techniques like payback period, accounting rate of return, net present value, internal rate of return, and profitability index. Key evaluation criteria for investment decisions include NPV, IRR, and reconsider assumptions. The document also highlights potential conflicts between NPV and IRR methods.
iZenBridge's PMP® Math Series: Project Selection : PV , NPV, IRR, BCR and Pay...Saket Bansal
Video of this presentation can be found at :
http://youtu.be/yIMMy8hh0WQ
In this presentation we have introduced some of the techniques used while performing project selection, we have seen people getting questions related to PV, NPV , IRR , BCR and Payback period in their PMP exam.
Project Selection falls under Project Integration Management Knowledge Area and it get executed before Project Charter get prepared.
This document discusses key concepts for evaluating investments:
1. ROI (Return on Investment) measures the profit or return from an investment compared to the cost of the investment. A higher percentage ROI means a more profitable investment.
2. NPV (Net Present Value) discounts future cash flows from an investment to determine if it has a positive or negative value today. A positive NPV means the investment should be accepted.
3. Payback Period is the number of years for an investment to recover its initial cost from cash flows. Shorter payback periods are preferable.
The document provides formulas and examples to calculate ROI, NPV, and Payback Period to evaluate potential investments. References are also
The presentation discusses the profitability index (PI), which is a capital budgeting technique used to evaluate investment projects based on their profitability. The PI is calculated as the discounted cash inflows divided by the initial cash outflow. A PI greater than or equal to 1 indicates the project is profitable. The presentation provides an example calculation of the PI for a project with an initial investment of $200,000 and cash flows of $40,000, $30,000, $50,000 and $20,000 over 4 years with a 10% discount rate, resulting in a PI of 1.1235.
Net present value (NPV) is used to analyze the profitability of investments by discounting future cash flows to their present value and comparing them to the initial investment amount. A positive NPV means the investment increases firm value and is acceptable, while a negative NPV means it decreases firm value and is unacceptable. To calculate NPV, an analyst estimates future cash flows, the required return, the timing of cash flows, and discounts the cash flows to find their present value minus the initial investment. NPV considers the time value of money and all cash inflows to determine if an investment maximizes firm value and owner welfare. However, NPV is limited by the accuracy of estimating future cash flows and discount rates, does not
The document discusses various capital budgeting methods used to evaluate investment projects. It describes the net present value (NPV) and profitability index (PI) methods. For NPV, a project is accepted if NPV is positive and rejected if negative. PI is the ratio of present value of cash inflows to outflows; a project is accepted if PI is greater than 1 and rejected if less than 1. An example NPV calculation is shown. The document also lists advantages and disadvantages of the NPV method.
The document provides information on calculating various financial ratios from a company's financial statements. It includes the formulas and calculations for ratios such as: gross profit ratio, net profit ratio, return on capital employed ratio, return on equity ratio, debt-to-equity ratio, current ratio, and inventory turnover ratio. It also defines key terms needed to compute the ratios, such as determining current assets, current liabilities, equity, assets, gross profit, net profit, and capital employed.
This document defines 44 financial ratios that are commonly used in financial analysis. It notes that ratios may be defined differently in some cases and instructs candidates to use the definitions provided in the list for examination purposes. The ratios cover liquidity, asset management, debt management, profitability, investment returns, and equity valuation.
This document contains definitions and formulas for various financial ratios and concepts related to ratio analysis, working capital management, financing decisions, investment decisions, and time value of money. Some of the key ratios and concepts covered include current ratio, quick ratio, debt-equity ratio, return on equity, net present value, internal rate of return, payback period, cost of debt, cost of equity, weighted average cost of capital, DuPont analysis, and leverage. Formulas are provided for calculation of these various ratios, costs, and financial metrics.
ChapterTool KitChapter 7102715Corporate Valuation and Stock Valu.docxtiffanyd4
ChapterTool KitChapter 710/27/15Corporate Valuation and Stock Valuation7-4 Valuing Common Stocks—Introducing the Free Cash Flow (FCF) Valuation ModelData for B&B Corporation (Millions)Constant free cash flow (FCF) =$10Weighted average cost of capital (WACC) =10%Short-term investments =$2Debt =$28Preferred stock =$4Number of shares of common stock =5The first step is to estimate the value of operations, which is the present value of all expected free cash flows. Because the FCF's are expected to be constant, this is a perpetuity. The present value of a perpetuity is the cash flow divided by the cost of capital:Value of operations (Vop) =FCF/WACCValue of operations (Vop) =$100.00millionB&B's total value is the sum of value of operations and the short-term investments: Value of operations$100+ ST investments$2Estimated total intrinsic value$102The next step is to estimate the intrinsic value of equity, which is the remaining total value after accounting for the claims of debtholders and preferred stockholders: Value of operations$100+ ST investments$2Estimated total intrinsic value$102− All debt$28− Preferred stock$4Estimated intrinsic value of equity$70The final step is to estimate the intrinsic common stock price per share, which is the estimated intrinsic value of equity divided by the number of shares of common stock: Value of operations$100+ ST investments$2Estimated total intrinsic value$102− All debt$28− Preferred stock$4Estimated intrinsic value of equity$70÷ Number of shares5Estimated intrinsic stock price =$14.00The figure below shows a summary of the previous calculations.Figure 7-2B&B Corporation's Sources of Value and Claims on Value (Millions of Dollars except Per Share Data)Inputs:Valuation AnalysisConstant free cash flow (FCF) =$10Value of operations$100Weighted average cost of capital (WACC) =10%+ ST investments$2Short-term investments =$2Estimated total intrinsic value$102Debt =$28− All debt$28Preferred stock =$4− Preferred stock$4Number of shares of common stock =5Estimated intrinsic value of equity$70÷ Number of shares5Estimated intrinsic stock price$14.00Data for Pie ChartsShort-term investments =$2Value of operations =$100Total =$102Debt =$28Preferred stock =$4Estimated equity value =$70Total =$1027-5 The Constant Growth Model: Valuation when Expected Free Cash Flow Grows at a Constant RateCase 1: The expected free cash flow at t=1 and the expected constant growth rate after t=1 are known.First expected free cash flow (FCF1) =$105Weighted average cost of capital (WACC) =9%Constant growth rate (gL) =5%When free cash flows are expected to grow at a constant rate, the value of operations is:Value of operations (Vop) =FCF1 / [WACC-gL]Value of operations (Vop) =$2,625Case 2: Constant growth is expected to begin immediately.Most recent free cash flow (FCF0) =$200Weighted average cost of capital (WACC) =12%Constant growth rate (gL) =7%When free cash flows are expected to grow at a constant rate, the value of operations is:.
This document provides definitions and formulas for various financial ratios used to analyze companies. It includes ratios in several categories: activity ratios, liquidity ratios, solvency ratios, profitability ratios, valuation ratios, and DuPont analysis. Activity ratios measure efficiency related to inventory management, accounts receivable, accounts payable, and asset usage. Liquidity ratios assess a company's ability to meet short-term obligations. Solvency ratios indicate financial leverage and coverage. Profitability ratios reveal margins and returns. Valuation ratios are used to evaluate stock prices. DuPont analysis breaks down return on equity into its components.
This document summarizes key concepts from Yusra Hasan's FIN 422 final exam chapters. It covers topics such as capital budgeting, capital structure, financial statement analysis, discounted cash flow valuation, net present value, risk and return modeling, and capital structure theories. The goal of financial management is to maximize stockholder equity value. Key models discussed include the balance sheet equation, income statement equation, Fisher equation, dividend valuation models, capital asset pricing model, weighted average cost of capital, and Black-Scholes option pricing model.
Semmi Chen, a retired singer, is considering investing $100,000 in company XYZ. She asks for help analyzing XYZ's financial statements to determine if it is a good investment. The assistant provides Semmi with an introduction to financial ratios that can be used to evaluate a company's profitability, efficiency, liquidity, and capital structure based on its financial statements. Key ratios discussed include gross profit margin, net profit margin, rate of stock turnover, current ratio, and return on capital. The assistant offers to calculate these ratios from XYZ's financials and make a recommendation about whether Semmi should invest.
This document provides information on calculating free cash flow (FCF) and determining a firm's cost of equity capital using the Capital Asset Pricing Model (CAPM).
It defines FCF as net operating profit after tax (NOPAT) minus changes in net working capital and capital expenditures. It also outlines how to modify FCF calculations to exclude non-operating cash flows. The document then explains how the CAPM model is used to estimate a firm's cost of equity capital (ke) based on the market risk premium and the stock's beta relative to the market. It provides an example of calibrating the CAPM for Microsoft using historical stock return data versus an S&P 500 index fund.
This document discusses key financial concepts related to capital, including invested capital, return to capital, profitability ratios, cash flow to capital, capital structure, and cost of capital. It provides examples of balance sheets, income statements, and calculations of various ratios such as return on invested capital (ROIC), return on assets (ROA), return on equity (ROE), interest coverage ratios, and profit margins. The document uses a company called Fairway Corp as an example to demonstrate calculations of invested capital, net fixed assets, net operating assets, net profit after tax, and various profitability ratios.
The document defines various financial ratios used in ratio analysis including liquidity ratios, profitability ratios, and solvency ratios. It then provides an example ratio analysis calculation for Scully Corporation using their 2010 and 2009 balance sheet and income statement data. Ratios calculated include current ratio, acid-test ratio, receivables turnover, inventory turnover, and comparisons of ratio changes between years.
This document contains definitions and explanations of various finance and accounting concepts:
1. It defines key terms like the accounting equation, balance sheet, income statement, financial ratios, and cash flow statement.
2. It provides formulas and explanations for common financial analysis tools like common-size analysis, trend analysis, benchmarking, forecasting, and discounted cash flow analysis.
3. It explains concepts related to capital budgeting including the feasibility study, business plan, free cash flow, and investment appraisal methods like NPV, IRR, payback period, and profitability index.
Ratio analysis involves calculating financial ratios to analyze a firm's performance. There are several categories of ratios, including liquidity ratios, activity ratios, debt ratios, profitability ratios, and market ratios. Liquidity ratios measure a firm's ability to meet short-term obligations, activity ratios measure how efficiently a firm uses its assets, debt ratios indicate the degree of a firm's financial leverage, profitability ratios evaluate profits relative to sales and assets, and market ratios relate market value to accounting values. Ratio analysis provides insights into a firm's financial health and performance.
This document defines and provides brief explanations for 13 common project management metrics:
1) Present Value calculates the amount needed today to achieve a target future value based on interest rate and time.
2) Payback Period measures the length of time to recoup initial costs of a product or service, with shorter periods preferred.
3) Net Present Value compares the present value of cash inflows to outflows, with higher values preferred for capital budgeting decisions.
1. The document discusses various financial ratios used to analyze the financial performance and position of a business. It provides definitions and formulas for current ratio, liquid ratio, debt-to-equity ratio, inventory turnover ratio, and others.
2. Ratios like current ratio and liquid ratio measure short-term financial stability, while debt-to-equity ratio assesses long-term financial soundness. Turnover ratios evaluate how efficiently a company utilizes its assets and manages inventory.
3. Profitability ratios such as gross profit ratio, operating ratio, and net profit ratio help analyze operational efficiency and overall business performance.
This document discusses various financial ratios used in ratio analysis. It covers ratios related to liquidity, asset utilization, debt utilization, profitability, and market value. Key ratios include the current ratio, quick ratio, accounts receivable turnover, inventory turnover, debt-to-assets ratio, profit margins, return on equity, and price-to-earnings ratio. It also discusses DuPont analysis and relationships between ratios. Problems that can impact ratio analysis and interpretation are noted, such as inflation and different inventory accounting methods between companies.
This document discusses ratio analysis, which is a technique used to analyze and interpret financial statements. It provides ratios that can be used to evaluate a company's liquidity, solvency, activity/turnover, and profitability. Specifically, it outlines various ratios that fall under each of these categories, such as current ratio, debt-to-equity ratio, inventory turnover ratio, gross profit ratio, and return on equity. The objectives, advantages, and limitations of ratio analysis are also summarized.
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4) Capital budgeting methods including payback period, average rate of return, net present value, profitability index, and internal rate of return to evaluate investment projects.
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2. Price/earnings ratio models that relate a stock's price to its earnings, taking into account factors like required rates of return and expected growth rates.
3. Free cash flow to equity models that value stocks based on the present value of expected future free cash flows to equity holders after meeting all other financial obligations.
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MUTUAL FUNDS (ICICI Prudential Mutual Fund) BY JAMES RODRIGUESWilliamRodrigues148
Mutual funds are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. They are managed by professional portfolio managers or investment companies who make investment decisions on behalf of the fund's investors.
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World economy charts case study presented by a Big 4
World economy charts case study presented by a Big 4
World economy charts case
World economy charts case study presented by a Big 4
World economy charts case study presented by a Big 4World economy charts case study presented by a Big 4
World economy charts case study presented by a Big 4
World economy charts case study presented by a Big 4World economy charts case study presented by a Big 4World economy charts case study presented by a Big 4World economy charts case study presented by a Big 4World economy charts case study presented by a Big 4World economy charts case study presented by a Big 4World economy charts case study presented by a Big 4World economy charts case study presented by a Big 4World economy charts case study presented by a Big 4World economy charts case study presented by a Big 4World economy charts case study presented by a Big 4World economy charts case study presented by a Big 4World economy charts case study presented by a Big 4World economy charts case study presented by a Big 4study presented by a Big 4
1. Corporate Finance and Portfolio management
1. Net Present Value n
n
2
2
1
1
0
r)(1
CF
......
r)(1
CF
r)(1
CF
CFNPV
Invest if : NPV > 0 Do not invest if: NPV< 0
2. Internal Rate of Return 0
IRR)(1
CFn
0t
t
t
Invest if: IRR > r Do not invest if: IRR< r
3. Average Accounting Rate of Return (AAR)=
book valueAverage
incomenetAverage
4. Profitability Index PI=
InvesmentInitial
NPV
1
InvesmentsInitial
flowscashfutureofPV
Invest if: PI > 1.0 Do not invest if: PI< 1.0
5. Cost of Capital eeppdd rwrwt)(1rw(WACC)
where wd = target debt proportion in total capital
rd = the before-tax marginal tax rate t = the company’s 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
6. Capital Asses Pricing Model Approach FMiFi RREβR)E(R
where
β I = 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
7. Dividend Discount Model Approach V0 =
......
r1
D
r1
D
e
2
e
1
where
V0 = the intrinsic value of a share Dt = the share’s dividend at the end of period t
re = the cost of equity
8.
gr
D
P
e
1
0
9. g
P
D
re
0
1
2. 10.
E
D
t)(11
1
ββ equityasset
11. Country equity premium= Sovereign yield spread
currencymarkettdevelopmentheof
termsinmarketbondsoverignthe
ofdevationstandardAnnualized
indexequityof
deviationstandardAnnualized
12. The cost of preferred stock is the preferred stock dividend divided by the current
preferred stock price :
p
p
p
P
D
r
13. We can estimate the growth rate in the dividend discount
model by using published forecasts of analysts or by the sustainable growth rate:
14. Current Ratio =
abilitiesCurrent li
sestsCurrent as
15. Quick Ratio =
abilitiesCurrent li
ceivablesntsle invesmem marketabShort-terCash Re
16. Accounts receivable turnover =
ceivablesAverage re
esCredit Sal
17. Inventory turnover =
ventoryAverage in
ods soldCost of go
18. Number of days of receivables =
on credity's salesAverage da
eceiveableAccounts r
=
365redit /Sales on c
eceivableAccounts r
19. No. of days of inventory =
soldt of goodsy'sAverage da
Inventory
cos
=
365ods sold /Cost of go
Inventory
20. Operating cycle = Number of days of inventory + Number of days of receivables
21. Net operating cycle = Number of days of inventory + Number of days of receivables - Number
of days of payables
ROE
EPS
D
1g
3. 22. Money Market yield =
maturitytodaysofNumber
360
pricePurchase
pricePurchase-valueFace
23. Bond Market yield =
maturitytodaysofNumber
365
pricePurchase
pricePurchase-valueFace
24. Discount- basis yield =
maturitytodaysofNumber
360
valueFace
pricePurchase-valueFace
25. Cost of trade credit = 1
1
1 perioddiscountbeyond
daysofNumber
365
Discount
Discount
26. Return on equity =
equityrs'shareholdeAverage
assetstotalAverage
assetstotalAverage
Revenues
Revenues
incomeNet
equityrs'shareholdeAverage
incomeNet
27. Standard Deviation =
n
1i
i
2
ii
2
P)]E(R[Rσ
28. rij=
ji
ijCov
where rij= the correlation coefficient of returns
i = the standard deviation of Rit j = the standard deviation of Rjt
29. 212,121
2
2
2
2
2
1
2
1 2 rwwwwport
Derivatives and Alternative Investments
1. FRA payoff formula (from the perspective of the party going )
Notional Principal =
360
rateunderlyinginDays
xpriationaterateUnderlying1
360
rateunderlyinginDays
ratecontractForwardexpirationatrategUnderliyin
2. Minimum and Maximum Values of Options
Option Minimum value Maximum Value
European call 00 c 00 Sc
American call 00 C 00 SC
European put 00 p T
rXp )1/(0
American put 00 P XP 0
4. 3. Put-call parity = c0 + X/ (1+r)T
=p0 +s0
4. Appraisal price =
ratecapMarket
NOI
Equity and Fixed income
1. Dividend Discount Model (DDM)
k
D
k
D
k
D
k
D
1
......
111
Vj 3
3
2
21
n
t
t
t
k
D
1 1
2. Present value of Free Cash Flows to Equity
n
t
t
j
j
k
FCFE
V
1 1
2. Justified/ Fundamental (P/E)
gk
ED
E
Pi
11
1
/
4. (Shareholders’ equity)- (Total value of equity claims that are senior to common stock) = Common
shareholders’ equity
5. (Common shareholders’ equity)/ (Number of common stock shares outstanding) = Book value per
share
6. Coupon rate = Yield required by market Price = Par value
Coupon rate < Yield required by market Price < Par value (discount)
Coupon rate > Yield required by market Price > Par value (premium)
7. Price of callable bond = Price of option-free bond – Price of embedded call option
8. Price of putable bond = Price of option- free bond + Price of embedded put option
9. Taxable-equivalent yield =
ratetaxMarginal-1
ldexempt yieTax
10. Present value of an annuity =
i
i1
1
1
paymentAnnuity
periodsofno.
11. Valuing a Zero- Coupon Bond 2
1
rsno. of yea
i
alueMaturity v
Where i is the semiannual discount rate
12. Current yield =
Price
interestcoupandollarAnnual
5. 13. Yield on an annual-pay basis
1
2
basisequivalent-bondaonYield
1
2
14. Spread for life =
Price
100
marginQuoted
Maturity
Price100100
15. Z-spread = OAS + Option cost
16.
1
1
1
1
t
m
m
tm
tm
mt
z
z
f
17. Effective duration =
decimalinyieldinChangepriceInitial2
riseyieldsifPrice-declineyieldsifPrice
18. Macaulay duration =
Pricek
PVCFn.....PVCF2PVCF1
Yield/k1
1 n21
19. Modified duration=
Yield/k1
durationMacaulay
20. Portfolio Duration = kk DwDwDwDw .....332211
Financial Reporting and Analysis
1. Assets = Liabilities + Owners’ equity Revenue – Expenses = Net income (loss)
2. Basic EPS
goutstandinsharesofnumberaverageWeighted
dividendsPreferred-incomeNet
3. Diluted EPS =
ersioned at convbeen issucould have
atshares thNew commondingouts
resber of shaverage numWeighted a
videndseferred die debtconvertibl
rest onAfter taxNet income
tan
Pr
int
4. Diluted EPS =
excersiceuponreceivedcashwith
purchasedbeenhavecouldthatShares
excersiceoptionatissuedbeenhavecould
thatsharesNewgoutstandin
sharesofnumberaverageWeighted
dividendsPreferredNetincome
6. 5. Net profit margin =
Revenue
incomeNet
6. Gross profit margin=
Revenue
profitGross
7. FCFF= NI + NCC + Int (1-Tax rate)- FCInv – WCInv
8. FCFF = CFO + Int (1-Tax rate) - FCInv
9. FCFF = CFO- FCInv + Net borrowing – Net debt repayment
10. Definitions of commonly Used Activity Ratios
Activity Ratios Numerator Denominator
Inventory Turnover Cost of goods sold Average inventory
Days of inventory on hand (DOH) Number of days in period Inventory turnover
Receivables turnover Revenue Average receivables
Days of sales outstanding(DSO) Number of days in period Receivables turnover
Payables turnover Purchases Average trade payables
Number of days payables Number of days in period Payables turnover
Working capital turnover Revenue Average working capital
Fixed asset turnover Revenue Average net fixed assets
Total asset turnover Revenue Average total assets
11. Definitions of commonly Used Liquidity Ratios
Liquidity Ratios Numerator Denominator
Current ratio Current assets Current liabilities
Quick ratio Cash + Short-term marketable investments + Receivables Current liabilities
Cash ratio Cash + Short-term marketable investments Current liabilities
Defensive
interval ratio
Cash + Short-term marketable investments + Receivables Daily cash
expenditures
Additional Liquidity Measures
Cash Conversion cycle (net
operating cycle)
DOH + DSO – Number of days of payables
12. Definitions of commonly Used Solvency Ratios
Solvency Ratios Numerator Denominator
Debt Ratios
Debt-to-assets ratioa
Total debtb
Total assets
Debt-to-capital ratio Total debtb
Total debtb
+ Total shareholders’ equity
Debt-to-equity ratio Total debtb
Total shareholders’ equity
Financial leverage ratio Average total assets Average total equity
Coverage Ratios
Interest coverage EBIT Interest payments
Fixed charge coverage EBIT + Lease payments Interest payments + Lease payments
7. 13. Definitions of commonly Used Profitability Ratios
Profitability Ratios Numerator Denominator
Return on Sales10
Gross profit margin Gross profit Revenue
Operating profit margin Operating income11
Revenue
Pretax margin EBT (earnings before tax but after interest) Revenue
Net profit Income Net Income Revenue
Return on Investment
Operating ROA Operating income Average total assets
ROA Net income Average total assets
Return on total capital EBIT Short and long -term debt and equity
ROE Net income Average total equity
Return on common equity Net income-preferred dividends Average common equity
14. ROE = Net profit margin * Asset turnover * leverage
15. ROE = Tax burden * Interest burden * EBIT margin * Asset turnover * Leverage
Quantitative analysis
1. Population Mean: calculated as
Where there are N members in the population and each observation is Xi i =1, 2, …N.
Sum of all the deviations is zero.
2. Sample Mean: calculated as
3. Weighted Mean: calculated as
4. Geometric Mean: calculated as
Where there are n observations and each observation is Xi.
5. Mean Absolute Deviation: is the average of the data’s absolute deviations from the mean.
6. Population Variance: is the average of the population’s squared deviations from the mean.
The population standard deviation is simply the square root of the population variance.
7. Sample Variance: is the average of the sample data’s squared deviations from the sample mean.
The sample standard deviation is
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8. 8. Covariance describes the co-movement between 2 random numbers, given as :
Cov(X1, X2) = σ12
9. Correlation coefficient is a unit-less number, which gives a measure of linear dependence between
two random variables. ρ(X1, X2) = Cov(X1, X2) / σ1σ2
10. Portfolio Expected Return:
E(rp) = wA rA + (1-wA )rB
Portfolio Variance:
OR
11. Coefficient of variation
12. Sharpe measure
13. Addition Rule
Used to Get Compound Probabilities for Union of Events: P(A OR B) = P(A U B) = P(A) + P(B) - P(A ∩ B)
For Mutually Exclusive Events: P(A OR B) = P(A U B) = P(A) + P(B)
14. Sum Rule & Bayes’ Theorem
Out of a group of 100 patients being treated for chronic back trouble, 25% are chosen at random to
receive a new, experimental treatment as opposed to the more usual muscle relaxant-based therapy
which the remaining patients receive. Preliminary studies suggest that the probability of a cure with the
standard treatment is 0.3, while the probability of a cure from the new treatment is 0.6.
15. Discrete Probability Distributions
Probability distribution for a Binomial random variable is given by:
16. Normal Distribution Random Variable
General Normal random variable X ~ N (μ, σ2
)
X can be standardized to a Standard Normal random variable.
Resulting variable has mean zero and variance equal to 1.
YX
YX
XYEYXCov
YXEYXCov
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BAAABAAAr rrCovwwwwp
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BAABAABAAAr wwwwp
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X
s
CV
p
fp rr
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)()/()()/(
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)/( cc
APABPAPABP
APABP
BAP
xnx
x
n
ppCxXP
)1()(
X
Z
9. 17. Confidence Intervals
The standard error of the mean (sx) is given by:
18. Errors in Estimation
Type I and Type II Errors
Type I error occurs if the null hypothesis is rejected when it is true
Type II error occurs if the null hypothesis is not rejected when it is false
Significance Level
-> Significance level
The upper-bound probability of a Type I error
1 - ->confidence level
The complement of significance level
19. The sample variance for a pooled estimater is given as
20. Hypothesis Tests for Variances
n
s
sx
2
)1()1(
21
2
22
2
112
nn
snsn
s