Oatsandsugar.files.wordpress.com



Finance: Final Exam Johanan OttensooserSimple Interest: Interest paid only on principleFV=PV+PV*i*nPV=FV(1+i*n)-1Compound InterestInterest paid on a changing principle (+interest or –payments)FV=PV1+inPV=FV1+i-nAnnuityEqual payments at equal intervals for a given periodFV=PMT1+in-1iPV=PMT1-1+i-niPerpetuityEqual payments at equal intervals to perpetuityPV=PMTiEffective Annual Interest RateChanging rate with non-annual compounding periods to an annual rate with annual compounding periodsEAR= 1+im-1Debt & ValuationPartiesAcceptor (guarantee)Drawer (takes funds, issues debt)Discounter (buys debt @ discount)Short term debtPeriod is less than one yearNo explicit interest paid (interest is the difference between FV and purchase price)FV=PV(1+rt)PV=FV1+rtBondsPay coupons at regular intervalsRepay an amount at maturityMarket interest rates (“i” or YTM or RRR) fluctuatesWhen bond price < face value the bond is discountPV=PMT1-1+i-ni+FV1+i-nPMT=FVCoupon RateAnnualNumber of Periods Per YearEquityKeyP0 = Value of share @ t=0Dt = Expected dividend payout at time tD = Value of a constant dividendr = Discount Rateg = growth rateD1 = D0(1+g)Equity Valuation (current value of a share) = PV of all future dividendsP0=D11+r+D21+r2+…+Dt1+rtConstant Dividend ModelIs perpetuity ... therefore from PV=PMTi P0=DrConstant Growth ModelRequires:Constant rate of change in dividendRate smaller than the discount rateP0=D1r-gRights issueM = Market PriceS = Subscription priceN = Number of sharesValue Rights Issue=N(M-S)N+1Ex Rights PriceX = Ex Rights PriceS = Subscription priceR = Rights issue valueX=S+RCapital BudgetingChoosing an investmentAccounting Rate of ReturnARR=Average NP(initial cost+salvage)2If ARR ≥ required RR, then acceptPayback PeriodDiscounted paybackCash flows are discounted to their present valuesRemoves the issue of TVM in Payback periodGives breakeven lifeNet Present ValueNPV is PV of all future cash flows discounted at the required rate of return less initial investmentsNPV=CF11+r+CF21+r2+…+CFn1+rn-I0 CFt1+rt-I0NPV≥0 than acceptr = required rate of returnCFt = cash flows for time “t”I0 = Invested amount at “t=0”NPV = Change in s/h wealthInternal Rate of ReturnRequired rr that NPV = 0NPV=0=CF11+r+CF21+r2+…+CFn1+rn-I00=CFt1+rt-I0Investment relationsMutually exclusive (one)Independent (zero, one or two, as per # of choices)Capital RationingAccept all projects w +ve NPVBut! Capital is limited!HardBy financeSoftBy managementProfitability IndexPI=NPV+Initial CostInitial CostPI=1, indifferentPI>1, acceptFischer Effect1+R=1+r(1+h)R = nominalr = realh = infln.Capital BudgetingAll net cash flows1) @ y02) @ y1-yn3) @ ynAfter Tax Cash FlowCFafter tax=CFbefore tax*(1-%tax rate)Tax saving on depnTax saving on Depn=Depn*%tax rateChange in Accts’ receivable and inventory go in first and last year (where they are instituted and when they are reverted) ... Acct receivable increase as –ve, inventory increase as +veRiskEfficienciesStrongAll information is reflected in share priceSemi-StrongAll public information is reflected in share priceWeak Current price reflects own past pricesTrend analysis cannot find mispriced sharesReturn (1 period)Rt=Pt-Pt-1+DtPt-1R = ReturnP = Price (Pt @ t) (Pt-1 @ “beginning”)D = Cash FlowReturn (multiple periods)P0=Drr = rate of returnD = Cash Flow (present value of all future cash flowsAverage returnR=rinr = rate of return in periodn = number of observationsExpected ReturnER=PaRa+PbRb+…Pa = Probability of a occurringRa = Result of A occurringNB: do “boom” and “bust” separate (i.e. average/weighted average them, and then use form)Std devOld calculatorMode SDClear SCLResult (shift+,) frequencyShift (2)HistoricalArithmeticσa=(R1-R)2+(R2-R)2+…+(Rn-R)2n-1R=ResultVarianceVa=σa2With probabilitiesσa=P1(R1-R)2+P2(R2-R)2+…+Pn(Rn-R)2R=ResultP= probabilityWordsCovariance (i.e. move in the same direction)Correlation (i.e. move together ρ = 1Systematic (whole system)Unsystematic (part of system) (can be removed via diversificationBeta0 = no correlation+ = positive correlation- = negative correlation(can be weighted for portfolio)For creating weighted portfolio (work out what you have and then simultaneous equations)SMLER=Rm-Rfβ+Rfy=mx+bi.e. Rm-Rf = slope = rise/run = return/beta Rf = return when b = 0Also literal [E(R)=return, Rm = market expected return) for finding fragments)E(R)i=Rf+βi[ERm-Rf)Sub in to check whether share is over/under priced (if ER < right then overpriced... i.e. not enough returns)WACCWACC=Rd1-tcDV+ReEV+RpPVRd=rrr of debtTc = company tax rateD = mkt value of debtV = value (D+E+P+...)Re = rrr of equityE =mkt value of equityRp = rrr of preference sharesP = mkt value of preference sharesWeights = E/V and D/V (V=D+V)BondsUsual pricing model“cost” is “required rate of return”/YTM...Preference SharesValued @ face value + growthCost=RRR=Interest PaidMarket valuePreference SharesPriced via dividend pricing or via SMLCapital StructuresCapital Target maximises ValueValue added by loans via tax shieldVL=VU+tcDD = debt valueTax shield V costs of fin. DistressDirect (costs of liquidation)Indirect (not being able to invest, losing employees, etc.)EBIT (earnings before interest and tax) EPS (earnings per share)In change (EPS1=EPS2)EPS=EBIT-INT1-T-Dp# of Sharesi.e.EBIT-INT11-T-Dp# of Shares1=EBIT-INT21-T-Dp# of Shares2 to graph, change EBIT in formula above and plot EPSIf asked which is better, higher EPS @ any given EBITOptions/ForexCall is an option to buyPut is option to sellOut of money is not profitableNot worthless because of time value Affected byShare price’Exercise priceVolatilityTime to expiryRisk free interest ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download