Corporate Finance

Cheat Sheets
 Corporate Finance

CAPITAL BUDGETING

Σ
N
CFt CFt = Expected net cash flow at time t
Net present value (NPV) NPV = (1 + r)t N = Investment’s projected life
t=0 r = Required rate of return for the investment

Σ
N
Internal Rate of Return CFt
=0 CFt = After-tax cash flow at time t
(IRR) (1 + IRR)t
t=0 r = Required rate of return for the investment

Average Accounting Rate of Average net income

AAR =
Return (AAR) Average book value

PV of future cash flows NPV

Profitability Index (PI) PI = =1+
Initial Investment Initial Investment

COST OF CAPITAL

wd = Тhe desired or target proportion of

debt in a company’s capital structure when
securing new funding
rd = Тhe cost of debt before the application of
taxes
t = Тhe company’s marginal tax rate
Weighted Average Cost
WACC = wdrd (1 - t) + wprp + were wp = Тhe targeted proportion of preferred
of Capital (WACC) stock in a company’s capital structure when
the firm raises new funds
rp = Marginal cost of preferred stock
we = The target proportion of common stock
in the capital structure when the company
raises new capital
re = The marginal cost of common stock

Tax shield Tax shield = Deduction × Tax rate

Pp = Current preferred stock price per share

Cost of Preferred Dp
rp = Dp = Preferred stock dividend per share
Stock Pp rP = Cost of preferred stock
 Corporate Finance

COST OF CAPITAL

P0 = Тhe current stock price

D1 = Тhe expected dividend at the end of
Cost of Equity D1 Period 1
(Dividend discount model re = +g re = Required rate of return on the market
approach) P0
g = The growth rate

Growth Rate g= 1-
( ) D
EPS
x ROE
ROE = Return on Equity
D = Dividends per share
EPS = Earnings per share (EPS)
(D/EPS) = Assumed stable dividend
payout ratio

Risk premium = Additional yield on a

Cost of Equity company’s stock relative to its bonds
(Bond yield plus risk premium) re = rd + Risk Premium
rd = The cost of debt

βi = Return sensitivity of stock i

to changes in the market return
Capital Asset Pricing
E (Ri) = RF + βi [E (RM) - RF ] E(RM) = Expected return on the market
Model (CAPM)
E(RM) − RF = Expected market risk premium
RF = Risk-free rate of interest

Rm = Average expected rate of return on

the market
Cov (Ri, RM)
Beta of a Stock βi = Ri = Expected return on an asset i
Var (RM) Cov(Ri, Rm) = The covariance of the return of
asset i with the return of the market
Var (Rm) = The variance of the return of the
market

βLevered, Comparable
Pure-play Method Project βUnlevered, Comparable = t = Tax rate
Beta
(De-lever) [(1 + (1 - tComparable)
DComparable
EComparable )] D = Debt
E = Equity

[ ( )]
Pure-play Method for DProject
βLevered, Project = βUnlevered, Comparable
Subject Firm 1 + (1 - tProject) E
(Re-lever) Project
 Corporate Finance

COST OF CAPITAL
Adjusted CAPM E(Ri) = RF + βi [E (RM) - RF + Country risk premium]
(for country risk premium)

( )
σ of equity
index of the developing country
Country Risk Premium CRP = Sovereign yield spread x
σ of sovereign bond market in terms
of the developed market currency
σ = Standard deviation

Amount of capital at which

the source’ s cost of capital changes
Break Point Break point =
Proportion of new capital
raised from the source

MEASURES OF LEVERAGE

Degree of Operating Degree of Operating Percentage change in operating income

=
Leverage Leverage Percentage change in units sold

Degree of Financial Degree of Financial Percentage change in Net Income

=
Leverage Leverage Percentage change in EBIT

Degree of Total Degree of Total Percentage change in Net Income

=
Leverage Leverage Percentage change in number of Units Sold

Net Income
Return on Equity Return on Equity =
Shareholders’ Equity
(ROE)

P = Price per unit

The Breakeven V = Variable cost per unit
F+C F = Fixed operating costs
Quantity of Sales QBreakeven =
P-V C = Fixed financial cost
Q = Quantity of units produced and sold

P = Price per unit

Operating Breakeven F
QOperating Breakeven = P - V V = Variable cost per unit
Quantity of Sales F = Fixed operating costs
 Corporate Finance

WORKING CAPITAL MANAGEMENT

Current assets
Current Ratio Current Ratio =
Current liabilities
Cash + Receivables + Short-term marketable investments
Quick Ratio Quick Ratio =
Current liabilities

Accounts Receivable Credit sales

Accounts Receivable Turnover =
Turnover Average receivables

Number of Days of 365

Number of days of receivables =
Receivables Accounts receivable turnover
Cost of goods sold
Inventory Turnover Inventory Turnover =
Average Inventory
Number of Days of 365
Inventory Number of Days of Inventory =
Inventory turnover
Purchases
Payables Turnover Payables Turnover Ratio =
Average accounts payables

Number of Days of 365

Number of Days of Payables =
Payables Payables turnover ratio
Net operating cycle = Number of days of inventory
Net Operating Cycle + Number of days of receivables
- Number of days of payables
D = Dollar discount, which is equal to the
difference between the face value of
Yield on a Bank D 360 the bill (F) and its purchase price (P0)
rBD = x
Discount Basis (BDY) F t F = Face value of the T-bill
t = Actual number of days remaining to maturity
rBD = Annualized yield on a bank discount basis

Effective Annual Yield 360

EAY = ( 1 + HPR) t
-1
(EAY)
(Cashflow ending value - Beginning value + Cashflow received)
Holding Period Return HPR =
Beginning value
360

( %Discount
)
Number of days
Cost of Trade Credit Cost of trade credit = 1+
past discount
-1
1 - %Discount

Interest + Dealer’ s commission + Other costs

Cost of Borrowing Cost of borrowing =
Loan amount - Interest
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