Ch 8,9,11 Flashcards
Annualized Return=
(p1-p0+CF)/p0 * 360/holding period
p1= cash at end
p0= cast at beginning
CF= other cash flows from asset during holding period
CAPM return calculation
return=
Ri=Rrf+βi(Rm−Rrf)
Return=Riskfree rate + beta(return on market - risk free rate)
Expected return or mean rate=
Probabilityreturn + probability return…..
Probabilities in decimals like (.04), return rates as is (11.5)
Variance=
(lowest rate - mean rate)^2 * probability of lowest rate
+
(middle rate - mean rate)^2 * probability of middle rate
+
(highest rate - mean rate)^2 *
probability of highest rate
Standard Deviation=
square root of variance
Market Risk Premium=
(market return - risk free rate)
Build up Method
Bond yield
+ Equity risk premium
+ Micro-cap risk premium
+ Start-up risk premium
= Required rate of return
Micro-cap risk only if company is small (less than 1 Billion Sales)
Start-up risk only if its a start-up
EVA=
NOPAT- (WACC x Costly Capital)
After Tax Cost of Debt =
Before tax cost of debt - tax savings
or
before tax cost of debt * (1 - tax rate)
note: the before tax cost of debt is the interest rate
Gordon Growth Model is
V0= D1 / (Kcs - g)
Kcs is the required rate of return
g is the growth rate
V0 is the value of stock at time 0
D1 is the dividend at the next period
3 ways to find internal cost of equity
CAPM
Build up Method
Gordon Growth
How do you modify the CAPM to find the external cost of equity
External equity costs= rate * (1+ flotation cost %)
Note: You are adding the flotation cost to the cost you have to pay for external financing.
How do you modify the Build up Method to find the external cost of equity
External equity costs= rate * (1+ flotation cost %)
Note: You are adding the flotation cost to the cost you have to pay for external financing.
How do you modify the Gordon Growth Model to find the external cost of equity
V0 * (1- Flotation Cost percent)
which is the same as
P0 * (1- Flotation Cost percent)
Note: You are removing the flotation costs from the value that you get
How to Calculate Value of Preferred Stock with Flotation Costs
Vps (1- flotation %) = Dividend / required rate of return
or
Vps - $flotation = Dividend / required rate of return
WACC=
C/V (kcs) + P/V (kps) + D/V (kd)(1−t)
C = the market value of common stock
P = the market value of preferred stock
D = the market value of debt
V= C + P + D
kcs = cost of common stock
kps = cost of preferred stock
kd = cost of debt
t = tax rate
How to determine to accept or reject based on NPV
If positive NPV, accept
If negative, reject
Calculator Notation for NPV
From the Finance menu, select:
7:npv(
Enter it like this:
npv(rate%,IO,{CF1,CF2, . . . },{N1,N2, . . . })
where CF1 is cash flow #1, and N1 is the number of periods in a row that cash flow #1 occurs. IO is the initial outlay or initial investment
Purpose of Profitability Index?
To assist the NPV by understanding the return as a percentage of the initial investment.
How to decide to accept or reject a project based on PI
If PI >1 accept, if its <1 reject
How to adapt NPV to find PI?
Same formula, but put 0 for the initial outlay, and then divide your final answer by the initial outlay
Cost of Preferred Stock=
Kps= dividend/ (p*(1-flotation costs))
Calculate IRR on calculator
Its number 8 in the finance list, and then you enter the values just like NPV except without the percentage rate value
How to determine if Its a good IRR
If the IRR is greater than the discount rate, you accept the project
