Chapter 4 - Investment Appraisal Flashcards
Interest rate investor demands
Risk free rate + Inflation premium + default risk + liquidity premium + maturity premium
Future Value
Present Value * (1+R)n
Present Value
Future Value/ (1+R)n
Future Value - Continuous Compounding
PeRT: Present^e(decimalised interest rate * years)
Present Value - Continuous Compounding
Future^e-(decimalised interest rate * years)
APR
(1+ (nominal/number of payments))^n -1
AER - more than one compounding period per year
(1+ (nominal/number of payments))^n -1
AER - less than one compounding period per year
(1+ (periodic rate)^(1-number of years))-1
Net present value
NPV = 0 NPV = Present value of inflows - present value of outflows
Approximate IRR
2/3 * (profit from project/initial outlay)
Gordons Growth Model
Discounted Cash Flows
Present Div * (1+rate of growth))/(investors required rate - dividend growth rate
Standard Deviation
σ = (Σ(X-X̄)^2)/n
Sigma when whole data set
Sample when sample: divide by n-1
Stats mode on calculator
MODE 2 then 1
Mean of table on calculator
SHIFT 1, 4, 2
Standard deviation on calculator - sigma
SHIFT 1, 4, 3
Standard deviation on calculator - sample
SHIFT 1, 4, 4
Information Ratio
Information Ratio = Extra Return/Extra RIsk
Information ratio = alpha/ standard deviation of excess return
The higher the information ratio the better
Gross Profit Margin
(Gross profit/Revenue) *100
Operating Profit Margin
(Operating Profit/Revenue) * 100
Gross Profit
= Revenue - Cost of sales
ROCE
= (Operating Profit/Capital Employed) * 100
or operating profit margin * asset turnover
Capital employed= Total Assets - Current Liabilities
Asset Turnover
= Revenue / Capital Employed
Operational Gearing Ratio
= ((Revenue-variable costs) /Profit)*100
Current Ratio
= Current Assets/ Current Liabilities
eg.
Short term assets/Short term liabilities
Quick Ratio
= (Current Asset - Inventory)/Current Liabilities
Inventory Turnover
= Cost of Goods sold/ Inventory
Inventory Days
= (Inventory/ Cost of goods sold)*365
Receivables Collection Preiod
= (Trade Receivables/revenue)*365
Debt to Equity
= ((Interest bearing debt + preference share capital)/Equity share holder funds)*100
Net Debt to Equity
= (Debt-Cash)/Equity
Interest Cover
= (operating profit + interest receivables + other income receivables)/Interest payable
Asset Cover
= Capital Employed/Long term liabilities
EPS - Earnings per share
= (Profit after tax - Preference share div)/(Total equity - preference shares)
Return on Equity
= (Profit after tax - Preference share div)/Total equity
PE - Price to earnings
Share price/Earnings per share
PEG - Price earnings to growth
PE ratio/Expected growth rate of earnings
NAV - Net Asset Value
Net assets for ordinary shareholders/Number of ordinary shares
Price to book
= Share price/NAV
Earnings Yield
= EPS/Share price
The reverse of the PE ratio
EV to EBITDA
=(Assets + Equity + Debt)/EBITDA
Dividend Yield
= Net div per share/Share price
Dividend Cover
= EPS/Net Div per share
Consumption
C = a + cY
C = Consumption a = non discretionary spending c = Gradient of Slope Y = Disposable income
Aggregate Demand Multiplier
= 1/(1-MPC)
MPC = Marginal Propensity to Consume
