Corporate Finance Flashcards
Accounts Receivable
Day sales outstanding * Sales/365
Accounts Payable
Target payment terms * Purchases/365
Additional funds needed
ADD DEFINITION/CALCULATION!
Additional funds needed
Required increase in assets (A/S0)*Schange
Less spontaneous change in liabilities (L/S0)*Schange
Less increase in retained earnings (Net margin * S1 * RetRatio)
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(A/S0)*Schange - (L/S0)*Schange - (Net margin * S1 * RetRatio)
Arithmetic vs geometric mean
INSERT DEFINITION
Effective cost of trade credit
Asset turnover
ADD DEFINITION
Asset β
βa=βe * (E/V)
E/V is market value capital structure. User surrogates to estimate unlevered β, calculate weighted averages of unlevered βs, re-lever at target’s market value capital structure
Cash conversion cycle
Inventory conversion + AR conversion - AP conversion
Inventory/Sales per day + AR/Sales per day - AP/COGS per day
CAPM
R = Rrf + β(Rm-Rrf)
- Rrf = risk free rate (long-term treasury bond*
- Rm = return on a broad market interest*
Beta (β)
Measures the variability of a security’s return relative to a portfolio/the market.
β>1 indicates risk greater than the market
β
Bond par value
contracted face value of a bond, amount to be repaid
After tax cost of debt
Kd=(T-bond30+debt spread)*(1-Rt)
Because interest payments on debt are always tax deductible, Kd is always considered after tax
Cost of trade credit
Discount/(100-disc) * 365/(DSO-disc period)
Day sales outstanding
(AR/Total credit sales) * Number of days
Cost of equity
T-bond yield + β * Market Risk premium
Discounted Cash Flows method (DCF)
- Establish free cashflows
- Estimate terminal value
- Discount CF and terminal value by WACC to derive PV of operations
- Add market value of non-operating assets
- Reduce by market value of debt
Effective annual rate
(1+i/m)mn-1
Equity mutiplier
ADD DEFINITION
Free cash flows
Sales - operating expenses - taxes - investment in operations
NOPAT + depreciation - change in capital investments
Future value (FV)
FV = PV*(1+i)n
Internal rate of return (IRR)
Discount rate at which the investment’s NPV = 0
Inventory
Sales/Target inventory turnover
Inventory turnover
COGS/Final inventory
Market risk premium/equity premium
Required return on the market minus the risk-free rate (spread)
Net margin
ADD DEFINITION
Net operating working capital
Operating current assets - operating current liabities
Includes cash but excludes short-term notes payable
Non-operating activities
Financing activities, non-operating investments (ie securities)
NOPAT
EBIT * (1-tax rate)
Operating activities
Activities related to the firm’s normal course of business operations; process of income generation and investments required to support it.
Accounts: net income, depreciation, various asset and liability accounts but excluding cash, securities and third-party debt.
Payback period
Period of time to recovery of investment. Does not take into account time value of money or value of cashflows after payback.
Periodic rate
i/m
i=interest rate
m=# periods per year
FV=PV*(1+(i/m))mn
Present value (PV)
PV = FV*(1/(1+i)n)
Retention Ratio
ADD DEFINITION
ROA
ADD DEFINITION
ROE
ADD DEFINITION
ROIC
NOPAT/Total operating capital
Sustainable growth rate
Profit margin * asset turnover * equity multiplier * retention ratio
NI/sales * sales/TA * TA/Eq * (NI-Div)/NI
TIE
EBIT/Interest
Total net operating capital
Net operating working capital (NOWC) + long-term operating assets (PPE)
Unlevering Beta
Asset β = β * (E0/V0)
Relevered β = βA / (E1/V1)
Valuation ratios
P/E
P/Sales
P/Book
P/EBITDA
P/FCF
Valuing stock: Zero growth model
P = Div/r
r = expected return on stock
Weighted average cost of capital (WACC)
WACC = wdkd(1-t) + wpfkpf + wcskcs
k is new cost of debt
d = debt
pf = preferred stock
cs = common stock
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