Corporate Finance Flashcards
average accounting rate of return calculation
AAR = average net income / average book value
profitability index calculation
PI = 1 + (NPV / IO)
capital budgeting decision rules
invest if
NPV is greater than 1
IRR is greater than r
PI is greater than 1
in calculating WACC, debt…
is calculated on after-tax basis. multiply by (1-t)
CAPM formula
Er = Rf + beta (Rm -Rf)
pure-play method, unlevered beta calculation
Bu = BlC / [ 1 + (1 - Tc)(Dc /Ec)]
lever the beta calculation
BlProject = BuC [1 + (1-Tp)(Dp / Ep)
Country equity premium calculation
= sovereign yield spread (annualized sd of equity index / annualized sd of sovereign bond market in terms of developed market currency)
DDM calculation
= D1/P0 + g
growth rate calculation
= (1 - D/EPS)*ROE
DOL calculation
= (Q(P-V)) / (Q(P-V) -F)
DFL calculation
= [Q(P-V) -F] / [Q(P-V) - F - C)
C is fixed financing cost
a DOL of x means
a 1% change in units sold results in a 1% * x change in operating income
a DFL of x means
a 1% increase in operating income would result in a 1 * x percent increase in net income
using financial leverage generally increases…
the variability of ROE
DFL is not affected by
tax rate
DOL tells of the sensitivity of
operating income to changes in revenue
DFL tells of the sensitivity of
net income to changes in operating income
DTL calculation
DOL * DFL
breakeven point
the number of units produced and sold at which the companys NI is zero (revenues equal costs)
breakeven calculation
= (F + C) / (P - V)
operating breakeven includes
only operating costs
operating breakeven calculation
= F / (P-V)
major drags on liquidity
uncollected receivables, obsolete inventory, tight credit
