Corporate Finance Formulas

Question 1

Payback Period

Answer 1

Full years until recovery + (unrecovered cost at the beginning of last year / cash flows during last year)

Question 2

Profitability Index

Answer 2

PV of future Cash Flows / Initial Cash Outlay

Question 3

Weighted average cost of capital (WACC)

Answer 3

WACC = Wd(Kd (1-t)) + Wps(Kps) + Wce(Kce)

Wd = weight of total that is debt
kd = cost of debt 
kps = cost of preferred stock 
kce = cost of common equity

Question 4

After tax cost of debt

Answer 4

= interest rate - tax savings

= (1-t)*Kd

Question 5

Cost of preferred debt

Answer 5

Kps = Dps / p

Question 6

3 models to estimate the cost of equity capital

Answer 6

1. Capital Asset Pricing Model
2. Dividend Discount Model Approach
3. Bond-Yield Plus Risk Premium Approach

Question 7

CAPM

Answer 7

Kce = Rf + Beta*(E(Rm) - Rf)

Rf = risk free rate
E(Rm) = expected RoR in the market

Question 8

Dividend discount model

Answer 8

Po = D1 / (Kce - g)

Question 9

Bond-Yield Plus Risk Premium Approach

Answer 9

Kce = bond yield + risk premium

Question 10

Beta Calculations

Answer 10

BetaASSET = BetaEQUITY * ( 1 / (1 +[(1-t)*D/E]))

Beta PROJECT = BetaASSET * (1 + (1-t)*(D/E))

D/E == debt to equity ratio for comparable company.

Question 11

Revised CAPM

Answer 11

Kce = Rf + Beta*(E(Rmkt) - Rf + CRP)

CRP = Country Risk Premium
- typically depicted as sovereign yield spread.

Question 12

breakeven quantity of sales

Answer 12

fixed operating and financing cots / (price - operating costs)

Question 13

operating breakeven quantity of sales

Answer 13

fixed operating sales / (price - variable costs per unit)

Question 14

Cost of trade credit

Answer 14

(1 + [percent discount / (1 - percent discount)])^(365/days past discount) - 1

Question 15

degree of operating leverage

Answer 15

= % change in EBIT / % change in sales

Question 16

degree of financial leverage

Answer 16

= EBIT / (EBIT -1)

= Percent change in EPS / Percent change in EBIT

Question 17

degree of total leverage

Answer 17

=DOL * DFL

= % change in EPS / % change in sales