Formulas Flashcards
1
Q
Firm value
A
2
Q
Pro forma sheets
A
3
Q
Cost of equity
A
4
Q
WACC Formulas
A
5
Q
Option pricing of V = E + D
A
If debt is risky, there may be two outcomes.
- V>=D -> promised payment made in full
- V<d> Defaulting on payment</d>
==> Actual payment to debt: min(D,V) (assume limited liability)
-> If we have a put option to sell for D, the payout is max(0,D-V)
Debt: min(D,V) = D - max(0, D-V),
where D is riskless debt, and the rest is a short put option.
Equity: Call option on firm equity, max(0, V-D)
We can see that this is V in all cases;
1) V>=D, E+D = V-D+D-0 = V
2) V<d>
</d>
6
Q
Formulas for instaneous Betas
S = Equity, B = Debt
A
