WACC Flashcards
To remember key formulas
What is ROE and recall its formula
Return on Capital employed and
ROE = Total profit/opening net assets(equity book value)
or profit = Equity book value * ROE
How to derive the share price if dividend is constantly growing
P=D(1+g)/ke-g
or
Ke=D(1+g)/p+g
recall formula for gordon’s growth model
g=b*r
G=growth
b=ROE
r=retention ratio
recall different growth rates formulas
- Dividend history
g=(latest dividend/old dividend)^1/n -1 - Gordon’s model
g=b*r - Profit growth rate
g=(latest profit/old profit)^1/n -1 - Net assets growth
g=(latest NA/old NA)^1/n -1 - Retained profits to opening Net assets
g= Retained profits/opening NA
what is price earning multiple and what does it mean?
- Higher P/E indicates the greater confidence of investor in the company
- It shows how much amount investor is paying per rupees earning
Formula= price/earning
or price per share/EPS
what is dividend cover
dividend cover is profit over dividend formula is
Dividend cover = Profit/dividend
or EPS/DPS
Higher times means company pay less dividend
The investor of this company will earn less dividend but will be benefitted in form of capital gain when he will sell the shares.
what is dividend yield?
dividend yield is how much dividend an investor has earned on a particular price.
formula= dividend/price
dividend payout ratio formula
dividend/profit or earning(EPS)
what is the relation between the P/E ratio and dividend cover ratio
You can drive the Dividend Yield from P/E and P/D which will be used in this formula as D/P
Ke=D(1+g)/p+g
recall the formula for IRR
a+[A/(A-B)]*(b-a)
a= chotay ka rate
A= chotay ki NPV
B= baray ki NPV
b= bara rate
if the coupon rate for the bond in the market goes down after one year what should investment in such bond at higher or lower price?
Higher price because you coupon is giving you higher than market price
step involved in calculating the post tax kd when pre tax kd
calculate the market value using pre tax cash flows and pre tax rate
using the market value calculated in the step above put in post tax cash flows and market value calculate a rate which will be of post tax kd
answer this case scenario
post tax kd is given and market value is to be calculated.
- Draft cash flows individually with tax savings on interest.
- Find PV at post tax Kd to get market value.
answer this case scenario
MV of the bond is given and post tax kd is to be calculated
1, Draft cash flows by taking market value at year 0 and take tax savings on interest.
- Find IRR of post tax cash flows and market value.
answer this case
Pre tax kd is given and market value of bond and post tax kd are to be calculated
- find market value using pre tax cash flows discounted at pre tax rate
- Find post tax kd by finding IRR of market value and post tax cash flows.
what if in the question you are provided with market value of the preference shares and nominal rate but they won’t say anything about the period of redemption?
well if the market value is low and high then it is obvious that effective rate would be according to it because let’s say that the market rate is higher than the nominal rate of preference shares then other person would not buy it face value rather at discount rate this would make the effective rate higher and further if period is not given then it is understood that it is indefinite period.
