Financial Formulas
By: tybeau55 • June 10, 2019 • Course Note • 994 Words (4 Pages) • 738 Views
Chapter 6
OCF = (Sales – Costs)(1 – T) + Depreciation*T
Include change in nwc, salvage value, opportunity cost, and ocf (not sales or costs or anything else, must be ocf) in calculations
EAC- find the npv, then plug npv in as pv and solve for pmt (fv=0)
Find ocf not including sales (so ocf for costs) and include salvage values (fv is still 0 even if salvage value)
Choose option with lower EAC
increase in nwc add in year 0 then subtact back at end
decrease in nwc --- subtract in year 0 then add back at the end
Salvage value net of tax = value* (1-T) – book value
Changes in nwc accounts: think of it like cash flows: so increase in asset is a neg cash flow and thus would be a negative when calculating nwc change
Chapter 16
Value of a firm = value of debt + value of equity
When there are no taxes ---- Value of levered Firm=Value of unlevered firm
When there are no taxes ---- Rs = R0 + (B / SL) (R0 - RB)
RB is the interest rate (cost of debt)
Rs is the return on (levered) equity (cost of equity)
R0 is the return on unlevered equity (cost of capital)
B is the value of debt
SL is the value of levered equity
When there are taxes ---- Value of levered firm = value of unlevered firm + Tax rate*the value of debt
Value of unlevered firm= EBIT(1- tax rate) / the return on unlevered equity
When there are taxes ---- RS = R0 + (B/S)×(1-TC)×(R0 - RB)
RB is the interest rate (cost of debt)
RS is the return on equity (cost of equity)
R0 is the return on unlevered equity (cost of capital)
B is the value of debt
S is the value of levered equity
Options- Ch 22 and 23
Delta: = Range in Option Price /(Range in Stock Price)
Value of call option= Max (the value of stock at expiry – exercise price, 0) ---- Payoff= value of option – call premium
Value of put option = Max (exercise price – the value of stock at expiry, 0) ---- Payoff = value of option – put premium
Stock price +Put option = PV(strike price)+Call option
Binomial options:
Call price = (prob * Call value upside+ (1-prob)* call value downside)/ (1+rate)^period in years
Risk Neutral Prob= (e^rt – d) / (u-d) --- u=upside stock price/original stock price and d= downside stock price/ original stock price
For two step use the length of time for the first step for t in risk neutral prob
When given standard deviation of stock returns--- u= e ^ (std dev * sqrt (time in years)) ----- d=1/u
2 step call price = prob ^ 2 * call value double up + 2 * prob up * prob down * middle call option value + prob down^2 * call value double down
Chapter 21
Cash flows for buying--- upfront negative cf for the purchase and then there will be a depreication tax shield and possible savings
After tax savings= annual saving * (1 – tax rate) Dep tax shield= dep exp * tax rate
Cash flow for lease ---- nothing up front and then lease payments and possible savings each year
Lease payments = payment * (1 – tax rate) After tax savings = savings (1-tax rate)
To get net advantage of leasing--- pv of leasing – pv of buying
To get breakeven lease payment – find npv of buy (neg in year 0 then dep tax shield) and plug this in for pv and do TVM on calculator solving for payment with fv=0 --- this gives you the payment after tax--- once you do this divide by 1-tax rate in order to account for tax discount and get pre tax payment
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