Time Value of Money Bond Valuation and Risk The Capital Asset Pricing Model (CAPM)

a) FV = PV(1+k)T a) PVzero = FV/(1+k)T a) Efficient frontier = Portion of the opportunity set that is
b) DFT = 1/(1+k)T b) PVCoupon = Coup/(1+k) + … (Coupon+FV)/(1+k)T not dominated
c) PV = FVxDF c) PVCoupon = Coup x (1-DF)/k + FVxDF b) Market Portfolio = T; contains all risky assets weighted
d) PV(CF Stream)= CF1xDF1 + CF2xDF2 … + CFTxDFT d) DF = 1/(1+k)T according to their value
e) Kreal = (1+Knominal)/(1+inflation) -1 e) PVPerpetual = Coupon/k c) CML = Line from RF to Market Portfolio (efficient)
f) Keffective = (1+Kstated/n)n-1 f) YTM = (FV/Price)1/T -1 • E[Ri]= RF + ((E[RM] – RF)/σM)xσi
g) Expected CF = CFAxPA + CFBxPB g) YPerpetual = Coupon/Price d) SML = Line from RF to Asset (inefficient)
h) K = Riskless Rate + Risk Premium h) + Δ Yield  -Δ Price • E[Ri]= RF + (E[RM] – RF)x βi
i) PVPerpetuity = CF/(k-g) i) Forward Rate = Closes gap between spot rates e) βi = ρi,M xσi/σM
j) PVDeferred Perp = PVPerpetuityxDF(T-1) • 1f3 = Fwd between 1 and 3 yr spot rates f) βPortfolio = weighted average of βs
k) PVAnnuity = PVPerpetuity – PV Deferred Perpetuity • 1f3 = (1+y)(1+1f3)2 = (1+y3)3 g) α = Ri – E[Ri]
l) Arbitrage if same CF and different PV j) Risk = Δ Price when Δ Yield h) Estimation of β = Regression of Excess Returns of the
k) Duration = measure of risk. Time to get PV back firm and the market; β is the coefficient of Regression
• McD = 1xCF1xDF/P + … + TxCFTxDF/P
• Durzero = T
Firm Valuation
• DurPerpetual = 1+1/yield Capital Structure and Valuation
a) Earnings/Share (EPS) = EAT/#Shares
• DurPorfolio = weighted average of DurAssets a) VU = EU
b) Book Value per share = Equity/#Shares
• ModDur = McD/(1+y) b) VL = EL + Debt
c) Price to Earnings (PER) = Price/EPS
• PNew = Poldx(1-ModDur(yieldnew-yiledold) c) ROEU = FCF/EU
d) Price to Book (PB)= Price/Book Value
l) Yield = Risk free + Risk Premium d) ROEL = (FCF–D×KDx(1-Tax))/(EL)
e) Market Cap = Equity Value = Pricex#shares
f) EBITDA Multiplier = Equity Value/EBITDA MMI – Firm Value and Share Price
g) Enterprise Value = Market Cap + Debt – Cash – a) ITS(if no personal tax): DxKDxTax
Other financial assets b) ITS: KdxDx(1-(1-Tax)(1-Ti)/(1-Te))
DCF Risk-Return and Diversification c) VL = VU + PV(ITS)
a) DCFEquity = DCFAssets + Cash - Debt a) Risk = Volatility = Standard Deviation = σ d) VL = VU + (DxTax)
b) DCFAssets = FCFxDF + Terminal ValuexDF b) σ = (((R1-R)2 + (R2-R)2 + … + (RN-R)2)/(n-1))1/2 e) Price ShareL = PU + PV(ITS)/#SharesU
c) TVT = FCFT-1/(k-g) c) Expected Return (ER) = Average of Returns MMII – Cost of Equity
d) Adj PV = DCFLeveredAsset = DCFUnlevered + DCFTax Benefit d) ERPortfolio = WAxERA+WBxERB a) KEL = KEU +(KEU – KD)(1-Tax)D/EL
e) FCF = EBITx(1-Tax) +Dep – CAPEX – Δ WK e) Correlation (ρ) = CovAB / σAσB = Direction and b) KEL = RF + (E[RM] – RF)xβL
f) WK = Receiv + Invent – Payab – Other oper proportion of change c) KEU = RF + (E[RM] – RF)xβU
current assets + other oper curr liabilities f) σAB = (WA2x σA + WB2x σB + 2WAWB ρ σAσB)1/2 d) βL = βUx(1+(1-Tax)xD/E)
g) WACC = D/(E+D)xKDx(1-T) + E/(E+D)xKE • # of ρ = N(N-1)/2 e) EL = (FCF – DxKDx(1-Tax))/ KEL
h) KE = RF + (RM – RF)xβ g) Opportunity Set = Curve with all possible combinations MMIII – WACC
i) βL = βUx(1+(1-Tax)xD/E) of assets a) WACC = D/VLxKDx(1-Tax)+EL/VLx KEL
j) βL = Market Beta = Equity Beta h) Risk Free Asset = Has 0 risk b) WACC = kEU + (1-Tax(D/VL))
i) Efficient frontier = Straight line from RF to Efficient c) VL = EBIT(1-Tax)/WACC
Portfolio T Optimal Capital Structure
Project Valuation • E[Ri]= RF + (E[RT] – RF)/ σT a) Warning!: FCF > DxKD
Accept if ΔNPV – Inicial Investment > 0 j) Sharpe Ratio = (ERT-RF)/σT b) Trade-off theory: VL = VU + (DxTax) – PV(FDC)
a) ΔNPV = ΔCFTxDFT + … + ΔCFTxDFT
b) CF = EBITx(1-Tax) + Dep – Capex – ΔWK
c) WACC = D/(E+D)xKDx(1-T) + E/(E+D)xKE
d) Profitability Index = Present Value/CF0
e) IRR = Rate at which NPV = 0
f) PB Period = Years to get CF0 back with FCF
g) Discounted PB Period = Years to get CF0 back with
Discounted FCF