Contents

Contents 2
Capital Budgeting 3
Cost of Capital 3
Measures of Leverage 4
Working Capital Management 5

2
 Corporate Finance

CAPITAL BUDGETING

N
CFt
Net present value (NPV) NPV =
Σ
t=0
(1 + r)t

N
CFt
Σ
Internal Rate of Return
=0
(IRR) (1 + IRR) t
t=0

Average Accounting Rate Average net income

of Return (AAR) AAR =
Average book value

PV of future cash flows NPV

Profitability Index (PI) PI = =1+
Initial Investment Initial Investment

COST OF CAPITAL

Weighted Average Cost of

WACC = wdrd (1- t) + wprp + were
Capital (WACC)

Tax shield Tax shield = Deduction × Tax rate

Dp
Cost of Preferred Stock rp = Pp

Cost of Equity D1
re = P0
+g
(Dividend discount model approach)

g= 1- D
Growth Rate
( EPS ) x ROE

Cost of Equity Risk premium = the additional

(Bond yield plus risk premium) re = rd + Risk Premium yield on a company’s stock relative
to its bonds

3
 Corporate Finance

COST OF CAPITAL

Capital Asset Pricing

E (Ri) = RF + βi [E (RM) - RF]
Model (CAPM)

Cov (Ri, RM)

Beta of a Stock βi = Var (RM)

βLevered, Comparable
Pure-play Method Project βUnlevered(Comparable) =
Beta (De-lever)
[ (
1 + (1 - tComparable) DComparable
EComparable )]
DComparable
Pure-play Method for
Subject Firm (Re-lever)
βLevered, Project = βLevered, Comparable [ (1+ (1 - tProject)
EComparable )]
Adjusted CAPM
E(Ri) = RF + βi [E (RM) - RF + Country risk premium]
(for country risk premium)

)
σ of equity
Country Risk
Premium CRP = Sovereign yield spread x
( index of the developing country
σ of sovereign bond market in terms
of the developed market currency

Amount of capital at which

the source’ s cost of capital changes
Break Point Break point =
Proportion of new capital
raised from the source

MEASURES OF LEVERAGE

Degree of Operating Degree of Operating Percentage change in operating income

=
Leverage Leverage Percentage change in units sold

Degree of Financial Degree of Financial Percentage change in Net Income

Leverage Leverage
= Percentage change in EBIT

4
 Corporate Finance

MEASURES OF LEVERAGE

Degree of Percentage change in Net Income

Degree of Total =
Total Leverage Percentage change in number of Units Sold
Leverage

Return on Equity Net Income

Return on Equity =
(ROE) Shareholders’ Equity

P = the price per unit

The Breakeven F+C V = the variable cost per unit
Quantity of Sales QBreakeven = P-V F = the fixed operating costs
C = the fixed financial cost

P = the price per unit

Operating Breakeven F
QOperating Breakeven = V = the variable cost per unit
Quantity of Sales P-V F = the fixed operating costs

WORKING CAPITAL MANAGEMENT

Current assets
Current Ratio Current Ratio =
Current liabilities

Cash + Receivables +
Quick Ratio + Short-term marketable investments
Quick Ratio =
Current liabilities

Accounts Receivable Accounts Receivable Credit sales

Turnover Turnover =
Average receivables

Number of Days of Number of days of 365

=
Receivables receivables Accounts receivable turnover

Cost of goods sold

Inventory Turnover Inventory Turnover = Average Inventory

Number of Days of Number of Days of 365

=
Inventory Inventory Inventory turnover

5
 Corporate Finance

WORKING CAPITAL MANAGEMENT

Purchases
Payables Turnover Payables Turnover Ratio =
Average accounts payables

Number of Days of 365

Number of Days of Payables =
Payables Payables turnover ratio

Net operating cycle = Number of days of inventory +

Net Operating Cycle + Number of days of receivables -
- Number of days of payables

D = Dollar discount, which is equal to the

Yield on a Bank Discount difference between the face value of
D 360
Basis (BDY) rBD = x the bill (F) and its purchase price (P0)
F t F = Face value of the T-bill
t = Actual number of days remaining to maturity

360
Effective Annual Yield (EAY) EAY = ( 1 + HPR) t -1

%Discount
Holding Period Return HPR =
1 - %Discount

360
Cost of trade %Discount
Cost of Trade Credit
credit
=
(1+
1 - %Discount ) Number of days past discount
-1

Cost of Interest + Dealer’ s commission + Other costs

Cost of Borrowing =
borrowing Loan amount - Interest

6
Corporate Finance
Formula Sheet

www.365careers.com