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FM Formula Sheet - Not Given

This document provides formulas for various concepts in financial management (FM), including: 1) Discounting formulas for present value of single and annuity cash flows, perpetuities, and growing perpetuities. 2) Formulas linking real, nominal, and effective interest rates and inflation. 3) The formula for calculating equivalent annual cost from a series of uneven cash flows. 4) Formulas for expected value, sensitivity, rights issues, operating and financial gearing, and adjusted present value.

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Sophie Chopra
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
30 views

FM Formula Sheet - Not Given

This document provides formulas for various concepts in financial management (FM), including: 1) Discounting formulas for present value of single and annuity cash flows, perpetuities, and growing perpetuities. 2) Formulas linking real, nominal, and effective interest rates and inflation. 3) The formula for calculating equivalent annual cost from a series of uneven cash flows. 4) Formulas for expected value, sensitivity, rights issues, operating and financial gearing, and adjusted present value.

Uploaded by

Sophie Chopra
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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FM Formula sheet

Discounting

1
Present value of a single cash flow = Cash flow × n
(1 + r)

ቆ1 – nቇ
1 1
Present value of an annuity cash flow = Annuity cash flow ×
r (1 + r)
1
Present value of a perpetuity cash flow = Perpetuity cash flow ×
r
One new type of cash flow you may need to discount in FM is a growing perpetuity
1
Present value of growing perpetuity = Cash flow at t1 ×
r–g

Inflation

The real and money (nominal) returns are linked by the formula:
(1 + money rate) = (1 + real rate) (1 + inflation rate)
The effective rate is given by:
1 + money rate
1 + effective rate =
1 + specific inflation rate

Replacement analysis

This is the equal annual cash flow (annuity) to which a series of uneven cash flows is
equivalent in PV terms. It is calculated as:
PV of costs
Equivalent annual cost =
Annuity factor

Expected value

EV = ∑px

Sensitivity

NPV of the whole project


Sensitivity =
NPV of the cash flows affected net of tax
Rights issue

The ex-issue or ex-rights price is calculated as:


(Market value of shares already in issue) +
ሺProceeds from new share issueሻ + (project NPV)
Number of shares in issue after the new/rights issue

Value of a right

= The ex-rights price (shown above) – the exercise price

Operating gearing

Fixed costs Fixed costs


or
Variable costs Total costs

Financial gearing

Debt Debt
or
Equity Debt + Equity

Adjusted present value

APV = base case NPV + PV of the tax shield


Valuations

Dividend valuation model

1
Present value = d1 ×
ke – g

Dividend yield model

Dividend
Price =
Yield

PE model

Equity value = Earnings × PE ratio

EBITDA model

Enterprise value = EBITDA x EBITDA multiple

 This valuation gives us the Enterprise value, rather than just the value of equity

Enterprise value = market value of equity + preference shares + Minority interest


+ debt – cash and cash equivalents

And so, if we are looking for the market value of equity only, we need to deduct
the market value of other types of finance and add back cash and cash
equivalents

 The EBITDA multiple is calculated as:

Enterprise value
EBITDA
WACC

Cost of equity Cost of preference shares Cost of debt

DVM CAPM Kp = D/P0 Kd = yield (1 – T)

Ke Ke Yield Yield
D0(1 + g) = Rf + β(Rm – Rf) I T0
= +g =
P0 P0 (P0)
= IRR T(1-n) I
Tn R

Where Where Where Where Where


D0 = Rf = D= I= I=
dividend risk free rate constant interest paid interest paid
just paid dividend paid
Rm = P0 = P0 =
P0 = average market P0 = ex-interest ex-interest market
ex-div market return ex-div market market price price
share price share price
β= T= T=
g= beta factor corporation corporation tax rate
growth tax rate
R=
redemption value
NB: For convertible
debt R = the higher
of the cash value or
share value on
conversion.

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