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Midsem Cheat Sheet (Finance)

This document provides an overview of key concepts in corporate finance including the four main areas of finance, measures of profitability, the goals of financial management, and decisions related to investments, financing, and working capital. It also covers time value of money principles, methods for valuing debt and equity instruments, and capital budgeting techniques. The key techniques discussed are net present value analysis, internal rate of return, payback period, and profitability index.

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lalaran123
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489 views2 pages

Midsem Cheat Sheet (Finance)

This document provides an overview of key concepts in corporate finance including the four main areas of finance, measures of profitability, the goals of financial management, and decisions related to investments, financing, and working capital. It also covers time value of money principles, methods for valuing debt and equity instruments, and capital budgeting techniques. The key techniques discussed are net present value analysis, internal rate of return, payback period, and profitability index.

Uploaded by

lalaran123
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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L1 Intro to Finance

4 Areas of Finance: Corporate, Investments, Financial Institutions, International Finance


Measures of Profit:
o Return on Asset = Net Profit / Total Assets
o Return on Equity = Net Profit / Total Equity
o Price Earnings Ratio = Price Per Share / Earnings Per Share
o Earnings Per Share = Net Profit / Number of Ordinary Shares
Goal: Maximise shareholder wealth through share price / dividends. Wealth = Cash Flow
Factors in any Financial Decision: CASH, TIME, RISK
FM Responsibilities: Investment Decision, Financing Decision, Working Capital Decision
Net Working Capital: Current Assets Current Liabilities
INV Decision: Determine value of long-term asset, evaluate size, time & risk on Cash Flow
FIN Decision: Determine between DEBT (loan) & EQUITY (owner), trade-off risk & return
WC Decision: Managing short-term assets/liabilities. Inventory, Acc. Rec & Pay management
Principal-Agent Problem: Where a person/entity can make a decision that effects another entity
Role of Financial Markets: Facilitates transactions in financial securities, market exist to efficiently
allocate funds for alternative use, brings buyers and sellers together
Earnings Per Share: [(EBIT Interest)(1-tax rate)] / No. of shares
L2 + 3 Time Value of Money
PV, FV = Present/Future Value || i, r = Interest Rate || n, t = no. of Periods || PMT = Periodic Payment
FV = PV + INT || INT = PV * i * n || (Compound) FV = PV (1 + i)
n
|| INT = FV PV || !!!REARRANGE!!!
Effective Annual Rates (EAR) = (1 + i)
m
1 | m = no. of compound periods per year
Terminal Value: The PV in the future of all future cash flow when theres a stable growth rate
Annual Percentage Rate: Compounded more frequently | EAR,EFF,ER = Compounded annually only
EAR = (1+APR/n)
n
-1 | n = no. of compounding period of the APR per EAR period | EAR = (1+i)
m

Annuity: case of multiple case flows, no. of = cash flow at = time intervals, NORMAL = at end of period

()

PMT = Annuity Payment


()


Amortisation Schedule: Beginning Balance, Total Payment, Interest Payment, Principal Payment, End BL
L4 Debt and Valuation
Debt: Contractual rather than residual, Commits Firm to interest/repayment (Not Equity), No Voting
(Equity does), Unpaid debt is liability (Not Equity), Debt is loan repaid in future (Equity not Repayable)
Features: Maturity (Short/Long), Security, Ranking (Subord. Or Senior), Int. Rate (Fixed, Float, Combo),
Repayment Pattern (Int. Only, Principle + Int. capitalised Int.), Currency, Source
Securities: Floating Charge over asset, Mortgage, Specific Charge, + & - covenants, Guarantees
Short-Term Debt: Securities with term <1year, Instant money raise, Bills, Promissory Notes, Overdrafts
Long-Term Debt: Securities with term +1year, Public/Private Funding, Term Loans, Bank Funds, Bonds
Valuing Short-Term Debt: PV = FV / ( 1 + rt), r = interest rate, t = time to maturity (Anything Borrowed)
Valuing a Bond: No. of Periods to maturity, FV, Coupon Payment (CP Rate x FV), Market Interest Rate
Bond Valuation Formula:
()

+ FV(1 + i)
-n

CP PMT: FV x CP Rate / Times Paid per annum | Term = Time for Maturity / Times Paid Out (semi-ann=2)
o If CP PMT > once a year, divide same number for YTM rate before use, n used backwards
Yield to Maturity (i): Discount Rate which equates the PV of all future coupon payments and the FV
with the Market Price. Same as, required return, market yield/rate.
Coupon Rate: Yield paid by a fixed income security. Simply the annual coupon payment related to value.
L5 Equity and Valuation
Equity: Permanent Risk Capital, Most important source of funds, limited liability, residual claim, ASX
Dividends: Distribution of Profit, One type of Shareholder return, Payment at directors whim
Shareholder Rights: Right to receive DIV, Voting Rights, Asset Rights, Participate in Rights Issue
Raising Equity: Primary Issue, Rights issue, Private placement Types: Ordinary Share, Pref. Shares
Primary Issue: Sale of new shares (IPO), Prospectus, Corporate Adviser, Underwriter, apply for listing
o ADV: Access to Cap. Markets, Raise firm profile, market valuation, align MNG & Share H goals
o DIS: Dilute Control, Directors ++ Responsibility, Increased Cost, Demand for Information
Pref. Shares: Pref. treatment for dividends, liquidation, but no voting rights
Rights Issue: Secondary issue of shares to existing shareholders, Buy more shares, in-ratio to no. owned
Rights Valuation: R = N(M-S)/(N+1) | Ex-Rights Share Price: P
x
= M (R/N) or S + R
M = Current Mar. Price, S = Subs. Price of new share, N = No. of current share which allow for new share
Private Placement: Issue share to individual or group, pre-considered to be friendly
o ADV: Easier to do and for smaller amounts, High certainty, low cost, friendly buyer
o DIS: Dilute interest of existing shareholders, can lower share price, cannot place >15%
Current value of a share is PV of all future divided. P
0
= D
1
/(1+r)
1
+ D
2
/(1+r)
2
+ + D
x
(1+r)
x

P
0
= Value of Share at Time 0 (PV) | D
t
= expected dividend payment at period t | r = discount rate (i)
Price Today (D
o
) = D
1
/ [Required Rate (r) Growth Rate (g)] || Price Future = D
t+1
/ (r g) OR P
o
(1+g)
t

Constant Dividend Model: PV = PMT / i / OR For shares, P
o
= D / r | D = value of constant Div (PMT)
Constant Growth Model: P
o
= D
1
/ (r-g) | D
1
is DIV at time 1, g = growth rate, D
1
= D
0
(1+g)
Shifty Shares: Use PV = FV(1+i)
-n
for initial, P
x
= D
x+1
/(r-g) for 1
st
Change, Put it through FV(1+i)
-n
, ADD ALL

L6 Capital Budgeting 1

Accounting Rate of Return: Measure of efficiency/prof, ratio of income to asset,

( )

o ADV: Simple to workout, Profit figures available, considers income for each year of life
o DIS: TVM ignored, Related to net profit not cash flow, Profit dependent on depreciation
Payback Period: Length of time required for INV stream of cash flow to equal INV initial cost
Determined by adding expected CF for each year until it reaches original value
o ADV: Simple, Risk Insight, used as supplementary info, measure of liquidity
o DIS: Ignored cash flow after payback, TVM ignored, Biased against slow projects,
Discounted Payback: Cash Flow converted to present values THEN do payback period
Net Present Value: Present value of all future cash flows discounted at the required rate of return less
the cost of the initial investment. Return = cost of capital, minimum return a firm needs to earn

()

()
()
OR [
()

] (for consistent payments)


NPV Decision Rule: Accept NPV > 0 only, 0 NPV = complete repayment no gain, No Shareholder Wealth
Internal Rate of Return: IRR = required rate that gives 0. NPV = 0, find r, IRR > Discount Rate = Good
Capitol Rationing: Process where limited capital budget is allocated to different projects in a way to
maximise shareholder wealth. Too many projects can be a bad thing, needs Profitability Index.
Profitability Index: Shows relative profitability of project or present value of benefits per dollar of cost
PI = (NPV + initial cost) / initial cost | PI = 1 (Indifferent), PI > 1 (Accept), PI < 1 (Reject)

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