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Corporate finance

 

Weight on the exam = 8%

Number of formulas = 28

CFA formulas

quantitative economics financials

corpfin portfolio equity

fixedincome derivatives alternative

 

NPV

npv

Net present value is a sum of present values of individual cash flows.

NPV - net present value

CF0 - initial investment in the project

CF1 - cash flow in period 1

CF2 - cash flow in period 2

CFn - cash flow in period n

r - discount rate

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Internal rate of return

Internal rate of return (IRR) - the discount rate that makes the present value of an investment's cost (outflows) equal to the present value of the investment's benefits (inflows).

irr

IRR - internal rate of return

CF0 - initial investment in the project

CF1 - cash flow in period 1

CF2 - cash flow in period 2

CFn - cash flow in period n

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Payback period

Payback period - the time required for the cash flows of the project to offset initial investment.

pbp

PBPeriod - payback period

FYuntil recov - full years until recovery

UCostbeg last year - unrecovered cost at the beginning of the last year

CFlast year - cash flow during the last year

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Average accounting rate of return

Average accounting rate of return - indicates average net income generated per dollar of average book value of assets

aar

AAR - average accounting rate of return

NIav - average net income

BVav - average book value

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Profitability index

Profitability index indicates present value of future cash flows generated per dollar of initial investment

pind

PI - profitability index

PVfuture CF - present value of future cash flows

CF0 - initial investment

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WACC

Weighted average cost of capital (WACC) is a weighted average of the required rates of return on a company's common stock, preferred stock and long-term debt, where the weights are the fraction of each source of financing in the company's target capital structure.

wacc

WACC - weighted average cost of capital

wd - weight of debt

rd - cost of debt

t - tax rate

wc - weight of common equity

rc - cost of cost of common equity

wp - weight of preferred stock

rp - cost of preferred stock

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Cost of preferred stock

Cost of preferred stock - the cost to a company of issuing preferred stock.

costp

rp - cost of preferred stock

Divpref - preferred stock dividend

P - price of preferred stock

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Cost of common equity

Cost of common equity - the rate of return that common equity holders require as a compensation for their contribution of capital. There are several approaches to determine cost of common equity

costc1

rc - cost of common equity

D1 - next year dividend

P0 - price of common stock

g - growth rate

costc2

rc - cost of common equity

rf - risk free rate

rm - market return

β - stock's beta

costc4

rc - cost of common equity

rb - bond yield

RP - risk premium

Cost of common equity with a country risk premium

costc3

rc - cost of common equity

rf - risk free rate

rm - market return

β - stock's beta

CRP - country risk premium

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Country risk premium

Country risk premium (CRP) - premium that reflects the uncertainty due to the possibility of major political or economic change in the country where an investment is located.

crp

CRP - county risk premium

YSsov - sovereign yield spread

STDeveq developing - annualized standard deviation of equity index of developing country

STDevbond developed - annualized standard deviation of the developing country sovereign bond market in terms of the developed market currency

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Soveregn yiled spread

Sovereign yield spread is an estimate of the country spread for a developing nation that is based on a comparison of bonds yields in country being analyzed and a developed country.

sys

YSsov - sovereign yield spread

GBYdeveloping - government bonds yields in developing country

GBYtreasury - yields of treasury bonds of similar maturity

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Asset beta

Asset beta - the unlevered beta. It reflects the business risk of the assets.

bass

βa - asset beta

t - tax rate

D - debt

E - equity

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Project beta

Project beta is a measure of its systematic or market risk.

bpro

βp - project beta

t - tax rate

D - debt

E - equity

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Current ratio

Current ratio - a measure of a company's ability to satisfy its current liabilities with its current assets.

currat

CR - current ratio

CA - current assets

CL - current liabilities

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Quick ratio

Quick ratio - a measure of a company's ability to satisfy current liabilities with its most liquid assets

quickrat

QR - quick ratio

CA - current assets

Inv - inventories

CL - current liabilities

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Receivables turnover

recturn

RecTurn - receivables turnover

Sales - annual sales

Recav - average receivables

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Days of sales outstanding

Days of sales outstanding or number of days of receivables

doso

Dayssal - days of sales outstanding

365 - number of days in a year

RecTurn - receivables turnover

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Inventories turnover

invturn

InvTurn - inventories turnover

COGS - cost of goods sold

Invav - average inventory

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Days of inventory on hand

Days of inventory on hand or number of days of inventory

doioh

Daysinv - days of inventory on hand

365 - number of days in a year

InvTurn - inventory turnover

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Payables turnover

payturn

PayTurn - payables turnover

Purch - purchases

Payav - average trade payables

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Number of days of payables

nodop

Dayspay - number of days of payables

365 - number of days in a year

PayTurn - payables turnover

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Break point

Break point -is the amount of capital at which the cost of one or more of the sources of capital changes, leading to a change in the WACC.

brpo

BP - break point

Capitalch - amount of capital at which the component's cost of capital changes

wcomp - weight of the component in the capital structure

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Operating cycle

Operating cycle is an estimate of the average time needed for a company to convert raw materials into cash from a sale.

opcyc

OpCycle - operating cycle

Daysinv - average days of inventory

Dayssal - average days of receivables

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Cash conversion cycle

Cash conversion cycle - a financial metric that measures the length of time required for a company to convert cash invested in its operations to cash received as a result of its operations.

ccc

CCC - cash conversion cycle

Dayssaldays sales outstanding

Daysinvdays of inventory on hand

Dayspaynumber of days of payable

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% discount

% discount - the amount by which an instrument is priced below its face value.

pdis

% discount - discount as a percentage of face value

FV - face value

P - price

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Discount-basis yield

Discount-basis yield (or bank discount yield) annualizes, on a 360-days year, the discount as a percentage of face value.

dby1

or

dby2

DBY - discount-basis yield

FV - face value

P - price

days - days to maturity

% discount - discount to face value in percent

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Money market yield

Money market yield (or CD equivalent yield) is a yield on a basis comparable to the quoted yield on an interest-bearing money market instrument that pays interest on a 360-day basis; the annualized holding period yield, assuming a 360-days year.

mmy1

or

mmy2

MMY - money market yield yield

FV - face value

P - price

days - days to maturity

HPY - holding period yield

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Bond equivalent yield

Bond equivalent yield is a calculation of yield that is annualized using the ratio of 365 to the number of days to maturity. Bond equivalent yield allows for the restatement and comparison of securities with different compounding periods.

bey1

or

bey2

MMY - money market yield yield

FV - face value

P - price

days - days to maturity

HPY - holding period yield

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DuPont equation

DuPont equation analyses return on equity (ROE) via decomposion of other financial ratios.

dupont

ROE - return on equity

NI - net income

Rev - revenue or sales

TotAs - total assets

TotEq - total equity

Net income/Revenue = net profit margin

Revenue/Total assets = Assets turnover

Total assets/Total equity = leverage ratio

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Extended DuPont equation

DuPont equation analyses return on equity (ROE) via decomposion of other financial ratios.

duponte

ROE - return on equity

NI - net income

EBT - earnings before tax

EBIT - earnings before interest and tax

Rev - revenue or sales

TotAs - total assets

TotEq - total equity

Net income/EBT = Tax burden

EBT/EBIT = Interest burden

EBIT/Revenue = Operating profit margin

Revenue/Total assets = Assets turnover

Total assets/Total equity = leverage ratio

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