Corporate finance

Weight on the exam = 8%

Number of formulas = 28

NPV

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

NPV - net present value

CF_{0} - initial investment in the project

CF_{1} - cash flow in period 1

CF_{2} - cash flow in period 2

CF_{n} - 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 - internal rate of return

CF_{0} - initial investment in the project

CF_{1} - cash flow in period 1

CF_{2} - cash flow in period 2

CF_{n} - 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.

PBPeriod - payback period

FY_{until recov} - full years until recovery

UCost_{beg last year} - unrecovered cost at the beginning of the last year

CF_{last 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 - average accounting rate of return

NI_{av} - average net income

BV_{av} - average book value

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

PI - profitability index

PV_{future CF} - present value of future cash flows

CF_{0} - 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 - weighted average cost of capital

w_{d} - weight of debt

r_{d} - cost of debt

t - tax rate

w_{c} - weight of common equity

r_{c} - cost of cost of common equity

w_{p} - weight of preferred stock

r_{p} - 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.

r_{p} - cost of preferred stock

Div_{pref} - 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

r_{c} - cost of common equity

D_{1} - next year dividend

P_{0} - price of common stock

g - growth rate

r_{c} - cost of common equity

r_{f} - risk free rate

r_{m} - market return

β - stock's beta

r_{c} - cost of common equity

r_{b} - bond yield

RP - risk premium

Cost of common equity with a country risk premium

r_{c} - cost of common equity

r_{f} - risk free rate

r_{m} - 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 - county risk premium

YS_{sov} - sovereign yield spread

STDev_{eq developing} - annualized standard deviation of equity index of developing country

STDev_{bond 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.

YS_{sov} - sovereign yield spread

GBY_{developing} - government bonds yields in developing country

GBY_{treasury} - 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.

β_{a} - 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.

β_{p} - 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.

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

QR - quick ratio

CA - current assets

Inv - inventories

CL - current liabilities

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Receivables turnover

RecTurn - receivables turnover

Sales - annual sales

Rec_{av} - average receivables

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Days of sales outstanding
Days of sales outstanding or number of days of receivables

Days_{sal} - days of sales outstanding

365 - number of days in a year

RecTurn - receivables turnover

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Inventories turnover

InvTurn - inventories turnover

COGS - cost of goods sold

Inv_{av} - average inventory

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Days of inventory on hand
Days of inventory on hand or number of days of inventory

Days_{inv} - days of inventory on hand

365 - number of days in a year

InvTurn - inventory turnover

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Payables turnover

PayTurn - payables turnover

Purch - purchases

Pay_{av} - average trade payables

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Number of days of payables

Days_{pay} - 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.

BP - break point

Capital_{ch} - amount of capital at which the component's cost of capital changes

w_{comp} - 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.

OpCycle - operating cycle

Days_{inv} - average days of inventory

Days_{sal} - 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 - cash conversion cycle

Days_{sal} days sales outstanding

Days_{inv} days of inventory on hand

Days_{pay} number of days of payable

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

% 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.

or

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.

or

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.

or

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.

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.

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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