Balance sheet Independent Mutually

Assets Liabilities & Equity Sales inclusive

Current assets Current liabilities Total assets turnover = (times) NPV NPV > 0  Positive
-Cash & equivalents Long-term liabilities
Total assets = - Initial cost + PV of accept and
-Acc.receivable Stockholder’s Total assets turnover * Capital intensity = 1 future CFs NPV < 0  highest
-Inventories equity ¿ reject NPV
Profit margin =
-Others -Preferred stock Sales Payback method = N0 of PP < Cutoff PP < cutoff
Fixed assets -Common stock EBITDA years before covering date  date
-(In)tangible assets -Capital surplus EBITDA margin = initial cost fully + accept Smallest
-Accu Retained- Sales remaning CF/ CF of the PP > Cutoff PP
earning Net income year fully covered date  reject
ROA =
Income statement Total assets NPV = 0  IRR IRR > r  IRR > r
Revenue C1 accept Highest
Net Income
(-) Operating expense Net income ∗Total assets -C0 +
1+ IRR
+ IRR < r  IRR
(-) Depreciation ROE = = Total assets reject
EBIT Total equity C1
Total equity
(-) Interest expense 2 +…=0
EBT
= ROA∗Equity multiplier (1+ IRR)
(-) Taxes (=EBT*tc) (corporate tax) Net Income Find IRR
EAT/ NI (dividends + addition to retained
∗Sales Number of sign changing
Sales  number of IRR
earnings) = ∗Total assets = Profit
Or NI = (EBIT – Interest expense)*(1 – tc) Total assets Profitability index PI > 1  PI > 1
Dividends Total equity Total PV of future CF accept Highest PI
Div/ share = = PI < 1 
Total shares outstanding margin * Total asset turnover * Equity multiplier C0 reject
(ROE: how much profit the firm make on the entire NPV
3 things about Income Statement: GAAP, non
– cash items (depreciation, deferred taxes)
investment) +1
ROA = ROE  No debt  No financial leverage C0
Types of value: book value (carrying value) –
EAT (¿) Value of a firm = Market value of debt + Market value
market value (for decision making)
EPS = of equity
Tax rate Average tax rate = Total shares outstanding
Total tax bill Price per share No debt Have debt (MM2)
P-E ratio =
Taxable income( EBT ) EPS (MM1)
NWC = CA – CL EP EBIT (1−tc) ( EBIT −interest expense)(1−tc)
Debt service = principal + interest expense
Total assets S
Equity multiplier No of share No of share
CF (A) = CF (B) + CF (S) Total equity
No taxes With taxes
CF (A) = OCF – CapEx - delta NWC Market value per share
 OCF = EBIT + Depreciation – Current tax Market to book value = M&M 1 EBIT (1)
Book value per share V L=V U =
R 0 V L=V U + tc. B
 CapEx = Purchase of FA – Sale of FA = (financial
Ending NFA – Beginning NFA + Market capitalization = Price per share*Shares leverage, firm
Depreciation outstanding value)
 Deta NWC = NWC (year t) – NWC (year t-1) EV = Market capitalization + Market value of V S = V L−Debt (2)
CF (B) = Interest – Net new borrowing = = interesting bearing debt – Cash
EV
M&M 2 B B
Interest – (new long term debt issued – debt
EV muliple (ratio) = (financial R S=R0 + (R 0−RRB)S=R0 + (R 0−R B)(1−
retirement) (debt issued: nợ có, debt retired: EBITDA leverage, firm S S
nợ phải trả) = Interest –(end.long term debt – value)
beg. long term debt) ROA∗retention ratio
Internal growth rate = (3) S S
CF (S) = Dividends – Net new equity raised 1−ROA∗retention ratio WACC = R WACC = R +
= Dividends – (stock sold – stock Sustainable growth rate = S +B S S +B S
repurchased) ROE∗plowback ratio B B
Common sizes: 100% assets (BL) and 100% + RB R (1−tc)
sales (IS) 1−ROA∗plowback ratio S +B S +B B
EBITDA = EBIT + Depreciation + EFN = Total assets* r- Current liabilities * r – NI R S : cost of equity / Required return on equity/ return on
Amortization (1+r) (1 – dividend payouts ratio) unlevered firm
Single cash flow R
Current assets - One period case: FV = PV (1+r) 0 : cost of capital / cost of equity if the firm was all – equity
Current ratio = financed/ return on unlevered equity
Current liabilities
 Current assets−Inventory - Multiple period case: FV = PV (1+r )
n
R0 : Interest rate/Cost of debt
Quick ratio =
Current liabilities Different compounding period WACC: ROA
B: Market value of bond/ debt
m∗T S: Market value of stock / equity
Cash r Operating cycle = Inventory period + Account receivable
Cash ratio = FV = C0. (1+ )
Current liabilities m periods
Total debt r : annual percentage rate
Total debt ratio = T years Cash cycle = Operating cycle – Accounts payable
Total assets Continuous compounding (biggest): C0*e r . T periods = Inventory period + Acc. receivable periods –
Total debt APR and EAR (Effective annual yield)
Acc.payable periods
Debt - equity ratio =
Total equity r ( APR)
m∗T
COGS
EBIT EAR = (1+ ) −1 Inventory turnover = (times)
Time Interest earned ratio (TIE) = m Inventory
Interest C
(more – better) Perpetuity PV = 365
EBITDA r Days’ sales in inventory = (days)
Cash coverage ratio = C Inventory turnover
Interest Growing Perpetuity PV =
Interest bearing debt r−g Sales
Cash flow available = Annuity: Receivables turnover = (times)
EBITDA n −n Account receivables
(the ability to pay interest unit debt) FV = C. [
(1+r ) −1 ] PV = C. [
1−(1+ r) ]
r r 365
Days’ sales in receivables (ACP) =
Growing annuity Inventory turnover
n
1+ g (days)
1−( ) n
PV = C1 * 1+r FV = PV (1+r )
Sales
r −g Payables turnover = (times)
Due annuity = Ordinary annuity * (1+r) Account payables
Compound (n0 of periods) – Annuity (n0 of
payments) 365
Days’ sales in payables = (days)
Value of a firm = Market value of debt + Market Payables turnover
value of equityz
Tax shield = PV of (tc. rB. B)
Cash + other CAs + Fas = CLs + Longterm debt +
Equity
Present value of the firm Partnership: General partnership, limited
¿1 partnership
V 0=¿ ¿0 + - Inexpensive and easy to firm, complicated
1+ R S written documentss (licenses, fees…)
¿1−¿0 = s * (t * EPS 1−¿ 0❑ - General partnership: unlimited liability for all
Price after stock dividend = debts (depends on contribution) -> difficult to
raise large amount of cash
Price before stock dividend - Income from a
1+ percentage stock dividend partnership is taxed as personal income to
Synergy = V AB−(V A +V B ) partner
Disadvantages of sole proprietorship and
*Corporation: flat tax rate (21%) (without
partnership
being affected by taxable income)
- Unlimited liability
Total tax bill = EBT * tc
- Limited life of enterprise
* LLC/ Proprietorship/ partnership: 7- tax
- Difficult to transfering ownership
bracket
- Difficult to raise cash
Taxable income Tax rate
Corporation
0 – 9525 10%
- Ownership is represented by shares of stock ->
9235 – 38700 12% can transfer to new owner (no limit)
38700 – 82500 22% - Sepate from owners -> unlimited life
82500 – 157500 24%
157500 – 200000 32%
200000 – 500000 35%
500000 37%
3 types of decisions: Capital budgeting,
Capital structure, Working capital

Ending acc. Receivable =starting acc. Receivable +sale

– collection
Simple interest rate = C * r * t
The pawn shop adds 2 percent to loan balances
for every two weeks a loan is outstanding. What is
the effective annual rate of interest?
A)79.97% B)73.08 % C) 51.21 % D) 67.34 % E)
83.43%
Answer: D. EAR = 1.02^(52/2) - 1
EAR = .6734, or 67.34%
Period: Current sales collected on period =
period− ACP
Sole proprietorship
Owned by one person, has unlimited liability Period
for business debts, obigation. No distrinction Cash disbursement  Payments are made
between personal and business assets Quarter n disbursement (x period, quarter n
Cheapest business to form purchase) =
Few gov. regulations to satisfy n−x x
No corporate income taxes. All profits  (of quarter n purchased )+ (of quarter n−1)
individual income
n n
EFN: pro forma statement
Life is limited by the life of sole
Projected addition to R.E
proprietorship
= PM. Projected sales. (1- Div payout)