- ROE = Net IncomeEquity
Chapter 10
- Project Cash Flows = Project Operating Cash Flow – Project Additions to NWC – Project Capital Spending
- Operating CFs = EBIT + Depreciation – Taxes
- Operating CF’s = Project operating CF’s
- S = Sales, C = Operating Costs, D = Depreciation, Tc = Corporate Tax Rate
- EBIT = S – C – D
- Taxes = EBIT x Tc = S – C – D x Tc
- OCF = EBIT + D – Taxes = (S – C – D) + D – (S – C – D) x Tc
- Project Net Income = EBIT – Taxes = (S – C – D) – (S – C – D) x Tc = (S – C – D) x (1 – Tc)
- Bottom Up Approach = OCF = (S – C – D) + D – (S – C – D) x Tc = (S – C – D) x (1 – Tc) + D
- Top Down Approach = OCF = (S – C – D) + D – (S – C – D) x Tc = (S –C) – (S – C – D) x Tc = Sales – Costs – Taxes
- Tax-Shield Approach = OCF = (S – C – D) + D – (S – C – D) x Tc = (S – C) x (1 – Tc) + D x Tc
- Depreciation (CCA) Tax Shield = D x Tc
- PVCCATS: C = Total Capital Investment in the Asset which is added to the pool, D = CCA rate for the Asset Class, T = Company’s Marginal Tax Rate, r = Discount Rate, S = Salvage Value, N = Asset life in years, PVCCATS = CDTD+r x 1+0.5r1+r - SDTD+r x 1(1+r)n
- NPV = Calculator Initial Investments and Cash Flows then Add PVCCATS
Chapter 14
- Cost of Equity = RE = D0x (1+g)P0 + g
- Dividend Growth Model Approach: P0 = D0x (1+g)RE-g = = D1RE-g
- RE = D1P0 + g
- First do D1 = D0 x (1 + g) then RE = D1P0 + g
- To find g, you can compound growth rate (Geometric Mean) by: Dyear 1 (1 + g) year5 = Dyears , or g = Retention ratio x ROE
- Using SML Approach:
- E(RE) = RF + BE x [E(RM) – RF] RE = RF + BE x (RM – RF)
- (RM – RF) = Market Premium
- Cost of Debt
- YTM = Cost of Debt
- After-tax Cost of Debt = I%(1-T)
- Cost of Preferred Stock: RP = DividendP0 = Dividend Yield
- Capital Structure Weights
- E = Equity = # of shares outstanding x Price Per Share
- Dm = Debt = Market price single bond x #