FV= C0 * (1+r)^t
NPV= -Cost + PV
FV= C0 * (1+ (r/m))^m*t m= times a year t= years
FV= C0 * e^rt (Continuous)
Profitability Index (PI)= Total PV of future cash flows/Initial Investment
OCF= EBIT – Taxes + Depreciation
Fisher Equation: (1+ Nominal Rate) =(1+Real Rate) * (1+Inflation Rate)
Bond Value = (C*(1-1/(1+r)^t)/r) + (F/(1+r)^t)
P0= Div/R P0= Div1/(1+R) + Div2/(1+R)^2….
Pa= (C/R-g1) * (1-((1+g1)^t)/(1+R)^t)
Expected Return: Ri= Rf+Beta * (RM-RF) (CAPM)
DOL= (Change in EBIT/EBIT) * (Sales/Change in Sales)
Dividend Discount Model: Rs= (D1/P)+g
Black-Scholes Model: C0= S * N(d1)- Ee^-Rt * N(d2)
The goal of financial management is to maximize the current value per share of the existing stock.
Agency problems-not increasing current stockholders value
Higher financial leverage results in more volatility, and vice versa.
If NPV is positive accept a project. Negative NPV means discount rate is too high.
Use WACC when risks of the project are equal to risk of firm
Step1: Computation of Risk- Adjusted Discount rate. Risk-Adjusted Discount rate = Risk free rate of return + Risk Premium
Step2: Computation of the asset worth.
Asset Worth = CF1 / (1+r)0 + CF2 / (1+r)1 +CF3 /(1+r)2
Pension Fund=Balance/FV of annuity
Call options-high when:
I. the time to expiration increases.
II. the stock price increases.
III. the risk-free rate of return increases.
IV. the volatility of the price of the underlying stock increase Beta in Portfolio = = (weight of portfolio in asset× beta) + (weight of portfolio in asset× beta) + (weight of portfolio in asset× beta), T-bills beta = 0, market beta =1
Rewarding executives with options ensure that managers have no agency cost.
Managers should change capital structure only if the firm increases in value.
Financial Distress-most firms survive; can be good by reevaluate mission and raising new capital
Indirect cost=underinvestment, turn down low risk, low