Sabrina Dhuman FIN401-Exam Crib Sheet
Sabrina Dhuman
FIN401-Exam Crib Sheet
After leasing questions, remember to switch back to END NPV=PV(OCF)+PV(NCS)+PV(NWC)+PV(CCA) 1. PV(OCF)=(S-V-FC)(1-Tc) =(EBITDA)(1-Tc) 2. PV(NCS)=(-Initial Cost)+PV(Salvage) 3. PV(NWC)=(-NWC)+PV(NWC) CdT 1+0.5r SdT 1 n 4. PV(CCA)=([ /d+r][ /1+r])- ([ /d+r][ /(1+r) ])
Break Even EBIT – EPScurr = EPSprop EBIT-Interest o EBIT-Interest o /#shares /s = /new #shares /s
Generate equal dividends 1. Find PMT where PV=P0 2. Investor gets P1(#shares) but wants PMT(#shares) = extra/short 3. Find Price @Yr1 from liquidating: *P1=P2/1+r 4. Buy/Sell = Extra or short/*P1 If 6 times greater 1. P0=6D/1+r + D/(1+r)2 2. Find what 6D is then follow from step 2 above
Cost of Preferred Stock: Rp=D/P0 Cost of Debt: YTM – use calc
Unlevered Firm=No Debt/All Equity M&M Properties Borrow/lend at same rate as firm; no tax, bankruptcy cost & agency cost; asymmetric information is there; efficient market prevails Property I Firm Value Property II WACC No VL = VU WACC=WERE+WDRD Taxes Value doesn’t WACC is constant change w/cap struc w/changes in cap struc changes. No optimal RE=Ru+(RU-RD)(D/E) Ru=business risk, (RU-RD)(D/E)= Firm risk cap struc Taxes VL=VU+DTc WACC=WERE+WDRD(1-Tc) Firm value increases Adding debt decreases as firm adds debt. WACC. 1. Firm is using Optimal cap struc = cheaper financing. 2. Int 100% debt payments are tax deductible RE=Ru+(RU-RD)(D/E)(1-Tc)
NAL=Cost-PV(ATLP)±PV(savings/cost)-PV(CCA)-PV(Salvage) 1. Rd*=Rd(1-Tc) 2. ATLP=Lease Pymt(1-Tc) =PYMT 3. PV(ATLP) **USE BGN & Rd* ** 4. Savings = amt(1-Tc) 5. PV(Savings) **USED END & Rd* ** 6. PV(CCA) & PV(Salvage) *r = Rd* If finding indifferent lease pymt NAL=0 Min amt lessor accepts, max lessee pays 1. Set NAL=0, find PV(ATLP) 2. PV(ATLP) as PV, i=Rd*, solve PMT **BGN** 3.BTLP=PYMT/1-Tc If no taxes, NAL=cost-PV(BTLP)-PV(Salvage) **USE BGN for LP** r=i, not using Rd* WACC=WERE+WDRD(1-Tc) V=D+E WE=E/V WD=D/V
Value of Right = Stock price – Ex-rights price Underwriter charges% spread – how many shares to be issued 1. X(1-%) = FTBR 2. X/sub price = #shares to issue
Firm Restructures – risky – you go safe 1. # shares to sell -find % debt= (#shares)($)/amt being borrowed -need to sell= (%)(#shares you own) -dollar value= (need to sell)($) 2. Find total CF = (#shares you own)(EPS)+Interest you earn =(#)(EBIT-Company Int/new #shares comp owns)+Int Firm Restructures – safe – you go risky 1. Find D/E ratio **V= #shares($) 2. Find your equity = (#shares owned)($) 3. Need to borrow = (D/E)(Investor Equity) 4. #shares bought = need to borrow/price 5. Find CF = EPS(#shares you own)-your interest for borrowing EPS= EBIT/#shares b/c company isn’t borrowing; old +new Stock Split= #stocks(fraction) Stock Split Price = price(inverse fraction) How many rights need to purchase @sub price? 1. New shares to issue= FTBR/Sub price 2. # Rights(N)= shares o/s (old)/shares issued(new) Ex-rights Price Price=N(price stock sells for)+Sub price/N+1
Dutch Auction 1. rank bids, highest to lowest based on price 2. Find successful bidders, that’s lowest price 3. If not enough – amt you have/amt needed = %, all bidders get this % of what they want Firm Commitment: Offering price is transferred from issuer to underwriter; Firm sells all Regular Underwriting: Firm=#(price-fee) PM=#(fee) #contracts to sell= amt you have/size of contract Profit=(#contracts held)(size)(end price – beginning price) Forward Contract A contract where two parties agree on the price of an asset today to be delivered and paid for at some future date Forward contracts are legally binding on both parties They can be tailored to meet the needs of both parties and can be quite large in size Because they are negotiated contracts and there is no exchange of cash initially, they are usually limited to large, creditworthy corporations Long position – agreeing to buy the asset at the future date (buyer); asset will rise in value Short position – agreeing to sell the asset at the future date (seller); asset will fall in value Cross-Hedging: Hedging an asset with contracts written on a closely related, but not identical, asset Basis Risk: When cross-hedging, the risk that the futures prices does not move directly with the cash price of the hedged asset Call Option-right to buy asset; seller obligated to sell asset if exercised - If S<E payoff = 0 but if S>E payoff is S-E (ITM for buyer) -Profit = (#)(S-E) – (#)(premium) -Upper bound: Call option price must be less than or equal to the stock price -Lower bound: Call option price must be greater than or equal to the stock price minus the exercise price or zero, whichever is greater -If either bound is violated, arbitrage opportunity
Sabrina Dhuman
FIN401-Exam Crib Sheet
After leasing questions, remember to switch back to END
Put Option-right to sell asset; seller obligated to buy asset if exercised - If S>E payoff = 0 but if S<E payoff is E-S(ITM for Buyer) -Profit = (#)(E-S) – (#)(premium) Option Premium – purchase price of option *American anytime up to and including exp, Euro on exp date Option value = Intrinsic Value + Time Value -Intrinsic value: what the option would be worth if it were about to expire; Max (0, S – E); also known as the lower bound -Time value: the likelihood that the option will move into the money before expiration; At expiration, time value = 0; Time value = Option price – Intrinsic value Hedging Commodity Price Risk w/Options - Owner of Call Opt; Exercises the Option: Receives a long position in the futures contract; Receives cash equal to the difference between the exercise price and the futures price - Writer/Seller of Call Opt: Receives a short position in the futures contract; Pays cash equal to the difference between the exercise price and the futures price - Owner of Put Opt; Exercises the Option: Receives a short position in the futures contract; Receives cash equal to the difference between the futures price and exercise price - Writer/Seller of Put: Receives a long position in the futures contract; Pays cash equal to the difference between the futures price and exercise price Warrants - A security that gives the holder the right to purchase shares of stock at a fixed price over a given period of time - It is basically a call option issued by corporations in conjunction with other securities to reduce the yield - Usually included with a new debt or preferred shares issue as a sweetener or equity kicker Difference between Warrants and Call Opt Warrants are generally very long term; They are written by the company and exercise results in additional shares outstanding; The exercise price is paid to the company and generates cash for the firm; Warrants can be detached from the original securities and sold separately; Warrants affect the value of the firm Conv ratio=par value/conv price (what bond is exchangeable for) Conv Price=par value/conv ratio Conv Premium= Conv Price-Stock Price/Stock Price **Straight Bond Value= calc PV **Conv Value = (conv ratio)(stock price) If conv value=SBV, (conv ratio)(x)=SBV Option Value=Mkt selling price – (higher of **) Floor value=worth at higher between SBV/conv Value
Reasons for issuing warrants/convertibles They allow companies to issue cheap bonds by attaching sweeteners to the new bond issue Coupon rates can then be set at below market rate for straight bonds They give companies the chance to issue common stock in the future at a premium over current prices Cons - If the company performs badly and the stock price drops Bondholders will not exercise their conversion option; The company should have issued common stock when stock price was high lost valuable opportunity - If the company does well and the stock price increases Bondholders will exercise their conversion option; The company is forced to sell stock at a price lower than the current market price P/E= equity/earnings =Price/EPS o EPS = earnings/shares /s Price per share = (P/E ratio)(earnings/shares o/s ) NPV=VB*-Cash Cost =VB+∆V-Cash Cost =[(Price)(#share in B)]+synergy-[(pay$)(#shares in B)] Price per Share after Transaction Price=VAB/#shares o/s in A =VA +NPV/#shares o/s in A =VA + VB+∆V-Cash Cost /#shares o/s in A P/E Ratio after Transaction is completed P/E=VAB/Earnings =Equity/EarningsA + EarningsB =[(EarningsA)(P/EA) ±NPV]/ EarningsA + EarningsB When shares are being exchanged 1. Find new shares o/s for firm A #shares to firm B = shares firm B/amt exchanged New Shares o/s = old shares o/s + #shares to firm B Price after Trans = VAB/New #shares o/s Total Premium Paid= (#shares to B)(Price after trans)-VB If NPV=0, Use of A & Solve for #shares 0= VB+∆V-(X)(Original price per share A) STOCK ValueAB=VA+VB+∆V Price=VAB/old#shares+(amt paid in shares/price per shareA) CASH ValueAB=VA+VB+∆V-Cash Paid Price=VAB/old#shares Firm: it is a collection of legal relationships between parties who have contracted with each other What is the Goal of the Firm: The goal of the firm should also be the goal of management as management has contracted to carry out the goals of the firm Problem: the goal of management may diverge from those of the firm, creating an agency problem that needs to be addressed
What is the Goal of the Firm: The goal of the shareholders should be the goal of the firm since shareholders are the residual claimholders on the firm If goals of shareholders are not met, they will not invest in the firm, since they take on the most risk - other stakeholders will probably participate in the firm because they take on less risk and are protected by law Shareholders will spend time and money in monitoring and controlling management because management can most affect the fortunes of the firm The goal of all of the stakeholders should be the goal of the firm; All stakeholders are affected by firm decisions; The general welfare of society will be maximized if stakeholder utility is properly accounted for, and maximizing the welfare of society is an appropriate goal Agency Theory: An agency relationship exists when one party (the principal) hires a second party (the agent) to perform functions on behalf of the principal Agency costs refer to costs incurred by the firm as a result of a conflicts of interest between agents and principals. Include the costs associated with monitoring agents to ensure that they fulfill their obligations to shareholders; Direct or indirect costs; Agency costs can be mitigated through appropriate executive compensation procedures Corporate Governance: Corporate governance is akin to steering the ship, not rowing it; Tasks in corporate governance include: Hiring, firing, compensating, and monitoring the actions of senior management; Developing strategy for the firm as a whole; Risk management is a relatively recent role in corporate governance Boards of directors are composed of directors who are elected, supposedly, by shareholders Goal of corporate governance: To ensure that management represents shareholder interests to the best of their ability, Boards are agents of shareholders and principals in their relation towards management Magical EPS Mergers may create the appearance of growth in earnings per share If there are no synergies or other benefits to the merger, then the growth in EPS is just an artifact of a larger firm and is not true growth In this case, the P/E ratio should fall because the combined market value should not change -There is no free lunch
FIN401-Exam Crib Sheet
After leasing questions, remember to switch back to END NPV=PV(OCF)+PV(NCS)+PV(NWC)+PV(CCA) 1. PV(OCF)=(S-V-FC)(1-Tc) =(EBITDA)(1-Tc) 2. PV(NCS)=(-Initial Cost)+PV(Salvage) 3. PV(NWC)=(-NWC)+PV(NWC) CdT 1+0.5r SdT 1 n 4. PV(CCA)=([ /d+r][ /1+r])- ([ /d+r][ /(1+r) ])
Break Even EBIT – EPScurr = EPSprop EBIT-Interest o EBIT-Interest o /#shares /s = /new #shares /s
Generate equal dividends 1. Find PMT where PV=P0 2. Investor gets P1(#shares) but wants PMT(#shares) = extra/short 3. Find Price @Yr1 from liquidating: *P1=P2/1+r 4. Buy/Sell = Extra or short/*P1 If 6 times greater 1. P0=6D/1+r + D/(1+r)2 2. Find what 6D is then follow from step 2 above
Cost of Preferred Stock: Rp=D/P0 Cost of Debt: YTM – use calc
Unlevered Firm=No Debt/All Equity M&M Properties Borrow/lend at same rate as firm; no tax, bankruptcy cost & agency cost; asymmetric information is there; efficient market prevails Property I Firm Value Property II WACC No VL = VU WACC=WERE+WDRD Taxes Value doesn’t WACC is constant change w/cap struc w/changes in cap struc changes. No optimal RE=Ru+(RU-RD)(D/E) Ru=business risk, (RU-RD)(D/E)= Firm risk cap struc Taxes VL=VU+DTc WACC=WERE+WDRD(1-Tc) Firm value increases Adding debt decreases as firm adds debt. WACC. 1. Firm is using Optimal cap struc = cheaper financing. 2. Int 100% debt payments are tax deductible RE=Ru+(RU-RD)(D/E)(1-Tc)
NAL=Cost-PV(ATLP)±PV(savings/cost)-PV(CCA)-PV(Salvage) 1. Rd*=Rd(1-Tc) 2. ATLP=Lease Pymt(1-Tc) =PYMT 3. PV(ATLP) **USE BGN & Rd* ** 4. Savings = amt(1-Tc) 5. PV(Savings) **USED END & Rd* ** 6. PV(CCA) & PV(Salvage) *r = Rd* If finding indifferent lease pymt NAL=0 Min amt lessor accepts, max lessee pays 1. Set NAL=0, find PV(ATLP) 2. PV(ATLP) as PV, i=Rd*, solve PMT **BGN** 3.BTLP=PYMT/1-Tc If no taxes, NAL=cost-PV(BTLP)-PV(Salvage) **USE BGN for LP** r=i, not using Rd* WACC=WERE+WDRD(1-Tc) V=D+E WE=E/V WD=D/V
Value of Right = Stock price – Ex-rights price Underwriter charges% spread – how many shares to be issued 1. X(1-%) = FTBR 2. X/sub price = #shares to issue
Firm Restructures – risky – you go safe 1. # shares to sell -find % debt= (#shares)($)/amt being borrowed -need to sell= (%)(#shares you own) -dollar value= (need to sell)($) 2. Find total CF = (#shares you own)(EPS)+Interest you earn =(#)(EBIT-Company Int/new #shares comp owns)+Int Firm Restructures – safe – you go risky 1. Find D/E ratio **V= #shares($) 2. Find your equity = (#shares owned)($) 3. Need to borrow = (D/E)(Investor Equity) 4. #shares bought = need to borrow/price 5. Find CF = EPS(#shares you own)-your interest for borrowing EPS= EBIT/#shares b/c company isn’t borrowing; old +new Stock Split= #stocks(fraction) Stock Split Price = price(inverse fraction) How many rights need to purchase @sub price? 1. New shares to issue= FTBR/Sub price 2. # Rights(N)= shares o/s (old)/shares issued(new) Ex-rights Price Price=N(price stock sells for)+Sub price/N+1
Dutch Auction 1. rank bids, highest to lowest based on price 2. Find successful bidders, that’s lowest price 3. If not enough – amt you have/amt needed = %, all bidders get this % of what they want Firm Commitment: Offering price is transferred from issuer to underwriter; Firm sells all Regular Underwriting: Firm=#(price-fee) PM=#(fee) #contracts to sell= amt you have/size of contract Profit=(#contracts held)(size)(end price – beginning price) Forward Contract A contract where two parties agree on the price of an asset today to be delivered and paid for at some future date Forward contracts are legally binding on both parties They can be tailored to meet the needs of both parties and can be quite large in size Because they are negotiated contracts and there is no exchange of cash initially, they are usually limited to large, creditworthy corporations Long position – agreeing to buy the asset at the future date (buyer); asset will rise in value Short position – agreeing to sell the asset at the future date (seller); asset will fall in value Cross-Hedging: Hedging an asset with contracts written on a closely related, but not identical, asset Basis Risk: When cross-hedging, the risk that the futures prices does not move directly with the cash price of the hedged asset Call Option-right to buy asset; seller obligated to sell asset if exercised - If S<E payoff = 0 but if S>E payoff is S-E (ITM for buyer) -Profit = (#)(S-E) – (#)(premium) -Upper bound: Call option price must be less than or equal to the stock price -Lower bound: Call option price must be greater than or equal to the stock price minus the exercise price or zero, whichever is greater -If either bound is violated, arbitrage opportunity
Sabrina Dhuman
FIN401-Exam Crib Sheet
After leasing questions, remember to switch back to END
Put Option-right to sell asset; seller obligated to buy asset if exercised - If S>E payoff = 0 but if S<E payoff is E-S(ITM for Buyer) -Profit = (#)(E-S) – (#)(premium) Option Premium – purchase price of option *American anytime up to and including exp, Euro on exp date Option value = Intrinsic Value + Time Value -Intrinsic value: what the option would be worth if it were about to expire; Max (0, S – E); also known as the lower bound -Time value: the likelihood that the option will move into the money before expiration; At expiration, time value = 0; Time value = Option price – Intrinsic value Hedging Commodity Price Risk w/Options - Owner of Call Opt; Exercises the Option: Receives a long position in the futures contract; Receives cash equal to the difference between the exercise price and the futures price - Writer/Seller of Call Opt: Receives a short position in the futures contract; Pays cash equal to the difference between the exercise price and the futures price - Owner of Put Opt; Exercises the Option: Receives a short position in the futures contract; Receives cash equal to the difference between the futures price and exercise price - Writer/Seller of Put: Receives a long position in the futures contract; Pays cash equal to the difference between the futures price and exercise price Warrants - A security that gives the holder the right to purchase shares of stock at a fixed price over a given period of time - It is basically a call option issued by corporations in conjunction with other securities to reduce the yield - Usually included with a new debt or preferred shares issue as a sweetener or equity kicker Difference between Warrants and Call Opt Warrants are generally very long term; They are written by the company and exercise results in additional shares outstanding; The exercise price is paid to the company and generates cash for the firm; Warrants can be detached from the original securities and sold separately; Warrants affect the value of the firm Conv ratio=par value/conv price (what bond is exchangeable for) Conv Price=par value/conv ratio Conv Premium= Conv Price-Stock Price/Stock Price **Straight Bond Value= calc PV **Conv Value = (conv ratio)(stock price) If conv value=SBV, (conv ratio)(x)=SBV Option Value=Mkt selling price – (higher of **) Floor value=worth at higher between SBV/conv Value
Reasons for issuing warrants/convertibles They allow companies to issue cheap bonds by attaching sweeteners to the new bond issue Coupon rates can then be set at below market rate for straight bonds They give companies the chance to issue common stock in the future at a premium over current prices Cons - If the company performs badly and the stock price drops Bondholders will not exercise their conversion option; The company should have issued common stock when stock price was high lost valuable opportunity - If the company does well and the stock price increases Bondholders will exercise their conversion option; The company is forced to sell stock at a price lower than the current market price P/E= equity/earnings =Price/EPS o EPS = earnings/shares /s Price per share = (P/E ratio)(earnings/shares o/s ) NPV=VB*-Cash Cost =VB+∆V-Cash Cost =[(Price)(#share in B)]+synergy-[(pay$)(#shares in B)] Price per Share after Transaction Price=VAB/#shares o/s in A =VA +NPV/#shares o/s in A =VA + VB+∆V-Cash Cost /#shares o/s in A P/E Ratio after Transaction is completed P/E=VAB/Earnings =Equity/EarningsA + EarningsB =[(EarningsA)(P/EA) ±NPV]/ EarningsA + EarningsB When shares are being exchanged 1. Find new shares o/s for firm A #shares to firm B = shares firm B/amt exchanged New Shares o/s = old shares o/s + #shares to firm B Price after Trans = VAB/New #shares o/s Total Premium Paid= (#shares to B)(Price after trans)-VB If NPV=0, Use of A & Solve for #shares 0= VB+∆V-(X)(Original price per share A) STOCK ValueAB=VA+VB+∆V Price=VAB/old#shares+(amt paid in shares/price per shareA) CASH ValueAB=VA+VB+∆V-Cash Paid Price=VAB/old#shares Firm: it is a collection of legal relationships between parties who have contracted with each other What is the Goal of the Firm: The goal of the firm should also be the goal of management as management has contracted to carry out the goals of the firm Problem: the goal of management may diverge from those of the firm, creating an agency problem that needs to be addressed
What is the Goal of the Firm: The goal of the shareholders should be the goal of the firm since shareholders are the residual claimholders on the firm If goals of shareholders are not met, they will not invest in the firm, since they take on the most risk - other stakeholders will probably participate in the firm because they take on less risk and are protected by law Shareholders will spend time and money in monitoring and controlling management because management can most affect the fortunes of the firm The goal of all of the stakeholders should be the goal of the firm; All stakeholders are affected by firm decisions; The general welfare of society will be maximized if stakeholder utility is properly accounted for, and maximizing the welfare of society is an appropriate goal Agency Theory: An agency relationship exists when one party (the principal) hires a second party (the agent) to perform functions on behalf of the principal Agency costs refer to costs incurred by the firm as a result of a conflicts of interest between agents and principals. Include the costs associated with monitoring agents to ensure that they fulfill their obligations to shareholders; Direct or indirect costs; Agency costs can be mitigated through appropriate executive compensation procedures Corporate Governance: Corporate governance is akin to steering the ship, not rowing it; Tasks in corporate governance include: Hiring, firing, compensating, and monitoring the actions of senior management; Developing strategy for the firm as a whole; Risk management is a relatively recent role in corporate governance Boards of directors are composed of directors who are elected, supposedly, by shareholders Goal of corporate governance: To ensure that management represents shareholder interests to the best of their ability, Boards are agents of shareholders and principals in their relation towards management Magical EPS Mergers may create the appearance of growth in earnings per share If there are no synergies or other benefits to the merger, then the growth in EPS is just an artifact of a larger firm and is not true growth In this case, the P/E ratio should fall because the combined market value should not change -There is no free lunch
