Techniques

for Capital Budgeting

Payback Period

> estimates how long it takes a firm to recover initial investment.

> unit: years

How to solve:
CASH function
x
CF
CF
CF
CF
Solve: PBP

Discounted Payback Period

> estimates how long it takes a firm to recover initial investment.

> unit: years

How to solve:
CASH function Input:

I% = Discount Rate x
CF
CF
CF
CF
Solve: PBP

Net Present Value (NPV)

> Amount of additional value company would generate from investment

> unit:

How to solve:
CASH function Input:

I% = Discount Rate x
CF
CF
CF
CF
 Solve: NPV

Profitability Index

> for ranking purposes based on NPV

> unit:

How to solve:

NPV
= +1
CF 0

Internal Rate of Return

> determine specific rate of interest

I% = Discount Rate x
CF
CF
CF
CF
Solve: IRR

Modified Internal Rate of Return

> determine specific rate of interest

Step 1.)
Get all positive values and and use rate of reinvestment to get FV
at year N
Step 2.)
Get all negative values and use finance rate/discount rate to get PV
at year 0
Step 3.)
CMPD function
FV = Step 1 FV
PV = Step 2 PV
N = # of years
Solve = I%
 Equivalent Annual Annuity

> used if 2 projects having unequal lives

CMPD Function
I% = Discount Rate/Finance Rate
n = # of years
FV = 0
PV = NPV
Solve = PMT

Note: Solve for IRR & MIRR last for easier results
 WORKING CAPITAL (OLD - NEW
CAPEX (NEW EQUIPMENT + BO

NET OPERATING CASH FLOWS DIF

RETURN WORKING CAPITAL (R

SALE OF EQUIIPMENT (PAEXPL
Net Cash Flow

Expansion Project
Investment Outlays CF0 CF1 CF2
(Equipment) (xx)
(△ Net WC) (xx) Difference of revenue x percentage
(Opportunity Cost) after tax value
(xx)

Net Cash Flows over the Project's Life

Sales Revenue xx xx
(Variable Cost) (xx) (xx)
(Fixed Cost) (xx) (xx)
Gross profit
(expenses)
EBITDA
(Depreciation) (xx) (xx)
EBIT xx xx
(Tax on Optg Income) 1- TR (xx) (xx)
NOPAT (NET INCOME) xx xx

Dep'n Add Back xx xx

Positive Externality xx xx
(Cannibalization Effect) depending what year (xx) (xx)
3 different scenarios kung pano nabenta ang machinery xx
(xx)
Recovery of net working capital xx
Project net Cash Flows CF0 CF1 CF2

Sold at Book Value

Book Value +
If Sold at Gain
Gain after Tax +
Book Value +
if sold at Loss
Sell Price +
Loss Taxed +
 Replacement Project

CF0 CF1 CF3 CF2

WORKING CAPITAL (OLD - NEW) xx xx xx
CAPEX (NEW EQUIPMENT + BOOK VALUE OF OLD + GAIN OF SALE OF OLD AFTER TAX) xx

NET OPERATING CASH FLOWS DIFFERENCE (NEW - OLD) xx xx xx

RETURN WORKING CAPITAL (REVERSE LAHAT NG WC SA TAAS) xx

SALE OF EQUIIPMENT (PAEXPLAIN SA IBA) xx
Net Cash Flow xx xx xx xx
 Liquidity Ratio
Cash and cash Equivalents
Cash Ratio =
Current Liabilities

Current Assets
Current Ratio =
Current Liabilities

Current Assets - Prepaid Assets - Inventories

Quick Ratio = Current Liabilities

Group of Activity Ratios

Credit Sales/Revenue 365
A/R TO = A/R DAYS =
Ave of 2 period A/R A/R TO

COGS 365
INV TO = INV DAYS =
Ave of 2 period INV INV TO

Credit Purchase 365

A/P TO = A/P DAYS =
Ave of 2 period A/P A/P TO

OPERATING CYCLE = A/R DAYS + INVENTORY DAYS

CASH CONVERSION CYCLE = OPERATING CYCLE - PAYABLE DAYS

EFFICIENCY RATIOS
REVENUES
TOTAL ASSET TO =
AVE TOTAL ASSET

REVENUES
EQUITY TO =
AVE TOTAL EQUITY is preferred kasama?

REVENUES
FIXED ASSETS TO =

AVE TOTAL F. ASSETS

 VERTICAL ANALYSIS
BS ITEMS IS ITEMS
BALANCE SHEET = INCOME STATEMENT =
TOTAL ASSETS TOTAL SALES
HORIZONTAL ANALYSIS (%)
CURRENT YEAR
BALANCE SHEET = -1 x 100
PREVIOUS YEAR

CURRENT YEAR
INCOME STATEMENT = -1 x 100
PREVIOUS YEAR

Other Ratios

Net Income
RETURN ON ASSET =
Average Total Assets

NOPAT NOPAT = EBIT x (1-TR)

RETURN ON CAPITAL =
Average Common Capital Common Capital = Common Equity (w/ preferred) + Int bearing liabs + R/E

Net Income
RETURN ON EQUITY Total Common Equity = w/o preferred + R/E
Average Total Common Equity

Finaniclal Leverage
Net Profit Margin Multiplier
Average Total Assets
Net Income
Average Common Equity
Sales
> Risk
> Profitability > Benchmark number: 2
> Profitability > if FLM is 1 = No debts
> Greater than 2, greater debt finance than equity
> Less than 1, greater equity than debt

Risk Ratios
Finaniclal Leverage
DEBT TO EQUITY RATIO DEBT RATIO
Multiplier
TOTAL LIABS VERTICAL RATIO OF TOTAL Average Total Assets
TOTAL EQUITIES LIABILITY Average Common Equity

TIE
(times interest earned ratio)
EBIT
INTEREST EXPENSE FOR YR
 Market Value Ratios
Earnings Per Share Price to Earnings BPS

Net Income Stock Price Stock Price

Total Shares EPS (Common Equity+RE)/Total Shares

Trailing P/E Forward P/E

= Payout (1+g)
= Payout (1+g)
Price now Price now
EPS now r-g EPS next year r-g
Cost of Debt Market value of Debt
CMPD function Quoted price * Par
N = Number of Years x m
PV = Quoted price * par
PMT = Par * Coupon Rate/m
FV = PAR (default: 1000)
m = DEFAULT IS SEMI ANNUAL
I = Solve

I x m = YTD x (1-TaxRate) = Cost of Debt

Cost of Preferred Market of Preferred

Dividend Market value x Outstanding
Cost of Stock
Price

Cost of Common Market of common

Market Value x Outstanding
CAPM = B (Rm + RFR) -RFR

MRP

SUMPRODUCT of weight and cost = WACC

 WEIGHTS COST 40%
Debt 30% 8.00%
Preferred 10% 10.00%
Common 60% 15.00%
WACC 12.40%

Rivals
My Company A B C
Debt 50,000,000.00 25,000,000.00 101,000,000.00 40,000,000.00
Equity 60,000,000.00 50,000,000.00 190,000,000.00 60,000,000.00
Total 110,000,000.00 75,000,000.00 291,000,000.00 100,000,000.00
Weights
Debt 45.45% 33.33% 34.71% 40.00%
Equity 54.55% 66.67% 65.29% 60.00%

Average weight of debts 36.014%

Average weight of Equity 63.986%

Debt to Equity Ratio Target 70.00%

Debt level 41.18%