Stock Valuation – Single Holding Period

V0 = V1 + D1
1 + kcs

kcs = V1 + D1
V0

Financial Ratios
 Current Ratio = Current Assets / Current Liabilities
 Quick Ratio = (Current Assets - Inventory) / Current Liabilities
 Accounts Receivable (AR) Turnover = Credit Sales / AR
 Average Collection Period (ACP) = 365 / AR Turnover
 Inventory Turnover = COGS / Inventory:
 Days on Hand (DOH) = 365 / Inventory Turnover
 Total Asset Turnover (TAT) = Sales / Total Assets
 Fixed Asset Turnover (FAT) = Sales/Fixed Assets
 Operating Income Return on Investment (OIROI) = EBIT / Total Assets
 Debt Ratio = Total Liabilities / Total Assets
 Interest-Bearing Debt to Total Capital (IBDTC) = Interest-Bearing Debt / (Interest-Bearing
Debt + Owners' Equity)
 The Times Interest Earned Ratio (TIE) = EBIT / Interest Expense
 Financial Leverage Ratio (FLR) = Total Assets / Equity
 Return on Assets (ROA) = Net Income / Total Assets
 Return on Equity (ROE) = Net Income / Owners' Equity
 Gross Margin = Gross Profit / Sales
 Operating Margin = EBIT / Sales
 Net Margin = Net Income / Sales
 The DuPont Decomposition (aka "the DuPont equation"):
ROE = Net Income / Sales × Sales / Total Assets × Assets / Equity
= Net Income / Total Equity
 Return on Assets = Net Income / Assets
Time Value of Money
Present Value
PV = FV / (1 + r)n

PVAordinary= pmt [(1 - {1 / (1 + r)n}) / r]

PVAdue = pmt [(1 - {1 / (1 + r)n}) / r](1 + r)

Future Value
FV = PV (1 + r)n
n
FVA ordinary = pmt [({1 + r} - 1) / r]

n
FVAdue = pmt [({1 + r} - 1) / r] (1 + r)

Effective Yield (Annual Percentage Yield or APY)

Effective yield = [1 + (i / m)]m – 1 where i is annual interest rate and m is the number of annual
compounding periods

Bond Valuation
Bond Price
Enter: N, I/Y, PMT, FV

Solve for PV

Yield to Maturity
Enter: N, PV, PMT, FV

Solve for I/Y

Equity Valuation
Gordon Growth Model

V0 = D1 / (kcs - g), where D1 = D0 * 1+g

kcs = (D1 / V0) + g

Dividends

Dividend payout ratio: dividends per share / earnings per share

Dividend yield: annual dividends / common stock price per share

Forecast Probability (Expected Return)

E[R] = Pr * Rr + Pe * Re, where r = Recessionary and e = Expansionary

Capital Asset Pricing Model

E[R] = Rf + 𝛽(Rm – Rf), where Rf = Risk Free rate, Rm = Market Rate, 𝛽 = Beta Coefficient

Market Premium: Rm – Rf

Weighted Average Cost of Capital

WAAC = Emv/MV * RE + Pmv/MV * RP + Dmv/MV * RD (1-t)

Where MV is Market Value and t is tax rate

Financial Forecasting
Percent of Sales Method

1. Project sales revenues and expenses

2. Forecast change in spontaneous balance sheet accounts
3. Deal with discretionary accounts
4. Calculate retained earnings (RE)
5. Determine total financing need/assets
6. Calculate DFN (discretionary financing needed)

Sustainable Growth Rate

SGR = ROE * (1 – dividend payout ratio)
Capital Budgeting
NPV = ∑ of the Present Value Differential Cash Flows (plus Terminal Cash Flow) - Initial Cash Outlay

IRR = implicit rate of return of project

Degree of Leverage
Degree of Operating Leverage: (Sales – Variable Costs) / EBIT
Degree of Financial Leverage: EBIT / (EBIT – Interest Expense)
Degree of Combined Leverage: (Sales – Variable Expense) / (EBIT – Interest Expense)

Working Capital
Net Working Capital (NWC) = Current Assets – Current Liabilities

Operating Cash Flow (OCF) (∆ Revenue - ∆ Costs) * (1-tax rate) + Tax * ∆ Depreciation
Net Cash Flow = ∆ OCF - ∆ NWC – Capital Expenditures

Firm Valuation
Free Cash Flow (FCFF) = EBIT * (1-Tax Rate) + Depn – Cap Exp– Increase in NWC

Free Cash Flows from Equity (FCFE) = EBIT * (1-Tax Rate) + Depn – Cap Exp – Increase in NWC –
Increase in Debt

Or the sum of FCFF/(1+WACC) for each year forecast.