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Assuming a 7% rate of increase over the next 5 years, what is the present value of the income stream? Your discount rate is 12%, rent for the first year is expected to be $8,500, and the paymentsoccur at the end of the year.5, n. 5.00Stores number of payments.BUS, OLD 1.07, NEW 1.12Enters increase rate plus 1.%CH , I 4.67Stores adjusted rate into i.8500, 1.07, ÷, PMT7,943.93Stores adjusted payment.PV -34,706.26 Calculates present value.Example: We also know that the cash flows will grow at a rate of -3% per year so g=-0.03. Finally, the value for C should be the firstcash flow so it will be $2,000,000.where rf is the risk-free rate, βi is the beta of the asset and MRP is the market risk premium. Recall that CAPM is actually the equation to the SML.Remember that the beta of a portfolio is a weighted average of the individual betas:where D represents the market value of debt, E is the market value of equity, V is the market value of the firm (debt plus equity), Rd is the cost of debt, Re is the cost of equity, and τ is thecorporate tax rate.
FC Ft=EBI T
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Unformatted text preview: t − Cape x t − FC F t = OC F t − Cape x t − ΔNW C t Free cash flows are calculated AS IF the firm is UNLEVERED Financing is irrelevant for cash flow: CAPM: Assets with similar risk must offer similar return. E ( R a ) = E ( r f ) + E ( β a ) ×E [ MRP ] CAPM to find discount rate β e = β a + D E ( β a − β d ) ( 1 − τ ) com R nos betas Cost of Equity Arbitrage: Assets with the exact same future cash flows (payoffs) MUST sell for the exact same price today. MMI(Price): V L =V U MM2(Cost of Equity): R e = R a + D E ( R a − R d ) With no taxes, WACC is unaffected by capital structure. WACC = E V r e + D V r d ( 1 − τ ) As debt increases, the WACC remains constant (with no taxes) Re increases…BUT D/V larger and E/V smaller. EXACTLY OFFSET WACC with taxes: As debt increases, the WACC DECREASES Re increases…BUT D/V becomes larger and E/V becomes smaller. With taxes, the second effect is GREATER and thus WACC decreases V=FCF/WCC 1 + r ¿ T ¿ P + S = C + X ¿ options 1 + r ¿ T ¿ C − P = S − X ¿ rearanging...
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