Cheat Sheet

# Cheat Sheet - APR = Annual Percentage Rate stated annual...

This preview shows pages 1–2. Sign up to view the full content.

- APR = Annual Percentage Rate, stated annual interest rate - 1+nominal interest rate real interest rate = 1 1 inflation rate - + - (1 ) 1 m r EAY m = + - effective annual yield or interest rate; is the annual value gained with or without compounding EAY = APR (annual Compounding) EAY > APR (More Freq. Compounding) - Continuous Compounding = 0 rT C e - PV of Perpetuity = C r - PV of Growing Perpetuity = C r g - R must be greater than g for formula to work - PV 0 of an Annuity = 1 (1 ) (1 ) T C r r - + - PV 0 of a Growing Annuity 1 1 ( ) 1 T g C r g r + - - + Mortgage Payments (Monthly) Term = 20 yrs * 12 = 240 Pds APR = 12% / 12 = 1% r = 1% Each Payment: Balance x r = Interest Payment Monthly Payment – Interest Payment = Principle Reduction Balance A - Principle Reduction=Balance B Comparing Assets w/ Unequal Lives 1. Find NPV for 1 life cycle 2. Find Cost / yr PV = x * A 3. Compare Ax and Bx Determining Cash Flow Cash = (Revenue – Cash Costs)(1 - .34) + . 34(Depreciation) What happens to Cash Flow… 1. Sales rise by \$1? Down .34 tax Up .66 2. Materials costs rise by \$1? Pay \$1 Retain .40 Down .60 Depreciation expense rises by \$1? Income Down \$1 Tax down .34 Cash up .34 Calculate: NPV of Project: -30 + 21/1.12 + 21/1.12^2 IRR : -30 + 21 / (1+r) + 21 / (1+r) ^2 = 0 Cash Effects of Purchase and Sale of Assets 1. Initial cash outlay: -1000 @ C 0 (Cannot be expensed) 2. Depreciation Expense = 1000 Depreciation expense each Year: D1 = .200 (1000) = 200 C1 = 68 D2 = .320 (1000) = 320 C2 = 108.8 D3 = .192 (1000) = 192 C3 = 65.28 D4 = .115 (1000) = 115 C4 = 39.10 D5 = .115 (1000) = 115 C5 = 39.10 D6 = .058 (1000) = 58 C6 = 19.72 A. D * T (.34) = C B. Discount All Cash Flows C. Sum to Get NPV of Depreciation Tax Shield * For ever 1\$ Depreciation… Pre Tax Income Down 1\$ 3. Resale of Used Asset Resale Price 500K Book Value - 0 ------------------------- Taxable gain 500K 1 1 0 1 1 1 1 1 ( ) Div EPS P NPVGO r g r EPS RE Div EPS POR Div = = + - = + = NVPGO EXAMPLE 1. Earnings constant 2. EPS = Div (Cash Cow Value of a share = EPS / r = Div / r Now Firm retains entire dividend @ Date 1 to invest in a single project Date 0: NPV of Project = NPVGO # of Shares Thus, Value of a Share after commit to Project: EPS / r + NPVGO Earnings / yr = 1M Stock: 100k outstanding EPS = 10 A. @ Date 1 Firm can spend 1M on a Mktg Campaign which will increase subsequent earnings by 210, 000 or increase EPS by 21% 1. Cash Cow (Pays out all Earnings) P = EPS / r = 10 / .10 = \$100 Value of MKTG campaign @ Date 1: -1M + 210,000 / .10 = 1.1M @ Date 1 @ Date 2 Value of MKT campaign @ Date 0: = Discount 1 Period: 1.1M / 1.1 = 1M Thus NVPGO = 1M / 100k = \$10 Now EPS = EPS / r + NPVGO \$100 + \$10 = \$110 OR METHOD 2 Value created b/c: Rate of Return (21%) >

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 2

Cheat Sheet - APR = Annual Percentage Rate stated annual...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online