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

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- 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%) >
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This note was uploaded on 10/06/2010 for the course FNCE 100 taught by Professor Jaffe during the Spring '10 term at UNC Asheville.

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

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