Net proceeds face value float cost PV of ordinary annuity X PV of PV of ordinary annuity interest rate X Taxes paid Taxable income After tax income PLUS depreciation Before tax cost of debt 1 tax rate FINA 3770 Final cheat sheet Avg Tax Rate After Tax Cash Flow After tax cost of debt After tax cost of pref stock Dividends per share Net proceeds per share Annuity due annuity due Before tax cost of debt Beta Rf Rm Rf Beta of a portfolio CAPM Capital Structure Pref Structure Debt Structure Equity Structure Compounded continuously years I Y ex money Constant Growth Rate Corporate Bond Taxation Corporate Bond Yield 1 Tax Bracket Net Yield pick the corporate bond if it yields higher than the municipal bond after tax Cost of capital Cost of common equity Same as I Y Beta value of zero indicates NO market risk Bp wj Bj whereas wj stands for weighted average Run a regression of stock return and beta Long term liabilities Preferred stock Equity 2 0 Same as market twice as responsive risky 1 0 Same as market risk equal to market 0 5 Same as market half as risky as market 0 0 Uncorrelated w market moves no risk 0 5 Opposite of market half as responsive Pf B Pf E B B Pf E E B Pf E Ks D P g Beta Sum of weight Cost of components i e total of long term debt preferred and equity INTERNAL Use CAPM or Constant Growth Model EXTERNAL Use Constant Growth Model Dividends per share Net proceeds per share Long Term Govt bonds Long Term Corp bonds D P ei 1 100 2 yr security yield 1 yr security yield x 2 Pi Ki or Long Term Debt Short Term Debt and Stockholders Equity Cost of preferred stock Default Risk Premium Dividend Yield Effective interest rate Expected Rate of Return Expected Value Financial Structure Find IRR given NPV table IRR Discount rate 0 NPV Flotation Cost Home Equity Problems Liquidity Premium Maturity Premium P E Ratio Perpetuity Firms net profit Cost to firm homeowners equity interest rate 1 tax bracket Small firm return common stock return Long Term Govt bonds T Bill Price Earnings per share Payment IRR Net proceeds face value float cost Market Risk macroeconomic variables non diversifiable systematic Firm Specific Risk microeconomic variables diversifiable non systematic Profitability Index Real rate of return Return on Equity Standard Deviation Total Risk PI PV of future cash flows cost solve with algebra 1 risk free rate 1 inflation rate 1 Net Income After Taxes Common Stockholders equity Pi Ki K Total risk Company specific risk Market risk WACC Zero Growth Rate Weight of LT debt and equities After tax cost of source of funds Return Probability P D Ks 0 20 0 50 0 30 Expected Value 5 20 05 01 10 50 1 05 30 30 3 09 13 or 13 Standard Deviation 5 13 2 2 10 13 2 5 30 13 2 3 SALES COGS GROSS PROFIT Cash Expense Depr Expense Operating Income Dividend Income Less Exclusion 70 Interest Expense Taxable Income Taxes ADD BACK dividend exclusion Net Income after Tax Dividend Paid Retained Earnings Beta is a measure of Market risk When you diversify across a wide variety of firms in the stock market your goal is to get rid of risk Firm specific risk Microsoft fires the CEO of the company This is an example of Non systematic risk On which date will the price of the stock fall in value by amount of dividends about to be paid by the firm Ex dividend date Assume you were interested in investing in a stock with a beta of minus 2 5 if the stock market drops by 20 next year your stock will go 2 5 20 50 go up by 50 In estimating the beta of a stock you will regress what two variables against each other X and the Y variable Market return and return on the stock An investment requires an outlay of 20 000 and expected cash inflows of 3 000 per year for the first nine years and 6 000 in the tenth year If the cost of capital is 15 determine the profitability index of this project Co1 3000 Fo1 9 Co2 6000 CPT NPV 15797 PI 15797 20 000 0 79 Use the appropriate model to value the stock This stock is expected to pay dividends of 3 4 and 9 in years 1 2 and 3 The investor plans to sell the stock in year 3 for 40 The required rate of return on the stock is 9 9 Co1 3 Co2 4 Co3 49 CPT NPV Determine the cost of external equity Current or this years dividend is 3 30 Growth rate is 6 Stock is selling for 60 and flotation cost for new stock is 5 per share K 3 30 1 06 60 5 06 12 3 Determine the payback period for the following Initial 40 000 Yr 1 20 000 Yr 2 15 000 Yr 3 10 000 Yr 4 10 000 Yr 5 50 000 Yrs 1 2 35 000 Yr 3 5 000 needed 10 000 generated 0 50 2 0 50 2 5 years A bond has a coupon rate of 8 5 and a yield to maturity of 9 5 Such a bond will be selling for Less than 1000 Compute the float cost IBM sells stock to investors It sells 20 000 shares at 40 per share IBM nets 35 per share after underwriting comp Legal and other costs add up to 90 000 40 25 20 000 90 000 190 000 35 20 000 700 000 190 000 700 000 27 1 cost to firm firm nets float cost Compute the growth rate based on internal funds for a stock Net income after taxes is 350 it pays 200 in dividends and stockholders equity is 1000 ROE 350 1000 0 35 R 350 200 150 350 4286 35 4286 0 15 Assume that stock returns follow a normal distribution For a given stock expected value was 9 and standard deviation was 14 There is a 99 7 chance that the actual return earned by investors during a given year will be between and 9 14 3 33 9 14 3 51