Maxs Four Rules of Financial Management

1) Dont run out of cash.

2) Make good investment decisions.
3) Make good financing decisions.
4) Maximize shareholder value
Assignment # 1
Working capital = Current asset Current liabilities
Debt Ratio =
Return on equity =
Near Term Expected Growth = ROE X Plowback
Plowback rate =
FCF = EBIT(1-TAX) + Deprec. & Amort. NWC
Capital Expenditure
Zero Coupon Bond Price =
Stock price today with no growth =
100% Earnings = Payout Ratio + Plowback Ratio
Sustainable growth rate = ROE X Plowback Ratio
Growing Perpetuity =
PVGO =
Value of CO. w/ zero residual value = Sum of PV
Horizon value =
Value of CO. with indefinite growth = HV + PV
Horizon value with growth =
Final projecte cash flow
r
r g

Assignment # 2
Dividend Yield =
Price per share =
Market to book ratio =
Payback period = you can count
The Payback rule ignores all cash flows after
the cutoff date.
The payback rule give equal wait to all cash
flows before the cutoff date.

Remaining time =
Profitability Index =
Equity value of the firm = Discounted Terminal
Value + Sum of PV cash flows net debt
Pitfalls of IRR
Lending or Borrowing? Not all cash flow
streams have NPVs that decline as the
discount rate increases. When we borrow
money, we want high return; when we lend
we want a low rate of return. We have to
look for an IRR less than the opportunity
cost of capital.
Multiple Rates of Return There may be as
many IRRs for a project as there are sign
changes in the signs of the cash flows.
Mutually Exclusive projects Firms often
have to choose from among several
alternative ways of doing the same job. Use
NPV.
What happens when there is more than on
opportunity cost of capital have to compute
a complex weighted average of these rates.
When firms use IRR, they are assuming
there is no difference between short term
and long term discount rates.
Assignment # 3
SML =
r =
r =
r = .
=
CAPM states that the expected risk premium on
each investment is proportional to its beta. This
mean that each investment should lie on the SML All
the correctly priced securities are plotted on the
SML. The assets above the line are undervalued
because for a given amount of risk (beta), they yield
a higher return. The assets below the line are
overvalued because for a given amount of risk, they
yield a lower return.
After-tax WACC =
(
r ) (
r )
=
=
=
=
r =
r =
Opportunity CoC =

Expected return on equity

equity

r )

e t

r )
r

Other Equations
Market Cap. = Share price X Shares outstanding
Return on Assets =
Market Value = Value if all Equity Financed + PV
Tax Shield PV Costs of Financial Distress
PV Tax Shield =

Price/Earning =
Gross Margin =
Shrek = Love + Life
Average Collection days of AR =
Inventory Turnover =
Current Ratio =
Expected Return =

Dividend yield + Capital appreciation

DuPont Formula =
= profita ility

asset turnover

leverage

Modigliani & Miller (M&M)

MM1: Issuing debt does not affect the value of the
firm. In perfect capital markets, market value of the
firm is independent of its capital structure.
MM2: The expected return on the common stock of
a levered firm increases in proportion to the debtequity ratio (D/E), expressed in market values; the
rate of increase depends on the spread between ra ,
the expected rate of return on a portfolio, and rd ,
the expected return on the debt. Note if re = rd, the
firm has no debt.