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Finance Cheat Sheet (DRAFT) by

This is a draft cheat sheet. It is a work in progress and is not finished yet.

Class 1

Goal:
Maximize Firm Value
Terminal Value
Pricet+ΔNWC-tc(Pricet-BVt)
5 Principles of Investment Decisions
1)Deci­sions are based on cash flows, not accounting income.
2)Cash flows are based on opport­unity costs.
3)The timing of cash flows is important
4)Cash flows are analyzed on an after-tax basis.
5)Fina­ncing costs are reflected in the project’s required rate of return.

Class 2

Leverage
(Debt/­(De­bt+­Equity)
Cost of Equity
re=rfBe(rm-rf)
WACC
weighted average of the cost of equity and the after-tax cost of debt.
((E/V)(Re) + [((D/V­)(1­-T)­(Rd)]
E = Market value of the company's equity
D = Market value of the company's debt
V = Total Market Value of the company (E + D)
Re = Cost of Equity
Rd = Cost of Debt
T= Tax Rate

Class 3

EPS:
(Net Income­)/(­Shares Outsta­nding)
PE Ratio
(Market Price Per Share)­/Ea­rnings Per Share)
Equity Market Value
Share price x shares outsta­nding
Enterprice Value
equity market value + debt - cash
EV/EBITDA "­Val­ue-­to-­Earning
EV=Ent­erprise Value
Price/­Book=
Book Value/­Share
Backwards integr­ation
A firm takes over a supplier. An oil transp­orter buying an oil explor­ation and production company.
Forwar­dsi­nte­gration
A firm takes over a customer. An oil transp­orter buys a set of gasoline stations.
Investment Growths
Organic (Slow growth) - growth is when a firm grows or develops a new product or capability in-house (less risky, less expensive)

Inorganic (M&A, Fast growth)
Acquis­ition: buying part of a company
Merger: entire target
(Fast growing, reduces compet­ition)
  

Class 4

Beta Unleveled:
APV
1)Vunleveled 2)Calulate PV(SideEf­fects) 3)TV
TRUE. When leverage increases beta increases.
TRUE. When a firm has no debt the unlevered cost of equity equals the levered cost of equity.
FALSE. When leverage changes sharply, using the same WACC from the previous period is still approp­riate.
TRUE. Leverage represents a type of risk because it affects potential returns on investment

Class 5

Capital Structure
is the process of choosing how to finance a firm’s invest­ments.
Pecking Order Theory
of raising capital predicts managers will finance projects with retained earnings first, debt, then equity
Lifecycle Theory
predicts a firm’s financing changes as it makes the transition from a start-up firm to a mature firm to a declining firm.S­tart-up firms use debt sparingly, then as cash flows from invest­ments become more predic­table, the growing firm begins to use more debt, then leverage peaks for the mature firm right before it declines
Modigliani Miller
predicts capital structure is irrelevant for firm value in a world with no taxes, no bankru­ptcy, no financing constr­aints (i.e., all firms borrow at same rate), no transa­ction costs, and no market frictions (i.e., efficient prices and no agency costs)
Trade-off Theory:
VL = VU + PV (tax shields) – PV (bankr­uptcy costs) – PV (risk-­shi­fting) – PV (manag­erial risk aversion) + PV (disci­plinary debt)
actual capital structure > optimal capital structure.
=overl­evered= You want to decrease your debt levels.
Financing an investment with debt Increase leverage
Paying off debt with retained earnings Decrease leverage
Increasing your regular dividend Increase leverage
Cancelling a share repurchase plan Decrease leverage
Selling some of your assets and using the cash to pay down Increase leverage

Class 6

VAT=
GainT=
GainS=
VAT=the post-m­erger value of combined firm (acquirer + target)
VA=the pre-merger value of acquirer
VT= the pre-merger value of target (note: should be the trading price before any merger specul­ation caused the price to jump).
S=are estimated post-m­erger synergies
C= any cash paid by acquirer to target
TP= take over premium
PT= the price paid for the target

Class 9

Dividends
a dividend is a cash distri­bution to shareh­olders that occurs at a regular frequency (e.g., quarterly, annual, etc...)
Repurc­hases
A repurchase of stock is a distri­bution in the form of the company buying back its stock from shareh­olders.
Special payout
large one-time dividend, in case for next class, a preferred stock with fixed dividends, etc...
In reality, excess cash is bad because it works against the goal of corporate finance:
1)It lowers return on assets (i.e., ROA or profit­abi­lity).
2)It increases the cost of capital (why? cash is part of equity so will impact the WACC calcul­ation).
3)It can create an overly confident, undisc­iplined management team.

If actual value > intrinsic value don’t invest
If actual value < intrinsic value invest