BALANCE SHEET

BM 602

ASSETS

.
poonsak.sangsunt@gmail.com
081-625-2182

BALANCE SHEET
ASSETS

Current Assets

Debt

Fixed Assets

Equity:
Com. Stocks
Retained Earnings

BALANCE SHEET

LIAB. & EQUITY

ASSETS
Current Assets

Current Assets

Fixed Assets

Debt

LIAB. & EQUITY

(II)

Equity:
Com. Stocks (I)
Retained Earnings
(III)

Fixed Assets

Uses of Funds

LIAB. & EQUITY

Debt
Equity:
Com. Stocks
Retained Earnings

Sources of Funds

BALANCE SHEET

BALANCE SHEET

Investing <------------------ Financing

ASSETS

Financing

LIAB. & EQUITY

LIAB. & EQUITY

Current Assets

Debt
Equity:
Com. Stocks
Retained Earnings

Fixed Assets

Uses of Funds

Debt (II) ------------------>

Interest

Equity:
-----------------Com. Stocks (I)
Retained Earnings (III)

Dividend
&
Capital Gains

Sources of Funds

Sources of Funds

------------ Managing ------------

Managing

BALANCE SHEET

BALANCE SHEET

Financing

Investing

LIAB. & EQUITY

Debt (II) ------------------>

Interest

Equity:
-----------------Com. Stocks (I)
Retained Earnings (III)

Dividend
&
Capital Gains

Sources of Funds :
WACC & CAPITAL STRUCTURE

Managing

ASSETS
Current Assets -------

Liquidity & Profitability

Fixed Assets

Fixed Assets Turnover

Payback, DPB
NPV, IRR, MIRR

----------------

Uses of Funds
Managing

1-1

BALANCE SHEET
Investing
ASSETS
Current Assets -------

Liquidity & Profitability

Fixed Assets

Fixed Assets Turnover

Payback, DPB
NPV, IRR, MIRR

----------------

Uses of Funds:
RISK $ RATES OF RETURN

Managing

1-5

Responsibility of the Financial Staff

Maximize stock value by:
Forecasting and planning (

The effect of changing

technology
(

Investment and financing decisions (

)

Coordination and control (

Transactions in the financial markets (

Managing risk (

1-7
Financial Management Issues of the New Millennium

)
The globalization of business
(
)

1-8

1 - 15

(Goals
(Goals ofof the
the Corporation)
Corporation)

(Stockholder wealth maximization)

(Maximizing the price of the firms common stock)

Financial Goals of the Corporation

The primary financial goal is shareholder
wealth maximization,which translates to
maximizing stock price.
(
)

1 - 16

Business Ethics

1 - 20

Ethics

(Positive Correlation)

1 - 31

Factors that affect stock price.

Projected cash flows to

shareholders (
)
Riskiness of the cash
flows (
)

Timing of the cash flow

stream (
)

CF 1
CF 2
1
(1 k)
(1 k)
n
CF t
.
k) t
t 1 (1

Value

Investment decisions (

Financing decisions (the relative use of debt financing)

(
)
The external environment (

CF n
(1 k) n

(n),

t (CFt),

(k)

1 - 34

1.
2.
3.
4.

Dividend policy decisions (

To estimate an assets value, one estimates the cash

flow for each period t (CFt), the life of the asset (n),
and the appropriate discount rate (k)

1 - 33
Factors that Affect the Level and Riskiness of Cash Flows
Decisions made by financial managers:
(
)

1 - 32

Basic Valuation Model

)
)

2-2

2-4

The Annual Report

Balance sheet
Income statement
Statement of retained earnings
Statement of cash flows

Economic Value Added (EVA)

2 - 30

)
(EVA) = NOPAT After-tax ($) Cost
of Capital

2 - 31

NOPAT
(

Operating After - tax %

capital cost of capital
)

2 - 34

MVA =

Market
value
of equity

3-2

Equity capital
supplied by investors

MVA =

1.1.

3-5

3-6

1.
2.

3-7

3-8

5
1.
2.
3.
4.
5.

1.1.

Liquidity

2.2.

Asset Management

(amount of
assets vs. sales)

(Liquidity)
(Asset Management)
(Debt Management)
(Profitability)
(Market Value)

3.3.

Debt Management

3-9
4.4.

Profitability

1.

PM, ROE
5.5.

M/B

=
=
= 4.2

2.

P/E

(Current ratio)

ROA

Market Value

3 - 15

2.2.

(Quick or Acid test ratio)

1,000
310

=
= 385
310
= 2.1

= 3.2

= 1.2

3 - 17

3.3.

3 - 18

::

1.

(Inventory turnover ratio)

= 3,000
615

= 4.9
= 9. 0

3 - 19
2.

(DSO = Days sales outstanding)

375
3,000 / 365
375
= 46
8.2192
= 36

/365

:: DSO
DSO

3 - 20

3.

(Fixed assets turnover ratio)

=
3,000
1,000
= 3.0

4.

(Total assets turnover ratio)

3 - 21
= 3.0

FA TO
TA TO

FA
FA
3. 0 x
1. 5 x

3,000
2,000
= 1.8

1.

(Debt ratio)

3. 0 x
1. 8 x

3 - 28

=
=

2.
3. (

3 - 22

= 1.5

3 - 23

1.

TA
TA

=
=

4.4.

::

310 + 754
2,000
1,064 = 53.2 %
2,000
= 40.0 %

2. Time - interest - earned (TIE) =

=

EBIT
283.8
88

= 3.2

= 6.0

10

3 - 29

3. EBITDA Coverage Ratio

EBITDA coverage ratio =

::

EBITDA + Lease payments

Interest + Loan repayments + Lease payments

=
=

3 - 30

D/A
TIE
EBITDA
coverage

283.8 + 100 + 28
88 + 20 + 28
411.8
= 3.0
136

53.2 %
3.2 x
3.0 x

40.0 %
6.0 x
4.3 x

4.3

3 - 31

3 - 32

5.5.

EBITDA

1.

(Profit margin on sales)

=
= 113.5
3,000

3.8 %

5.0 %

11

3 - 33

3 - 34

::
PM

2. Basic Earning Power(BEP)

3. 8 %

5. 0 %

PM

3 - 35

:: BEP
BEP
14.2 %

BEP

3.

17.2 %

BEP

4.

BEP

EBIT

283.8
2,000

14.2 %

17.2 %

3 - 36
[Return on total assets (ROA)
Return on Investment (ROI)]

=
= 113.5
2,000
= 9.0 %

= 5.7 %

[(Return on common equity (ROE)] =

= 113.5
896
= 15.0 %

= 12.7 %

12

:: ROA
ROA
ROA
ROE

ROE
ROE

5.7 %
12.7 %

3 - 37

6.6.
1.

9.0 %
15.0 %
ROA

3 - 38

[Price/Earnings (P/E) Ratio]

ROE

BEP

3 - 39
2.

(Price/Cash Flow Ratio)

=

23.00
2.27
10.1

12.5

3.

3 - 40
[Market/Book

(M/B) Ratio]

23.00
= 5. 4
4.27
= 6. 8

(Book value per share)

=
=

Market/book ratio (M/B)

896
50

= 17.92

23.00
17.92

= 1.3

=
=

= 1.7

13

3 - 41

::
P/E
P/CF
M/B

8.8.

10.1 x
5.4 x
1.3 x

P/E :

3 - 49

12.5 x
6.8 x
1.7 x

1.
2.

P/CF :

M/B :

3.
4.

3 - 50
5.
6.
7.
8.

(window dressing)
LIFO FIFO

3 - 52

10.
10.
1.
2.
3.
4.
5.
6.
7.

((

))

Supplier

14

4-2

(Whatisisaamarket?)
market?)
(What

4-5

A market is a venue where goods and services

are exchanged. (
)
A financial market is a place where individuals and
organizations wanting to borrow funds are brought
together with those having a surplus of funds.
(
)

4-6

1.1.

Types of Market
1. Physical asset markets : (Tangible
asset markets)

4-7

2. Spot markets : (on - the - spot)

Real
Futures markets :

Financial asset markets :

15

4-8

4 - 11

6. Primary markets (

3. Money markets :

):

1
Capital markets :
1

4 - 12

7. Secondary markets (

4 - 13

):
.
(OTC)

( Primary Market )

( Secondary Market )

16

2.2.

4 - 16

4 - 17

Business

Securities (Stocks or Bonds)

Dollars

Savers

Business

Investment Bonds
Dollars Banking House Dollars

Savers

How is capital transferred between savers and borrowers?

Direct transfers
Investment banking house

Business

Financial intermediaries

4 - 20

3.3.
Organized Security Exchanges
Over - the - Counter Market : OTC

4.4.

Stocks

Business,
Securities

Dollars

Financial

Intermediary,s
Securities

Intermediary Dollars

Savers

(TheCost
CostofofMoney)
Money)
(The

4 - 22

The price, or cost, of debt capital is the interest rate.

(
)
The price, or cost, of equity capital is the required
return. The required return investors expect is
composed of compensation in the form of dividends
and capital gains. (
)

17

4 - 23

Risk (
Expected inflation (

Production opportunities
(
)
Time preferences for
consumption (
)
)
)

5.5.

Market A : Low - Risk Securities Market B : High - Risk Securities

Interest Rate , k
Interest Rate , k

S1

kA = 10
8

S1

kB = 12

D1

D2

Dollars

D1
0

Dollars

Nominal vs.
vs. Real
Real rates
rates
Nominal
k =

kk == kk**++ IP
IP ++ DRP
DRP ++ LP
LP ++ MRP
MRP

4 - 25

6.6.

4 - 24

k* =

rate)

4 - 26

(represents any nominal

(required rate of return on a

debt security)
(realrisk - free rate of interest)

18

IP
kRF

4 - 27
(inflation premium)

=
= k* + IP =

kRF = k* + IP

Nominal (Quoted)
Risk - Free Rate - US. Treasury bill (T - bill)
of Interest
- Treasury bonds (T - bonds)
*

(rate of interest on treasury securities)

DRP =
(default risk premium)
LP

4 - 28

=
(liquidity premium)

MRP =
(maturity risk premium)

4 - 29

IP

DRP (Default Risk Premium)

DRP

4 - 30

LP (Liquidity Premium)

2-4-5%

19

4 - 31

5-2

5-5

5-6

MRP (Maturity Risk Premium)

(interest rate risk)

2.

1.

(financial assets) :

2
(1) Stand - alone risk (

(2) Portfolio risk

20

5-7

3.

5-8

2
(diversifiable risk)

(1)
(2)

4.
(

(market risk ,

)
)

5%(

relevant risk)

5%(

(averse
(aversetotorisk)
risk)

5-9

5 - 10

1.1.
(

= 1,100 - 1,000 = 100

1

100
= 1,000
= 10 %

1,000
1,100
:

21

5 - 11

Risk, in traditional terms, is viewed as a negative.

Websters dictionary, for instance, defines risk as
exposing to danger or hazard. The Chinese
symbols for risk, reproduced below, give a much
better description of risk

wang chi

5 - 12

(low or negative return)

The first symbol is the symbol for danger,

while the second is the symbol for opportunity,
making risk a mix of danger and opportunity.

2
(Two types of investment risk)

(Stand - alone risk )

(Portfolio risk)

5 - 13

RISK,RETURN,AND DIVERSIFICATION

5 - 14

RISK ----> UNFAVORABLE OUTCOME

HIGH RISK, HIGH RETURN
DONT PUT ALL EGGS IN ONE BASKET
DIVERSIFY RISK
(UNSYSTEMATIC RISK)

22

5 - 15

2.2.

5 - 17
(1)
(1)

(Stand
(StandAlone
AloneRisk)
Risk)

(Probability
(ProbabilityDistribution)
Distribution)

(probability
(probability distribution)
distribution)

5 - 19

Martin
MartinProducts
Products

:: k^k(k(k-- hat)
hat)

(2)
(2)

(Expected Rate of Return)

k^ = P1k1 + P2k2 + .Pnkn
^

k =

Pik i

- 70

i=1

Pi =

i , ki =

U.S.
U.S.Water
Water

0.4

0.4

0.3

0.3

0.2

0.2

0.1

0.1
0 15

100
(%)

10 15 20

5 - 21

(%)

23

5 - 22

5 - 23

(3)
(3)

::

Variance =

(k i

i 1
n

-70

^
k ) 2 Pi

100

0 10 15 20

(%)

Standard deviation

^
k ) 2Pi

(k i

i 1
(Expected Rate of Return)

5 - 27

M
k^ = 15%

= 65.84%

::
1.
2.
3.

68.26%
95.46%
99.74%

5 - 28

k^
k^

k^

^k

-50.84%

15%

80.84%

(Coefficient of Variation CV)

24

5 - 29

(4)
(4)

::Coefficient
CoefficientofofVariation
Variation

5 - 46

(4)
(4)

1
CV =

Std dev
= ^
Mean
k

A standardized measure
of dispersion about the
expected value, that
shows the risk per unit
of return.

5 - 47

(Investor attitude towards risk)

Risk premium the difference between the return
on a risky asset and less risky asset, which serves as
compensation for investors to hold riskier securities.
(

5 - 49

3.3.

Portfolio :

(Portfolio
(PortfolioRisk)
Risk)

25

5 - 50

(1)
(1)

(Expected return on a portfolio) = ^kP

(2)
(2)

::

5 - 52
PP

k^kPP == ww11kk^11 ++ ww22kk^22 ++ .................. wwnnkk^nn

^
kp =

n
i=1

w i ^k i

^kP =

5 - 58

Stand-alone

risk

Correlation Coefficient : r

^ki

(3)
(3)
Market

= risk

Firm-specific

risk

5 - 59

Diversifiable
Company - Specific Risk
Unsystematic

stand - alone
risk
b

26

5 - 60

5 - 63
(

Relevant
Market
Risk
Non - diversifiable
Systematic

p (%)

Company Specific Risk

35

Stand-Alone Risk

portfolio

M= 20

Market Risk (

[betab]

10

20

30

)
2,000+

40

# Stocks in Portfolio

5 - 65

5 - 66

Capital Asset Pricing Model : CAPM

ki = kRF + (kM - kRF)bi

ki
kRF
kM
bi

(risk free rate)

=
=
=
=

27

5 - 67

(4)
(4)

(Beta :: b)b)
(Beta
Beta Coefficient : b

5 - 69

Illustration of beta calculation:

20

_
ki

. .

15

Regression line:
^
k i = -2.59 + 1.44 ^
k
Year k M
1 15%
2
-5
3 12

10
5

-5 0
-5

.-10

10

15

20

_
kM

ki
18%
-10
16

5 - 68

Run a regression of past returns of a security against past

returns on the market. ( regression
)
The slope of the regression line (sometimes called the
securitys characteristic line) is defined as the beta
coefficient for the security. [
regression line
(
the securitys characteristic line)
]

CHARACTERISTIC LINE
EXCESS RETURN
ON STOCK

5 - 70

Narrower spread
is higher correlation

Rise

Beta = Run

EXCESS RETURN
ON MARKET PORTFOLIO

Characteristic Line

28

WHAT IS BETA ?

5 - 71

5 - 72
CHARACTERISTIC LINES AND
DIFFERENT BATAS

An index of systematic risk.

risk

Beta > 1
(aggressive)

EXCESS RETURN
ON STOCK

It measures the sensitivity of a stocks returns

to changes in returns on the market portfolio.
The beta of a portfolio is simply a weighted
average of the individual stock betas in the
portfolio.

Beta = 1
Each characteristic
line has a
different slope.

Beta < 1
(defensive)

EXCESS RETURN
ON MARKET PORTFOLIO

5 - 85

4.4.

5 - 86

Security
SecurityMarket
MarketLine
LineEquation
Equation::

SML
SML

Security Market Line (SML)

=
i

kkii

== kkRFRF ++ (k(kMM -- kkRFRF)) bbii

29

5 - 94

Security
Security Market
Market Line
Line((SML
SML))

6
1

k (%)

Risk , b i

1.5

After increase
in risk aversion

5 - 98

SML 2

SML 1

13
11
8
6

Original situation

11

IP = 2 %

k (%)

k (%)

SML 1

5 - 95

New SML

Original situation
0

1.5

Risk , b i

6-2

kM= 13.5%

SML 2

k M = 11%

13.5

2. 5 %

SML1

11

Original situation

6
0

1.0

Risk, b i

30

1.1.
0

6-6

(TIME
(TIME LINE)
LINE)
1

CF1

CF2

CF3

Show the timing of cash flows. (

)
Tick marks occur at the end of periods, so Time 0 is today; Time 1 is the end
of the first period (year, month, etc.) or the beginning of the second period.
(
0
1
1(
)
)

FV1 = PV + PV ( i )
= PV (1 + i)
FV2 = FV1 (1 + i)
= PV (1 + i) (1 + i)
= PV (1 + i)2
FV
FVnn== PV
PV(1(1++i)i)nn
FV5 = 100 (1 + 0.05)5
= $ 127.63

(Future
(FutureValue
Value::FV)
FV)

i%

CF0

2.2.

6 - 10

Finding the FV of a cash flow or series of cash flows when compound

interest is applied is called compounding. (
FV
)
FV can be solved by using the arithmetic, financial calculator, and
spreadsheet methods. (FV
spreadsheet)
0

10%

- 100

FV = ?

6 - 12

6 - 13
Future Value Interest Factors : FVIFi , n = (1 + i)n

PERIOD ( n )
1
2
3
4
5
6
7
8
9
10

0%
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

5%
1.0500
1.1025
1.1576
1.2155

1.2763
1.3401
1.0471
1.4475
1.5513
1.6289

10 %
1.1000
1.2100
1.3310
1.4641
1.6105
1.7716
1.9487
2.1436
2.3579
2.5937

15 %
1.1500
1.3225
1.5209
1.7490
2.0114
2.3131
2.6600
3.0590
3.5179
4.0456

31

3.3.

6 - 17

(Present
(Present Value
Value :: PV)
PV)

Finding the PV of a cash flow or series of cash flows when compound

interest is applied is called discounting (the reverse of compounding).
[
PV
(
)]
The PV shows the value of cash flows in terms of todays purchasing
power. (PV
)
0

6 - 18

:
0 i = 5% 1
PV = ? FV1

FVn = PV (1 + i) n
FVn
PV =
(1 + i) n
2
FV2

FV3

FV4

FV5

127. 63

10%

PV = ?

100

Present Value Interest Factors for $1: PVIFi , n = 1/( 1 + i )n

PERIOD ( n )
1
2
3
4
5
6
7
8
9
10

5%
.9524
.9070
.8638
.8227

.7835
.7462
.7107
.6768
.6446
.6139

8%
.9259
.8573
.7938
.7350
.6806
.6302
.5835
.5403
.5002
.4632

10 %
.9091
.8264
.7513
.6830
.6209
.5645
.5132
.4665
.4241
.3855

12 %
.8929
.7972
.7118
.6355
.5674
.5066
.4523
.4039
.3606
.3220

14 %
.8772
.7695
.6750
.5921
.5194
.4556
.3996
.3506
.3075
.2697

5.5.
(Future
(Future Value
Value ofof an
an Annuity
Annuity :: FVA
FVAnn))
Annuity =

6 - 31

32

6 - 32

Future Value of an Annuity (FVAn)

What is the difference between an 6 - 33

ordinary annuity and an annuity due?
Ordinary Annuity

Annuity
2
1. Ordinary Annuity (Deferred Annuity) :

i%

PMT

PMT

PMT

PMT

PMT

Annuity Due
0

2. Annuity Due :

i%

PMT

Future Value Interest Factors for $1 Annuity : FVIFAi , n

PERIOD ( n ) 5 %
1
1.0000
2
2.0500
3
3.1525
4
4.3101
5
5.5256
6
6.8019
7
8.1420
8
9.5491
9
11.027
10
12.578

8%
1.0000
2.0800
3.2464
4.5061
5.8666
7.3359
8.9228
10.637
12.488
14.487

10 %
1.0000
2.1000
3.3100
4.6410
6.1051
7.7156
9.4872
11.436
13.579
15.937

12 %
1.0000
2.1200
3.3744
4.7793
6.3528
8.1152
10.089
12.300
14.776
17.549

14 %
1.0000
2.1400
3.4396
4.9211
6.6101
8.5355
10.730
13.233
16.085
19.337

6.6.
(Present
(PresentValue
Valueofofan
anAnnuity
Annuity::PVA)
PVA)

6 - 41

1.1. Ordinary
Ordinary Annuity
Annuity 1.
0 5% 1
2
3
95. 24
100
100
100
90. 70
86. 38
PVA3 272. 32 PVA = PMT (PVIFA )
PVAnn = PMT (PVIFAii, ,nn)

33

Present Value Interest Factors for $1 Annuity : PVIFAi , n

PERIOD ( n )
1
2
3
4
5
6
7
8
9
10

5%
0.9524
1.8594

2.7232
3.5460
4.3295
5.0757
5.7864
6.4632
7.1078
7.7271

8%
0.9259
1.7833
2.5771
3.3121
3.9927
4.6229
5.2064
5.7466
6.2469
6.7101

10 %
0.9091
1.7355
2.4869
3.1699
3.7908
4.3553
4.8684
5.3349
5.7590
6.1446

12 %
0.8929
1.6901
2.4018
3.0373
3.6048
4.1114
4.5638
4.9676
5.3282
5.6502

14 %
0.8772
1.6467
2.3216
2.9137
3.4331
3.8887
4.2883
4.6389
4.9464
5.2161

6 - 49

7.7. Perpetuities
Perpetuities
Perpetuities
05%1

2 3 4 5
PV = ? 100 100 100 100 100
PV ( Perpetuities ) = PMT
i
100
= 0.05 = $ 2,000

6 - 50

8.8.
1.1.

1.
(Present
(PresentValue)
Value)

PV =

6 - 51

CF1 + CF2 + CFn

(1 + i)n
(1 + i) (1 + i)2

0 6 %1

94.34 100 200 200 200 200 0 1,000

178.00
167.92
158.42
149.45
0
665.06
1,413.19

34

Will the FV of a lump sum be larger or smaller if 6 - 66

compounded more often, holding the stated I% constant?
LARGER, as the more frequently compounding
occurs, interest is earned on interest more often.
0

100
0
0

100

10%

Annually: FV3 =

5%

1
2

$100(1.10)3
3

= $133.10
2
4

Semiannually: FV6 = $100(1.05)6 = $134.01

133.10

6 - 79

Annual compounding
FV = PV (1 + i) n
More frequent compounding
FVn = PV 1 + iNom

mn

3
6

134.01

6 - 89

1. Nominal (Quoted) Rate : iNom

Annual Percentage Rate : APR

12

4.5 %

4.5 %

6 - 90

2. Periodic Rate : iPER

iPER = iNom
m
3%
(3 )
12 %
iPER = iNom ; iNom = (iPER) m
m
= 3 (4) = 12 %

35

6 - 91

7-2

7-5

7-6

3. Effective (Equivalent) Annual Rate : EAR

EAR : EFF % = 1 + iNom

m

-1

(What is a bond ?)
A long-term debt instrument in which a borrower
agrees to make payments of principal and interest,
on specific dates, to the holders of the bond.
(
)

1.1.
1.

(Treasury bonds
Government bonds)
(no default risk)

36

7-7

2.

3.

7-8

4.

(Corporate bonds)
default risk
(Municipal bonds)

(Foreign bonds)
default risk

default risk

7-9

7 - 10

2.
1.

(Par value)

(Coupon interest rate)

Floating rate bonds
Fixed rate bonds

Zero coupon bonds

37

7 - 11

3.

(Maturity date)
10 - 40

4.

7 - 12

5.

(Sinking funds)

(Call provisions)
6.

(Convertible bonds)

7 - 13

7 - 14

8.

7.

(Income bond)

(Bonds issued with warrants)

9. Indexd bond (Purchasing power bond)

38

7 - 15

3.3.

7 - 16

(Bond
(Bond Valuation)
Valuation)

0 kd% 1
VB = ? INT
VB =
kd =

N =

N
INT =
M =

INT +
M

INT INT

(par value)
(

7 - 17

7 - 18
1,000
10 %
15
10 %

VB = N INT + M
t = 1 (1 + kd) t (1 + kd) N
VVBB == INT
INT(PVIFA
(PVIFAkk , ,NN))++MM(PVIF
(PVIFkk , ,NN))
d

INT + INT ++ INT + M

( 1 + kd )1 ( 1 + kd )2
( 1 + kd )N ( 1 + kd )N
VB = 100 + 100 +.+ 100 + 1,000
( 1 + 0.1 )15 ( 1 + 0.1 )15
( 1 + 0.1 )1 ( 1 + 0.1 )2
= 100 (PVIFA10% , 15) + 1,000 (PVIF10% , 15)
VB =

39

7 - 27

7 - 29

4.4.

Bond Value

1,495
M = 1,000
714

kd

5%

Premium Bond

kd = coupon rate
kd

Discount Bond

15 %

10

15

Years

7 - 30

(par value) 1,000

10 %
14
1,494.93
(YTM)

7 - 31

1.
VB
1,494.93 =

INT + M
t = 1 (1 + kd) t (1 + kd) N

100
100
1,000
100
+
++
+
2
14
(1 + kd) (1 + kd)14
(1 + kd) (1 + kd)

VVBB == INT
INT(PVIFA
(PVIFA kkdd, ,1414))++MM(PVIF
(PVIF kkdd, ,1414))

40

7 - 34

7 - 36

1.
VB =
1,494.93 =

7 - 38

100 + Call Price

t = 1 (1 + kd) t (1 + kd) N
N

100 + 1,100
t = 1 (1 + kd) t (1 + kd) N

7 - 42

6.6.
(Interest
(InterestRate
RateRisk)
Risk)

=
100
985
Current Yield = 100 = 10.15 %
985

1.

1.
(PRICE)

2.

(Reinvestment Rate Risk)

(INCOME)

2.

41

S&P : AAA AA A BBB

BB B CCC D

Investment
InvestmentGrade
Grade

(Junk
(JunkBond)
Bond)

Moody ,s : Aaa Aa A Baa

Ba B Caa C

3.3.
(Common Stock Valuation)
:
2
1.
2.
(capital gain)

7 - 45

8-2

8-7

8-8

D0
Dt
P0
^P
t
^P
0

=
=
=
=
=

t
t

capital loss

42

8-9

P0
g
kS
^k
S
kS

8 - 10

D1
P0

= P^0
=
=
=
=
(

P^ 1 - P0 =
P0
kS

(expected dividend yield)

(expected capital gains yield)

k^S)

8 - 11

2
(1)
(2)
Expected total return : k^S =

8 - 12

(P0)
D1 + P^1 - P0
P0
P0

20
(D1)
1.50
^
(P1) 20.20

^
k^S = D1 + P1 - P0 = 1.50 + 20.20 - 20
P0
P0
20
20
= 8. 5 %

43

8 - 13

8 - 14

P^0 = D1 + D2 + ... + D
(1 + kS)1 (1 + kS)2
(1 + kS)
P^0 =

Dt
t = 1 (1 + kS)t

8 - 15

4.4.
D (1 + g)
P^0 = k0 - g
S

8 - 21

normal
Growth , 8 %

Dividend
End of Supernormal
Growth Period

D
P^0 = k -1 g
S

Supernormal
Growth , 30 %

normal
Growth , 8 %

zero
Growth , 0 %

1.15

Declining
Growth , - 8 %
0

5 Years

44

9-2

9-6

1.
(discount rate)

2.

9-7

1.1.

9-8

2.2.
(Capital Components) :
component cost

45

9-9

kd =

9 - 10

WACC =
(

kd (1 - T) =
kP =
kS =

(Weighted Average Cost of Capital)

WACC
(

9 - 11

3.3.

::kkdd(1(1--T)
T)
==

9 - 13

4.4.

::kkPP

--

kd

==

kkdd(1(1 -- T)
T)

kdT

kP = DPP
P

46

9 - 15

5.5.

9 - 16

::kkSS

(opportunity cost)

2
1.
2.
=
= kS

9 - 17

3
1.

Capital Asset Pricing Model : CAPM

kkSS == kkRFRF ++ (( kkMM -- kkRFRF )) bbii

2.

9 - 19

Risk Premium
kkSS == Bond
BondYield
Yield++Risk
RiskPremium
Premium
(bond yield) 8 % risk premium 4 %
kS = 8 % + 4 % = 12 %
bond
yield
12 % : kS = 12 + 4 = 16 %

47

9 - 20

9 - 24

3. Dividend Yield
Growth Rate
Discounted Cash Flow
P^0 = D1
kS - g
kS =

D1
P0

+g

kS
1 = 11.5 %
2 = 12.0 %
3 = 13.4 %
conservative
3

13.4 %

9 - 25

6.6.
ke

::kkee
kS
ke =

D1
+g
P0 (1 - F)

9 - 28

7.7.
(Weighted
(WeightedAverage
AverageCost
CostofofCapital
Capital::WACC)
WACC)
WACC = wdkd(1 - T) + wPkP + wckS
w =

F =
P0 (1 - F) =

48

8.8.

9 - 30

9 - 31

9.9.

(Adjusting
(Adjustingthe
theCost
CostofofCapital
Capitalfor
forRisk)
Risk)

10 - 2

10 - 9

2.2.

49

10 - 11

10 - 13

3.3.

5.5.

1.
2.
3.
4.
5.
6.

5.1
5.2

(Payback Period : PB)

(Discounted Payback Period : DPB)

5.3
(Net Present Value : NPV)

10 - 14

5.3
5.3

5.4

(( NPV
NPV ))

10 - 27

(Internal Rate of Return : IRR)

5.5
(Modified Internal
Rate of Return : MIRR)

NPV =
=
=

PV

- PV

CF0 + CF1 1+ CF2 2 + + CFn n

(1+k) (1+k)
(1+k)
n
CFt
t = 0 ( 1 + k )n

50

10 - 28

CF0 =
CFt =
k =

10 - 34

5.4
5.4

((IRR
IRR))

( discount rate )
(

NPV

0)

10 - 35
CF0 =

10 - 36

CF1
CF2
CFn
+
+

+
( 1 + IRR )1 ( 1 + IRR )2
( 1 + IRR )n

0 IRR 1

CF
1,000 =

500 + 400 + 300 + 100

( 1 + IRR )1 ( 1 + IRR )2 ( 1 + IRR )3 ( 1 + IRR )4

- 1,000

500

400

300

100

PV 1,000

CF1-4

NPV

IRR S = 14.5 %

51

10 - 38

10 - 39

3.
1. IRR
2.

IRR >

4.
IRR =

IRR >
IRR <

5.
IRR
S

L:

10 - 53

1.6
10

IRR

0
- 1.6

NPV

MIRR
IRR

10

10 - 54

10 %
2

10

- 10

- 1.6 10 - 10 10
CFj CFj CFj i NPV EXE
= - 0.7736

52

10 - 55
NPV
( Millions of Baths )

1.5
1.0
0.5
0
- 0.5
- 1.0
- 1.5

NPV = - 1.5 +

10
10
( 1 + k ) ( 1 + k )2

10 - 59

7.7.
( Modified Internal Rate of Return : MIRR )

IRR2 = 400 %

1.

100 200 300 400 500 Cost of Capital ( % )

IRR1 = 25 %

NPV = 0
IRR = 25% 400%

(Cost of Capital)

10 - 60

2.

( Terminal Value : TV )
3.
TV
MIRR

10 - 61
0
Cash Flows - 1,000

500

400

300

100
330
484
665.50
1,579.50

k = 10 %

k = 10 %
k = 10 %

PV of TV 1,000
NPV =
0

Terminal Value (TV)

MIRR = 12.1 %

53

13 - 3

13 - 4

1.1.
1.
2.
3.
4.
5.
6.

13 - 5

(
)

(P0)
(trade off)
E (ROE)
EPS
(risk)

13 - 6

1.
2.
3.
4.

54

13 - 7

((11))

2.2.
1.

(Business
(BusinessRisk)
Risk)

13 - 8

( Return on Invested Capital

ROIC )

2. Operating Leverage

ROIC

3.

ROIC = NOPAT =
Capital

Capital =

After-tax
NI to common +
stockholders interest payments
Capital

13 - 9

ROE
ROE == ROIC
ROIC
ROIC = ROE = NI to common stockholders
Common equity

ROE

13 - 12

1.
2.
3.
4.

5.
6.
7.

55

13 - 13

13 - 15

(( 22 )) Operating
Operating leverage
leverage
Operating leverage

Output
ROE = 0
EBIT = 0
EBIT = PQ - VQ - F = 0

QQBEBE = FF
P-V

13 - 17

AA

BB
Rev.

Rev.
TC
Loss

(( 33 ))
WACC

Profit
TC
FC

FC
0 40
60
Sales
Sales 0
) EBIT = 0 (
EBIT = 0 (

13 - 57

P0
WACC
)

56

13 - 65

4.4.
1.

1.
2.
3.
4.

2.
3.
4.
5.

5.
6.

13 - 67

13 - 66

MM && MM

13 - 68

(( 11 ))
M&M
M&M

EBIT

22

20

D1

D2 Leverage ( D/A )

100%
100%

57

13 - 69

13 - 70

(( 22 ))
33

20
0

D1

D2 Leverage ( D/A )

13 - 71

13 - 72

20

20
0

D1

D2

Leverage ( D/A )

D1

D2 Leverage ( D/A )

58

((33))

(Trade
(Trade--Off
OffTheory)
Theory)

13 - 73

M&M (
(

)
(+)

(-)
( D/A = 0 )

20

((

13 - 74

2)

D1 D2

Leverage ( D/A )

))

13 - 75

M&M
100 %

13 - 76

(( ))

D/A
D1
D2

D/A

D2

59

13 - 77

(4)

13 - 78

(Signaling Theory)

55

(Symmetric
(Symmetric information)
information)
(Positive)

13 - 79

(Negative)

13 - 80

M&M
M&M

((

))

60

14

14 - 3

(( Dividend
Dividend Policy
Policy ))

14 - 5

1.
2.
3.
4.
5.

1.
2.
3.
4.

14 - 6

14 - 7

1.1.

P^0 =

D1
kS - g

1.
2.

61

14 - 8

14 - 9

3
1. Dividend Irrelevance
2. Bird - in - the - Hand :
3. Tax Preference :

14 - 15

33
1. Irrelevance
2. Bird - in - the - Hand
3. Tax Preference

14 - 45

8.8.
10 %
10

100
2:1

62

15 - 2

(Stock Splits)
Ice Cream Parlor
Banana Splits
On Sale Now

16 - 2

16 - 4

1.1.
Permanent
PermanentCurrent
CurrentAssets
Assets VS Temporary
TemporaryCurrent
CurrentAssets
Assets

63

16 - 5

33

16 - 6

Conservative
3.3. Conservative
Approach
Approach

1.1. Maturity
Maturity Matching
Matching
(Self
(Self -- Liquidating)
Liquidating)
Approach
Approach 2. Relatively Aggressive
Approach

+
+

16 - 7

16 - 8

+
+

+
+

64