FIN 3403

Newly issued equity

(D1/Net price) + growth rate

Net Price (if given flotation costs as a percentage)

(Po)(1-flotation percentage)

When finding a z score for probably

(Probability you want to find - expected) / Standard deviation

EBT

**USE TO FIND TAXES** EBIT - Interest Expense = EBT To find tax value, multiply by tax rate

Determine what part of the increase in return on equity is due to the tax shelter effect from the firm's use of debt.

1. Calculate tax rate Taxes / EBT 2. Calculate rn(1-T) (Before tax cost of debt)(1-Tax rate) 3. Find Debt/Equity Ration (Decides to issue 25000 of debt before-tax rate .... 75,000 equity ... divide the two) 4. New ROE = Old ROE + Leverage effect + Tax-sheltered effect 5. Whatever value you get for your tax-sheltered effect is the answer

Given the information above, determine what percentage of the firm's total return on equity arises from the tax shelter effect.

1. Find BEP BEP = EBIT / Total Assets 2. Find D/E ROE = [BEP + (D/E)(BEP - cost of debt)](1-Tax rate) 3. Find tax sheltered effect (Cost of debt - (cost of debt)(1-tax rate))(D/E)

Determine Free Cash Flow in 2010 #12, 19, 20

1. Find NOPAT Earnings before interest and taxes x (1-tax rate) 2. Add depreciation *1 -- 3. Find NWC 2010 - NWC 2009 Cash + Accounts receivable + inventory - accounts payable - accruals *2 -- 4. Find the difference of net fixed assets and add depreciation *3 -- 5. Add *1 + *2 + *3

Determine the difference between Yield to Maturity & Yield to Call

1. Find PV Coupon / Current Yield 2. Find I/YR **Multiply by 2 if semi-annual** 3. Find I/YR for YTM **Multiply by 2 if semi-annual** 4. Take the difference between the two

Birthday Problem: Determine How much you would have to deposit in your retirement account

1. Find PV (set calculator to begin) N = Total withdrawals PV = ? I/Yr = (1 + Growth) / (1 + EAR) FV = / PMT = first withdrawal (-) 2. Value you currently have in your deposit (currently have in retirement account)(1+EAR)^(-years from now) 3. Take PV found in step 1 - value of current deposit found in step 2 4. Find payment (- years from now) N= (-years from now) I/Yr = (1 + EAR) Pmt = ? FV = Value found in step 3 PV = /

Given this information, determine the additional return on equity that is generated by the leverage effect.

1. Find ROA (Basic earning power)(1-Tax rate) (ROA - Cost of debt)(D/E)

Determine what the return on equity (ROE) should be for this levered firm.

1. Find ROA unleavered *1 2. Find the leverage effect (unlevered ROE - interest rate on debt*)(%debt/%equity) *2 *before tax rate 3. Find tax sheltered effect (interest rate on debt* - (tax rate + ROE))(%debt/%equity) *3 *Before tax cost of debt *Cost of debt 4. Add *1,*2,*3

Determine Current Market Price of the Firms Stock #12, 19, 20

1. Find WACC (Before Tax Debt)(1-tax rate)(debt %) + (cost of equity)(equity %) 2. Find NOPAT (EBIT)(1 - Tax rate) 3. Find EVA (NOPAT) - (WACC)(Amount of Capital) 4. Find NPV EVA / WACC 5. Find MVA NPV / # of shares 6. Add initial cost of shares

Determine the difference between the investor's required rate of return, and the firm's cost of preferred stock.

1. Find dividend 1 (Par value)(% Annual dividend) 2. Find investors required rate Dividend 1 / how much investors ae willing to pay per share 3. Find net price How much investors are willing to pay per share - flotation costs 4. Find firm's required rate of return Dividend 1 / Net price 5. Find the difference between firm and investors

Determine what the firm's cost of newly issued equity (re) would be.

1. Find growth rate (1-dividend payout rate)(ROE ) 2. Find D1 3. Find Net price Current price - flotation costs *quantity 4. (Dividend 1 / Net price) + growth rate

Birthday Problem "Determine how much each of the withdrawals will be"

1. Find i per (Nominal annual rate / When compounded (monthly -> 12) 2. Find Semi Annual rate (1+i/per)^6 5. Find PMT N = How much each of the _ withdrawals will be PV = Big number that's not the balance FV = Balance I/YR = Semi annual rate PMT = ?

Determine the firm's cost of newly issued equity (re).

1. Find rate of return Risk free rate + (risk premium)(beta) 2. Find Growth rate (1 - dividend payout rate)(ROE) 3. Find the price at year 0 (Dividend at year 0(1 + growth rate))/ (Rate of return - growth rate) 4. Find the net price Po(1-ROE) 5. Find cost of newly issued equity (Dividend 1 / Net price) + growth rate

Net Income ~ ROA (UNLEVERED)

1. Net Income = EBIT - Interest - Taxes* *(EBIT x Tax Rate)

Determine the intrinsic price of the firm's stock on a per share basis #12, 19, 20

1.Find Enterprise Value/Firm Value/ Market Value of Firm (Free cash flow) / (WACC - Annual Growth rate) 2. Find MV equity Enterprise value - Debt (market value) outstanding 3. Find intrinsic value MV equity / Shares of common stock

COST OF DEBT = BEFORE TAX RATE

COST OF DEBT = BEFORE TAX RATE

When given D1 for Banko model

Ignore the second part vice versa if includes Do

Determine the probability of observing a return on the portfolio between 14.5 percent and the mean.

Just find that one value (14.5)

#18 Determine the Economic Value Added

NOPAT - (WACC)(Total Invested Capital)

ROA (uneered)

Net Income / Assets

determine what the firm's new cost of stock (rS) will be after equilibrium is achieved.

Net Income / MV equity

**LEVERAGE FUNCTION**

ROA (unlevered) + (ROA - Cost of debt)(D/E) + (Cost of Debt - (Cost of debt)(1-tax rate)

Net Price (if given flotation costs as a quantity)

Po - Floatation cost

EBIT

Sales - Cost of Goods Sold - Operating Expense + Depreciation

Tax Rate

Taxes / EBT

Opposite sides of the mean/expected return

add the two probabilities

Same sides of the mean/expected return

subtract the probabilities