An Overview of Financial Management
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An Overview of Financial Management
1. Market Value of Business Future annual profit
Annual rate of return reqd by investor
2. Market Value of Business Future annual cash flow
Cost of Capital
3. Future value PV(1+i)ⁿ
4. Present Value Future Value
(1+i)ⁿ
5. Future value of regular annuity A (1+i)ⁿ - 1
i
6. 
Present value of regular annuity A 1- 1
i (1+i)ⁿ
7. Future value of annuity due F.V. of regular annuity(1+i)
8. Present value of annuity due P.V. of regular annuity(1+i)
9. Present value of Perpetuity A
(it is an annuity continue forever) i
10. At IRR P.V. of cash inflows = P.V. of cash outflow
We find IRR by following methods
v Interpolation = A + (L-I) * (B-A)
(L-H)
v NPV falls by Rs. 1109 when D.F. increases by 2 %
NPV falls by Re 1 when D.F. increases by 2 1109
NPV falls by Rs. 1176 when D.F. increases by 2 * 1176
1109
v 12 – i = NPV at 12% - actual return
13-12 NPV at 13% - NPV at 12%
11. Kd ( Cost of Debt)
When only int rate is given (Irredeemable Debenture)
Kd = I(1-t)
When floatation cost is given along with redemption value (Redeemable Debenture)
Kd = I(1-t) + RP - IP
n
------------------
RP + IP
2
12. Kp (Cost of Preference share) = Pref. Divd + RP - NP
n
---------------------------
RP+NP
2
13. Ke (Cost of equity Shares)
P0 = D & P0 = D1 [D1 = D0(1+g)]
Ke Ke – g
[g = b(retension ratio) * r(return on equity)]
Ke is nothing but reciprocal of P.E. Ratio
ROE = PAT
EQ
14. Value of Growth Opportunities (Vg)
Vg = share price with growth – share price without growth
Vg = D1 - EPS/DPS OR Vg = P0 - EPS
Ke - g Ke Ke
15. Ko = WeKe + Wdkd
|
Sales |
xxx |
|
(-)V. cost |
xxx |
|
Contribution |
xxx |
|
(-) F. cost |
xxx |
|
PBIT |
xxx |
|
(-) Int (Fin) |
xxx |
|
PBT |
xxx |
|
(-) Tax |
xxx |
|
PAT |
xxx |
|
(-) Pref Divd |
xxx |
|
PATES |
xxx |
16. vL = vuL + P.V. of interest tax shield
(P.V. of interest tax shield = Vd * Tax Rate)
17. Leverage (Basically it is how will you manage your fixed cost)
§ Operating Leverage = Contribution
PBIT
§ Financial Leverage = PBIT
PBT
§ Combined Leverage = Operating Leverage * Financial Leverage
18. Cash Flow = PAT + Depreciation Or,
PBDT (1-t) + Dep. Tax Shield (Dep. Tax shield = dep * tax rate)
19. Accounting rate of return = PAT
Net Investment
20. NPV = P.V. of cash inflow – P.V. of cash outflow
21. Profitability index = P.V. of cash inflow
P.V. of cash outflow
|
Both Formula is used when project lives are unequal |
22. 
Annualized NPV (A.E.B.) = NPV
P.V. of annuity factor
23. Annualized equivalent cost = P.V. of total outflow
P.V. of annuity factor
24. Point of view
§ Long term
· Take outflow as Total Outflow (investment in eq + long term funds)
· Take inflow as PBIT(1-t) + depreciation
§ Equity point of view
· Take outflow as Investment in Equity
· Take inflow as (PBIT-int) (1-t) + depreciation
25. Modified NPV
§ Calculate future value of cash inflow using the reinvestment rate given.
§ Calculate the present value of resultant figure using cost of capital.
26. Modified IRR = While calculating IRR the intermediate cash flows are being reinvested at IRR but if it is not so (i.e. the intermediate cash flow are reinvested other than IRR then we need to calculate Modified IRR)
§ Calculate future value of cash inflow using the reinvestment rate given.
§ Calculate the present value of resultant figure using cost of capital.
§ Find IRR by Interpolation
27. Adjusted Present Value (APV) = Base case NPV + Side effects of financing charges
§ Base case NPV = P.V. of cash flow before interest discounted at cost of unlevered equity.
§ Side effects of financing charges = P.V. of interest tax shield (discounted at cost of debt)
Here cash flow = EBIT(1-t) + depreciation
Take 1 assumption that project under evaluation is financed by equity only.
28. Risk Analysis
§ Risk adjusted discount rate = risk free rate + risk premium
A. Here risk free rate = cost of capital
29. certainity equivalent approach (denoted by alpha or K)
§ We have to calculate certain cash flow & discount it with risk free rate of return.
§ 1 indicating NO RISK & 0 indicating EXREME RISK
§ Higher the risk lower the value of alpha
30. Statistical Distribution = Here we measures RISK using Standard Deviation ( σ )
v Steps
§ Calculate mean of NPV/Return i.e.
§ Find deviation i.e. X -
§ Find (X - )²* P = Variance
§ σ = √varianceAn Overview of Financial Management
1. Market Value of Business Future annual profit
Annual rate of return reqd by investor
2. Market Value of Business Future annual cash flow
Cost of Capital
3. Future value PV(1+i)ⁿ
4. Present Value Future Value
(1+i)ⁿ
5. Future value of regular annuity A (1+i)ⁿ - 1
i
6. Present value of regular annuity A 1- 1
i (1+i)ⁿ
7. Future value of annuity due F.V. of regular annuity(1+i)
8. Present value of annuity due P.V. of regular annuity(1+i)
9. Present value of Perpetuity A
(it is an annuity continue forever) i
10. At IRR P.V. of cash inflows = P.V. of cash outflow
We find IRR by following methods
v Interpolation = A + (L-I) * (B-A)
(L-H)
v NPV falls by Rs. 1109 when D.F. increases by 2 %
NPV falls by Re 1 when D.F. increases by 2 1109
NPV falls by Rs. 1176 when D.F. increases by 2 * 1176
1109
v 12 – i = NPV at 12% - actual return
13-12 NPV at 13% - NPV at 12%
11. Kd ( Cost of Debt)
When only int rate is given (Irredeemable Debenture)
Kd = I(1-t)
When floatation cost is given along with redemption value (Redeemable Debenture)
Kd = I(1-t) + RP - IP
n
------------------
RP + IP
2
12. Kp (Cost of Preference share) = Pref. Divd + RP - NP
n
---------------------------
RP+NP
2
13. Ke (Cost of equity Shares)
P0 = D & P0 = D1 [D1 = D0(1+g)]
Ke Ke – g
[g = b(retension ratio) * r(return on equity)]
Ke is nothing but reciprocal of P.E. Ratio
ROE = PAT
EQ
14. Value of Growth Opportunities (Vg)
Vg = share price with growth – share price without growth
Vg = D1 - EPS/DPS OR Vg = P0 - EPS
Ke - g Ke Ke
15. Ko = WeKe + Wdkd
|
Sales |
xxx |
|
(-)V. cost |
xxx |
|
Contribution |
xxx |
|
(-) F. cost |
xxx |
|
PBIT |
xxx |
|
(-) Int (Fin) |
xxx |
|
PBT |
xxx |
|
(-) Tax |
xxx |
|
PAT |
xxx |
|
(-) Pref Divd |
xxx |
|
PATES |
xxx |
16. vL = vuL + P.V. of interest tax shield
(P.V. of interest tax shield = Vd * Tax Rate)
17. Leverage (Basically it is how will you manage your fixed cost)
§ Operating Leverage = Contribution
PBIT
§ Financial Leverage = PBIT
PBT
§ Combined Leverage = Operating Leverage * Financial Leverage
18. Cash Flow = PAT + Depreciation Or,
PBDT (1-t) + Dep. Tax Shield (Dep. Tax shield = dep * tax rate)
19. Accounting rate of return = PAT
Net Investment
20. NPV = P.V. of cash inflow – P.V. of cash outflow
21. Profitability index = P.V. of cash inflow
P.V. of cash outflow
|
Both Formula is used when project lives are unequal |
22. Annualized NPV (A.E.B.) = NPV
P.V. of annuity factor
23. Annualized equivalent cost = P.V. of total outflow
P.V. of annuity factor
24. Point of view
§ Long term
· Take outflow as Total Outflow (investment in eq + long term funds)
· Take inflow as PBIT(1-t) + depreciation
§ Equity point of view
· Take outflow as Investment in Equity
· Take inflow as (PBIT-int) (1-t) + depreciation
25. Modified NPV
§ Calculate future value of cash inflow using the reinvestment rate given.
§ Calculate the present value of resultant figure using cost of capital.
26. Modified IRR = While calculating IRR the intermediate cash flows are being reinvested at IRR but if it is not so (i.e. the intermediate cash flow are reinvested other than IRR then we need to calculate Modified IRR)
§ Calculate future value of cash inflow using the reinvestment rate given.
§ Calculate the present value of resultant figure using cost of capital.
§ Find IRR by Interpolation
27. Adjusted Present Value (APV) = Base case NPV + Side effects of financing charges
§ Base case NPV = P.V. of cash flow before interest discounted at cost of unlevered equity.
§ Side effects of financing charges = P.V. of interest tax shield (discounted at cost of debt)
Here cash flow = EBIT(1-t) + depreciation
Take 1 assumption that project under evaluation is financed by equity only.
28. Risk Analysis
§ Risk adjusted discount rate = risk free rate + risk premium
A. Here risk free rate = cost of capital
29. certainity equivalent approach (denoted by alpha or K)
§ We have to calculate certain cash flow & discount it with risk free rate of return.
§ 1 indicating NO RISK & 0 indicating EXREME RISK
§ Higher the risk lower the value of alpha
30. Statistical Distribution = Here we measures RISK using Standard Deviation ( σ )
v Steps
§ Calculate mean of NPV/Return i.e.
§ Find deviation i.e. X -
§ Find (X - )²* P = Variance
§ σ = √variance
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