An Overview of Financial Management

 

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