Fundamentals of Corporate Finance

Seventh Canadian Edition

by Ross, Westerfield, Jordan, and Roberts

Formula Sheet
Assets 5 Liabilities 1 Shareholders equity Revenues 2 Expenses 5 Income Cash flow from assets 5 Cash flow to bondholders 1 Cash flow to shareholders Current ratio 5 Current assets/Current liabilities Quick ratio 5 Current assets 2 Inventory Current liabilities [2.1] [2.2] [2.3] [3.1] [3.2] [3.3] [3.4] [3.5] [3.6] [3.7] [3.8] [3.9] [3.10] [3.11] [3.12] [3.13] [3.14] [3.15] [3.16] [3.17] [3.18] [3.19] [3.20] [3.21] [3.22] [3.23] [3.24] page # 26 30 32 64 66 66 66 66 67 67 67 67 68 68 68 68 69 69 70 70 70 70 71 71 72 72 74

Cash ratio 5 Cash 1 Cash equivalents/Current liabilities Net working capital to total assets 5 Net working capital/Total assets Interval measure 5 Current assets/Average daily operating costs Total debt ratio 5 [Total assets 2 Total equity]/Total assets Debt/equity ratio 5 Total debt/Total equity Equity multiplier 5 Total assets/Total equity Long-term debt ratio 5 Long-term debt Long-term debt 1 Total equity

Times interest earned ratio 5 EBIT/Interest Cash coverage ratio 5 [EBIT 1 Depreciation]/Interest Inventory turnover 5 Cost of goods sold/Inventory Days sales in inventory 5 365 days/Inventory turnover Receivables turnover 5 Sales/Accounts receivable Days sales in receivables 5 365 days/Receivables turnover NWC turnover 5 Sales/NWC Fixed asset turnover 5 Sales/Net fixed assets Total asset turnover 5 Sales/Total assets Profit margin 5 Net income/Sales Return on assets 5 Net income/Total assets Return on equity 5 Net income/Total equity P/E ratio 5 Price per share/Earnings per share Market-to-book ratio 5 Market value per share/Book value per share ROE 5 Net income/Sales 3 Sales/Assets 3 Assets/Equity 5 Profit margin 3 Total asset turnover 3 Equity multiplier

Formula Sheet

Dividend payout ratio 5 Cash dividends/Net income EFN 5 Increase in total assets 2 Addition to retained earnings 5 A1g2 2 p1S2R 3 11 1 g2 EFN 5 2p(S)R 1 [A 2 p(S)R] 3 g EFN 5 2p(S)R 1 [A 2 p(S)R] 3 g g 5 pS(R)/[A 2 pS(R)] ROA 3 R 1 2 ROA 3 R EFN* 5 Increase in total assets 2 Addition to retained earnings 2 New borrowing 5 A(g) 2 p(S)R 3 (1 1 g) 2 pS(R) 3 (1 1 g)[D/E] EFN* 5 0 Internal growth rate 5 g* 5 ROE 3 R/[1 2 ROE 3 R] g* 5 p 1 S/A 2 1 1 1 D/E 2 3 R 1 2 p 1 S/A 2 1 1 1 D/E 2 3 R

[4.1] [4.2] [4.3] [4.4]

95 101 101 102

[4.5] [4.6]

102 103

[4.7] [4.8] [5.1] [5.2] [5.3]

103 105 119 127 129

Future value 5 $1 3 (1 1 r)t PV 5 $1 3 [1/(1 1 r)t] 5 $1/(1 1 r)t PV 3 (1 1 r)t 5 FVt PV 5 FVt /(1 1 r)t 5 FVt 3 [1/(1 1 r)t] Annuity present value 5 C 3 a 1 2 Present value factor b r 1 2 1/ 1 1 1 r 2 t f r

[6.1]

145

5C3 e

Annuity FV factor 5 1 Future value factor 2 1 2 / r 5 1 11 1 r2t 2 12/r Annuity due value 5 Ordinary annuity value 3 (1 1 r) Perpetuity present value 3 Rate 5 Cash flow PV 3 r 5 C Annuity present value factor 5 1 1 2 Present value factor 2 / r 5 1 1/ r 2 3 1 1 2 Present value factor 2 PV 5 PV 5 C r2g 11g t C bd c1 2 a r2g 11r

[6.2] [6.3] [6.4] [6.5]

150 152 152 152

[6.6] [6.7] [6.8] [6.9] [7.1] [7.2] [7.3] [7.4]

154 155 157 160 180 197 198 198

EAR 5 [1 1 (Quoted rate/m)]m 2 1 EAR 5 eq 2 1 Bond value 5 C 3 (1 2 1/(1 1 r)t)/r 1 F/(1 1 r)t 1 1 R 5 (1 1 r) 3 (1 1 h) 1 1 R 5 (1 1 r) 3 (1 1 h) R5r1h1r3h R<r1h

Formula Sheet

3 211 212 213 214 217 281 282

P0 5 (D1 1 P1)/(1 1 r) P0 5 D/r P0 5 Pt 5 D0 3 1 1 1 g 2 r2g

[8.1] [8.2]

D1 r2g Dt 1 1 r2g

[8.3] [8.4] [8.5] [10.1] [10.2]

Dt 3 1 1 1 g 2 r2g

1 r 2 g 2 5 D1/ P0 r 5 D1/P0 1 g OCF 5 EBIT 1 D 2 Taxes 5 1 S 2 C 2 D 2 1 D 2 1 S 2 C 2 D 2 3 Tc OCF 5 1 S 2 C 2 D 2 1 D 2 1 S 2 C 2 D 2 3 Tc 5 1 S 2 C 2 D 2 3 1 1 2 Tc 2 1 D 5 Project net income 1 Depreciation OCF 5 1 S 2 C 2 D 2 1 D 2 1 S 2 C 2 D 2 3 Tc 5 1 S 2 C 2 2 1 S 2 C 2 D 2 3 Tc 5 Sales 2 Costs 2 Taxes OCF 5 1 S 2 C 2 D 2 1 D 2 1 S 2 C 2 D 2 3 Tc 5 1 S 2 C 2 3 1 1 2 Tc 2 1 D 3 Tc PV tax shield on CCA 5

[10.3]

282

[10.4]

282

SndTc 3 IdTc 4 3 1 1 .5k 4 1 3 2 3 d1k 11k d1k 11 1 k2n

[10.5] [11.1]

286 321

S 2 VC 5 FC 1 D P 3 Q 2 v 3 Q 5 FC 1 D (P 2 v) 3 Q 5 FC 1 D Q 5 (FC 1 D)/(P 2 v) OCF 5 3 1 P 2 v 2 3 Q 2 FC 2 D 4 1 D 5 1 P 2 v 2 3 Q 2 FC Q 5 (FC 1 OCF)/(P 2 v) Total dollar return 5 Dividend income 1 Capital gain (or loss) Total cash if stock is sold 5 Initial investment 1 Total return Geometric average return 5 3 1 1 1 R1 2 3 1 1 1 R2 2 3 p 3 1 1 1 RT 2 4 1/T 2 1 Risk premium 5 Expected return 2 Risk-free rate 5 E 1 RU 2 2 Rf E1R2 5 o R 3 Pj j j Var 1 R 2 5 1 1/ 1 T 2 1 2 2 3 1 R1 2 R 2 2 1 p 1 1 RT 2 R 2 2 4

[11.2] [11.3] [12.1] [12.2] [12.3] [12.4] [13.1] [13.2]

323 324 341 342 350 356 372 372

where Rj 5 value of the jth outcome Pj 5 associated probability of occurrence o 5 the sum over all j j

Formula Sheet

s2 5 o 3 Rj 2 E 1 R 2 4 2 3 Pj j s 5 2s2 E 1 RP 2 5 x1 3 E 1 R1 2 1 x2 3 E 1 R2 2 1 p 1 xn 3 E 1 Rn 2 s2P 5 x2Ls2L 1 x2Us2U 1 2xLx UCORRL UsLsU sP 5 2s2P Total return 5 Expected return 1 Unexpected return R 5 E(R) 1 U Announcement 5 Expected part 1 Surprise R 5 E(R) 1 Systematic portion 1 Unsystematic portion Total risk 5 Systematic risk 1 Unsystematic risk E(Ri) 5 Rf 1 [E(RM) 2 Rf] 3 bi R 5 E(R) 1 bIFI 1 bGNPFGNP 1 brFr 1 e E(R) 5 RF 1 E[(R1) 2 RF]b1 1 E(R2) 2 RF ]b2 1 E[(R3) 2 RF]b3 1 . . . E[(RK) 2 RF]bK s2P 5 x2Ls2L 1 x2U s2U 1 2xLx UCORRL, U sLsU s2 o o xs P i 5 1j 5 1 j ij ds2P dx2 5 2j 5 o1xjsi2 5 2 3 x1 COV 1 R1, R2 2 1 x2s22 1 x3 COV 1 R3, R2 2
N N N

[13.3]

373

[13.4] [13.5]

375 378

[13.6] [13.7] [13.8] [13.9] [13.10] [13.11] [13.12] [13A.1] [13A.2]

382 383 384 387 398 401 401 408 409

[13A.3]

409

1 p 1 xNCOV 1 RN, R2 2 4 COV 1 R2, RM 2

s2 1 RM 2 RE 5 1 D1/ P0 2 1 g b2 5

[13A.4] [14.1] [14.2] [14.3] [14.4] [14.5] [14.6] [14.7] [14A.1]

409 414 416 419 420 420 421 428 442

RE 5 Rf 1 bE 3 3 RM 2 Rf 4 RP 5 D/ P0 V5E1D WACC 5 1 E/ V 2 3 RE 1 1 P/ V 2 3 RP 1 1 Dm / V 2 3 RD 3 1 1 2 TC 2 fA 5 1 E/ V 2 3 fE 1 1 Dm/ V 2 3 fD 100% 5 E/V 1 Dm /V

bPortfolio 5 bLevered firm 5 bUnlevered firm 5 bUnlevered firm 5

Equity Debt 3 bDebt 1 3 bEquity Debt 1 Equity Debt 1 Equity 3 bEquity 3 bEquity

Equity Debt 1 Equity

[14A.2]

442

Equity 1 1 1 2 TC 2 3 Debt

Equity

[14A.3] [15.1] [15.2]

442 465 466

Number of new shares 5 Funds to be raised/Subscription price Number of rights needed to buy a share of stock 5 Old shares/New shares

Formula Sheet

5 467

Ro 5 (Mo 2 S)/(N 1 1) where Mo 5 common share price during the rights-on period S 5 subscription price N 5 number of rights required to buy one new share Me 5 Mo 2 Ro Re 5 (Me 2 S)/N Degree of financial leverage 5 DFL 5 EBIT EBIT 2 Interest Percentage change in EPS Percentage change in EBIT

[15.3]

[15.4] [15.5] [16.1] [16.2] [16.3]

468 468 483 483 487

Vu 5 EBIT/ REu 5 VL 1 EL 1 DL where Vu 5 Value of the unlevered firm VL 5 Value of the levered firm EBIT 5 Perpetual operating income REu 5 Equity required return for the unlevered firm EL 5 Market value of equity DL 5 Market value of debt RE 5 RA 1 (RA 2 RD) 3 (D/E)

[16.4] [16.5] [16.6] [16.7] [16.8] [16A.1] [18.1] [18.2] [18.3] [18.4] [18.5] [18.6] [19.1] [20.1] [20.2] [20.3]

487 489 491 491 493 512 549 549 549 551 551 563 588 604 609 609

bE 5 bA 3 (1 1 D/E)
Value of the interest tax shield 5 (TC 3 RD 3 D)/RD 5 TC 3 D VL 5 VU 1 TC 3 D RE 5 RU 1 (RU 2 RD) 3 (D/E) 3 (1 2 TC) VL 5 VU 1 c 1 2 1 1 2 TC 2 3 1 1 2 TS 2 1 1 2 Tb 2 d 3B

Net working capital 1 Fixed assets 5 Long-term debt 1 Equity Net working capital 5 (Cash 1 Other current assets) 2 Current liabilities Cash 5 Long-term debt 1 Equity 1 Current liabilities 2 Current assets (other than cash) 2 Fixed assets Operating cycle 5 Inventory period 1 Accounts receivable period Cash cycle 5 Operating cycle 2 Accounts payable period Cash collections 5 Beginning accounts receivable 1 1/2 3 Sales Average daily float 5 Average daily receipts 3 Weighted average delay Accounts receivable 5 Average daily sales 3 ACP Cash flow (old policy) 5 (P 2 v)Q Cash flow (new policy) 5 (P 2 v)Q9

Formula Sheet

PV 5 [(P 2 v)(Q9 2 Q)]/R Cost of switching 5 PQ 1 v(Q9 2 Q) where PQ 5 present value in perpetuity of a one-month delay in receiving the monthly revenue of PQ NPV of switching 5 2[PQ 1 v(Q9 2 Q)] 1 (P 2 v)(Q9 2 Q)/R NPV 5 0 5 2[PQ 1 v(Q9 2 Q)] 1 (P 2 v)(Q9 2 Q)/R NPV 5 2v 1 (1 2 p)P9/(1 1 R) NPV 5 2v 1 (1 2 p)(P 2 v)/R Score 5 Z 5 0.4 3 [Sales/Total assets] 1 3.0 3 EBIT/Total assets Total carrying costs 5 Average inventory 3 Carrying costs per unit 5 (Q/2) 3 CC Total restocking cost 5 Fixed cost per order 3 Number of orders 5 F 3 (T/Q) Total costs 5 Carrying costs 1 Restocking costs 5 (Q/2) 3 CC 1 F 3 (T/Q) Carrying costs 5 Restocking costs (Q*/2) 3 CC 5 F 3 (T/Q*) Q*2 5 Q* 5 2T 3 F CC

[20.4] [20.5]

610 610

[20.6] [20.7] [20.8] [20.9] [20.10] [20.11] [20.12] [20.13] [20.14] [20.15] [20.16] [21.1] [21.2] [21.3] [21.4] [21.5] [21.6] [21.7] [21.8] [21.9] [21.10] [23.1] [25.1] [25.2] [25.3] [25.4]

610 611 613 614 617 623 624 624 625 625 625 646 646 646 649 649 649 649 650 650 650 702 752 752 752 753

2T 3 F B CC

(E[S1] 2 S0)/S0 5 hFC 2 hCDN E[S1] 5 S0 3 [1 1 (hFC 2 hCDN)] E[St] 5 S0 3 [1 1 (hFC 2 hCDN)]t F1/S0 5 (1 1 RFC)/(1 1 RCDN) (F1 2 S0)/S0 5 RFC 2 RCDN F1 5 S0 3 [1 1 (RFC 2 RCDN)] Ft 5 S0 3 [1 1 (RFC 2 RCDN)]t E[S1] 5 S0 3 [1 1 (RFC 2 RCDN)] E[St] 5 S0 3 [1 1 (RFC 2 RCDN)]t RCDN 2 hCDN 5 RFC 2 hFC NPV 5 VB * 2 Cost to Firm A of the acquisition C1 5 0 if (S1 2 E) # 0 C1 5 S1 2 E if (S1 2 E) . 0 C0 # S0 C0 $ 0 if S0 2 E , 0 C0 $ S0 2 E if S0 2 E $ 0

Formula Sheet

7 755 756 782 782

S0 5 C0 1 E/(1 1 Rf) C0 5 S0 2 E/(1 1 Rf) Call option value 5 Stock value 2 Present value of the exercise price C0 5 S0 2 E/(1 1 Rf)t d1 5 3 ln 1 S0/ E 2 1 1 Rf 1 1/2 3 s2 2 3 t 4 / 3 s 3 2t 4 d2 5 d1 2 s 3 1t C0 5 S0 3 N(d1) 2 E/(1 1 Rf)t 3 N(d2)

[25.5] [25.6] [25A.1] [25A.2]

Online
Appendix 4A EFN 5 Increase in total assets 2 Addition to retained earnings 2 New borrowing 5 A(g) 2 p(S)R 3 (1 1 g) 2 pS(R) 3 (1 1 g)[D/E] ROE 5 p(S/A)(1 1 D/E) Appendix 7B NPV 5 (co 2 cN)/cN 3 $1,000 2 CP Appendix 19A Opportunity costs 5 (C/2) 3 R Trading costs 5 (T/C) 3 F Total cost 5 Opportunity costs 1 Trading costs 5 (C/2) 3 R 1 (T/C) 3 F C* 5 2 1 2T 3 F 2 / R C* 5 L 1 (3/4 3 F 3 s2/R)1/3 U* 5 3 3 C* 2 2 3 L Average cash balance 5 (4 3 C* 2 L)/3 Appendix 20A Net incremental cash flow 5 P9Q 3 (d 2 p) NPV 5 2PQ 1 P9Q 3 (d 2 p)/R [20A.1] [20A.2] 3 3 [19A.1] [19A.2] [19A.3] [19A.4] [19A.5] [19A.6] [19A.7] 2 2 3 3 5 5 5 [7B.1] 3 [4B.1] [4B.2] 4 4