Debt to Equity Ratio (D/E) = Total Liabilities / Shareholder Equity
Shareholder Equity (Owner's Equity) = Common Stock + Additional Paid in Capital
+ Retained Earnings
Total Liabilities = Short Term Debt + Long Term Debt + Other Fixed Payments
Liabilities
Short Term (Current)
Accounts Payable (A/P)
Notes Payable (NP)
$350
$370
$720
Long Term
Long Term Debt
Total
$550
$1,270
Shareholder Equity
Stock
Retained Earnings
Total
$580
$810
$1,390
Total Liabilities
Shareholder Equity
D/E (TL / SE) =
$1,270
$1,390
0.91
Profit Margin % = Net Income / Sales
Net Income = Taxable Income - Taxes
Taxable Income = EBIT - Interest
EBIT = Cost of Goods Sold - Depreciation
Sales = Net Sales
Net Income (R - E)
Taxable Income
Taxes
Total
$519
$156
$363
Net Sales
Total
$1,384
$1,384
Net Income
Sales
Profit Margin % (NI - S) =
$363
$1,384
0.26
Sales
Yield to Maturity (YTM) or APR = [Annual Coupon + (Face Value - Present
Value] / Time to Maturity) / (Face Value + Present Value) / 2
Annual Coupon = C (Formula) or [I/Y] (Calculator)
Face Value = [FV] (Formula & Calculator)
Present Value = [PV] (Formula & Calculator)
Time to Maturity = t (Formula) or [N] (Calculator)
**Annual Coupon or Bond Payment = FV * ACR / # of Payments (Ann/Semi)
Yield to Maturity (YTM)
Face Value (FV)
Current Value (CV)
Time to Maturity (n)
Annual Coupon Rate (%)
Bond Pmt ($1000 * 0.8 / 1)
$1,000
$932
4 years
8%
$80
YTM = [$80 + ($1,000 - $932) / 4] / ($1,000 + $932) / 2 = 17.8 / 483 =
0.10 or 10%
** Be sure to check for
Annual or Sem-Annual Coupon Rate
Amount you should pay for investment today = Present Value of Annual
Payments = Annual Payment * PVIFA (Interest,Term)
**Note PVIFA (i , n) = [1 - (1 + i)^-n] / i
Amount to Invest
Annual Payment
Term (N)
Interest Rate (I)
$850
20 years
10%
PVIFA (I,N) = [1 - (1 + 0.10)^-20] / 0.10
Present Value of Ann. Pmt. = $850 * 8.514
$7,236.53 is the max you should pay
= 8.514
=
Bond Pricing - Calculating PV
Given:
Face Value or Par Value
Semi-Annual Coupon %
Interest Rate
Time to Maturity
$1,000
7%
8%
8 years
Calculate [N]
years * 2 payments/yr = 16 [N]
8% / 2 for semi-annual payments = 4% [I/Y]
$1,000 * 7% / 2 payments/yr = $35 [PMT]
Standard FV for bonds = $1,000 [FV]
Calculate [PV]
[PV] = -941.74
Selecting w/ NPV (10% IRR)
Year 0
Year 1
Year 2
Year 3
8
Calculate [I/Y]
Calculate [PMT]
Calculate [FV]
[CPT]
Project A
($950,000)
$330,000
$400,000
$450,000
Project B
($125,000)
$55,000
$50,000
$50,000
(Project A) NPV = -$950,000 + $330,000 / (1 + 0.10) 1 + $400,000 / (1 +
2
3
0.10) + $450,000 / (1 + 0.10)
($300,000 + $330,578.51 + $338,345.86)
NPV = -$950,000 +
= $18,924.37
(Project B) NPV = -$125,000 + $55,000 / (1 + 0.10) 1 + $50,000 / (1 + 0.10)2
+ $50,000 / (1 + 0.10)3
NPV = -$125,000 + ($50,000
+ $41,322.31 + $37,593.98)
= $18,924.37
BOTH NPVS ARE EQUAL. SELECT BOTH IF POSS.
Determine Expected Rate of Return
Step #1
Annunity Discount Factor = Initial cash flow / Equal net cash flow =
$320 / $50 = 6.40
Step #2
Use PVAF table to find that 6.4 lies between 9% and 10%
Step #3
Calculate NPV at 9% and 10% = NPV9% = (Cash flow x Discount factor) Initial cash flow
=$50 x 6.418 - $320 = $320.90
- $320 = $0.90 (Do same for 10%) NPV10% = -$12.75
Step #4
Find expected rate of return = Lower discount rate + NPV at 9% / NPV
at 9% - NPV at 10% x (10% - 9%)
= 9 % + $0.90 / $0.90 (-$12.75) * 1
= 9% + $0.90 / $13.65 = 9%
+ 0.065934 = 9.065934
IRR = 9.065934%
A = P(1 + r / 100)^n
A = Future Value
P = Present Value
r = Rate of Interest
n = Time
$2,000
$800
5% Annual
?
$2,000 = $800 * (1 + 0.05 / 100)^n
[FV] $2,000 [PV] -$800 [PMT] 0 [I/Y] 5% [CPT] [N] = 18.78 or 19 years
**If FV meets required $$ amount, then [N] is correct.