Chapter 13
Expected Return and Standard Deviation
Chapter 9
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Discount payback period
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Calculating Modified IRR
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After tax salvage = Salvage proceeds – tax rate*(salvage
proceeds – book value)  book value = initial cost –
accumulated depreciation
3-year example
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Cost cutting example.
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Equivalent Cost Analysis
Chapter 10
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Free Cash Flow
o NOPAT + Noncash charges +/- change in NOWC –
PPE purchases
NOWC is reinvested in the final period.
Depreciation tax shield = Depreciation expense*tax rate
Straight line depreciation = (Initial Cost – Salvage)/# of
years
MACRS Depreciation
o 7-year example
Chapter 12
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Capital gains yield = (new price – old price)/old price
Total dollar return = Income from investment + capital
gain/loss
Geometric Return = (FV/PV)^1/t – 1
o Returns of 5%, -3%, and 12%
o =[(1.05)*(0.97)*(1.12)]^(1/3) – 1 = 4.49%
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Chapter 14
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Firm’s tax rate = taxes/EBT
Net Working Capital = Current Assets – Current Liabilities
Operating Cycle = Days’ Sales in Receivables + Days’ COGS
in Inventory
Cash conversion cycle = Operating Cycle – Days’ Payables
in Inventory
Effective Borrowing Rate
Loan Amount
Compensating Balance
Annual Interest rate
Expected return on equity formula (SML) on ratio sheet.
o (Rm – Rf) is market risk premium.
o Also calculated as Re = (D1/P0) + g
o Expected market return = Rf + (Rm – Rf)
Cost of preferred stock = D/P0
WACC = WERE + WDRD(1 – TC)
After-tax cost of debt = RD(1 – TC)
850,000
15%
8.0%
What is the firm's effective borrowing rate
Loan Amount
Annual Interest rate
Annual Interest Paid
850,000
8.0%
68,000
Loan Amount
Compensating Balance
Loan amount available for use
850,000
15%
722,500
Annual Interest Paid
Loan amount available for use
Effective borrowing rate
68,000
722,500
9.41%
Cash Budgeting
Previous Two Exams
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NOPAT = EBIT*(1 – tax rate)
Operating Cash Flow = NOPAT + depreciation
Bond Valuation

You purchased a bond at its par value when it was issued.
The bond pays an 8% coupon rate semiannually and
matures in 10 years. One year later, the market interest
rate for equally risky bonds has fallen to 7.6%. What is the
total dollar return and percentage return on your bond?
What was the real rate of return on your investment if
inflation was 3.0%?
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
Year 0
1,000.00
Bond Price
Year 1
$1,025.74
Interest

80.00
Increase in Bond Price
Interest
Total Return in $
25.74
80.00
$105.74
Rate of Return (Nominal)
N
I/Y
18
Nominal Return = (1 + real rate) * (1 + inflation) -1
1 + 10.57% = (1 + R) * (1 + 3%)
1.1057 = (1 + R) * 1.03
1.07353 = 1 + R
Real return =
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10.57%
PV
3.80
PMT
???
FV
40.00
1,000
PV
($1,025.74)
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7.35%
Free Cash Flow Example
Ending A/R Balance = Beginning A/R Balance + Sales –
Total Cash Collections
45-day period-> 50% collected in the current quarter and
50% next quarter.
30-day period-> 66.7% collected in the current quarter
and 33.3% next quarter.
60-day period-> 33.3% collected in the current quarter
and 66.7% collected next quarter.
Cash flow to creditors = Interest paid +/- net new
borrowing
Cash flow to stockholders = Dividends paid +/- net new
equity raised
To find FV with multiple cash flows on the calculator, use
the Cash Flow (CF) button to find the PV and then use the
TVM buttons to find FV from that PV.
Computing YTM of a Bond
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Par value is always FV
Coupon rate*par value=PMT
Current bond price is always PV