Corporate Finance

Ch 8 (Risk and Return)

• Expected return on a portfolio = rp = weight1expected return1 + w2r2 + … CAPM = Risk free rate + (MRP)(beta)

• MRP = Market rate – risk free rate Portfolio beta = bp = w1b1 + w2b2 + …

Ch 3 (Financial Analysis)

• Net working capital = Current assets – (payables + accruals)

• Free Cash Flows = EBIT(1 – T) + Depreciation –[(Capital Expenditures + Increase in NWC)]

o Increase in NWC = Change in current assets – change in payables + accruals

• FCF = The amount of cash that could be withdrawn from a firm without harming its ability to operate and to produce future cash flows.

Ch 4 (Financial Analysis & Ratios)

• Liquidity ratios – Will a firm be able to pay off its debts as they come due and thus remain a viable organization?

o Current Ratio = Current assets/Current liabilities AND Quick Ratio = Current assets – inventories/Current liabilities

• Asset Management ratios – Measures how effectively a firm is managing its assets

o Inventory Turnover = Sales/Inventories

o Days Sales Outstanding = Receivables/Average sales per day = Receivables/(Annual Sales/365)

o Fixed Assets Turnover = Sales/Net fixed assets (how effectively a firm uses plant and equipment)

o Total Assets Turnover = Sales/Total Assets

• Debt Management ratios – Measures how effectively a firm manages its debt

o Debt Ratio = Total Debt/Total Assets (Measures the percentage of funds provided by creditors)

o Times Interest Earned = EBIT/Interest (Measure of the firm’s ability to meet annual interest payments)

• Profitability Ratios – Shows combined effects of liquidity, asset management and debt on operating results

o Operating Margin = Operating Income (EBIT)/Sales (Measures operating income per dollar of sales)

o Profit Margin = Net Income/Sales

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