This document provides all the slides / lectures given from Chapter 1 - Chapter 13. The used book is: Corporate Finance, DeMarzo. All formula from all the chapters are explained for better understanding. There is also theory.
Income Statement: measuring Net Income (“bottom line” literally)
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 = 𝑃𝑟𝑒 − 𝑇𝑎𝑥 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝑇𝑎𝑥𝑒𝑠
Earnings per Share
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝐸𝑃𝑆 =
𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
,Diluted Earnings per Share
Value of earnings per share if all securities that can be converted into stock would be converted N of
shares goes up, EPS goes down (dilution)
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝐷𝐸𝑃𝑆 =
𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 + 𝐶𝑜𝑛𝑣𝑒𝑟𝑡𝑖𝑏𝑙𝑒 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠
The rate at which we can exchange money today for money in the future is determined by the current
interest rate.
Risk–Free Interest Rate; Discount Rate = 𝑟𝑓
The interest rate at which money can be lent without risk.
Express in values one year from now: multiply current value by interest rate factor
Express in current values: divide future value by discount factor
– Interest Rate Factor = 1 + 𝑟𝑓
– Discount Factor = 1 / (1 + 𝑟𝑓 )
Present Value: discount
The value expressed in terms of dollars today is called the present value (PV) of the investment.
Memory aid: discounting involves dividing by, compounding involves multiplying with
𝐶1
𝑃𝑉 =
(1 + 𝑟𝑓 )𝑛
The value expressed in terms of dollars in the future is called the future value (FV) of the investment.
Memory aid: discounting involves dividing by, compounding involves multiplying with
When cash flows are risky, we must discount them at a rate equal to the risk-free interest rate plus an
appropriate risk premium. If an investment has much more variable returns, it must pay investors a
higher risk premium.
𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 → 𝑑𝑖𝑣𝑖𝑑𝑒 𝑏𝑦 (1 + 𝑟𝑓 + 𝑟𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚)
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