Class notes
COMMERCE 2FB3 Full Class Notes
- Course
- Institution
All notes from slides plus clarification. All formulas posted as well as important testable items are highlighted. Used these and got an A, enjoy!
[Show more]
Seller
Follow
dilldylanhilton
Content preview
Managerial Finance - 2FB3Equations & Annotations
Chapter 14
Dividend Growth model (DGM)
,P0 being the price of a stock
D1 being the dividend
RE being return (cost of equity)
g being growth of the dividend
- This assumed dividend growth is constant
- Assumes RE > g
Estimating Dividend Growth Rate
g = Retention Ratio * ROE
Retention Ratio + Payout Ratio = 1
SML Approach
Rf being the risk free rate
E(RM) - Rf being the market risk premium
BE being systematic risk
Cost of Preferred Stock
RP = D / P0
RP being cost of preferred stock
D being divided
Weighted Average Cost of Capital (WACC)
D/V + E/V = 1 or wD + wE = 1
E = market value of equity = # of outstanding shared * price per share
,D = market value of debt = # of outstanding bonds * bond price
V = market value of the firm = D + E
D/E = target capital structure
wE = E/V = % financed with equity
wD = D/V = % financed with debt
E = Market Value of Equity
D = Market Value of Debt
RE = Cost of Equity (Dividend Discount or SML)
RD = Cost of Debt (YTM)
Note = If preferred stock is included add + (P/V)*RP to the end of the WACC equation
Debt to Equity Ratio
D/E = wD / wE
Flotation Cost Formula
Weighted average flotation cost: fA = (E/V) * fE + (D/V) * fD
fE = Flotation Cost of Equity, cost of issuing shares
fD = Flotation Cost of Debt, cost of issuing bonds
True Cost
True Cost = Capital Investment / (1 - fA)
fA being weighted average flotation cost
Cost of Debt
Cost of Debt = YTM(1 - Tax Rate)
, Chapter 15
Ex-Rights Price is the new price of the stock after the shares are offered
Rights-On Price is the old price of stock before new shares are offered
Effect of Rights on Stock Prices
Value of Right = Rights-on Price - Ex-rights Price
Value of Right, R0 = (M0 - S) / (N + 1)
M0 being Rights-on price
S being subscription price (price set for existing shareholders, or you can buy the rights)
N being # of rights to buy one new share (eg. need 5 shares for the right to buy 1)
Chapter 16
ROE
ROE = NI / (Shares * Share Price)
Structure of Calculating EPS
EBIT
(Interest)
(Taxes)
= NI
EPS = NI/Shares
Break Even EBIT/EPS
To find break even EBIT or EPS between 2 capital structures, set equations for EPS equal to
each other & solve
Unlevered Firm
EPS = EBIT/Shares
Levered Firm
EPS = [EBIT - Interest on Debt] / Shares
Price Per Share
P = Value of Shares Repurchased / (#of Shares Repurchased)
Case I - Proposition I
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller dilldylanhilton. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $6.82. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
53340 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now