COMMERCE 2FB3 Full Class Notes

Managerial Finance - 2FB3




Equations & 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