Corporate Finance Lectures Summary
As a supplement to the Microsoft Excel Book - Nando Piree
Thanks for buying the sheet + extras! You can click on any subject in the content page for a
shortcut. You can also use the search function with CTRL+F. I hope it’s of good use to you.
Good luck with the exam!
Content
Simple Formula sheet....................................................................................................................................... 3
Lecture 1: Accounting refresher ....................................................................................................................... 5
Balance sheet .............................................................................................................................................. 5
Income statement........................................................................................................................................ 7
Link Balance sheet and income statement: ............................................................................................. 7
Cash flow statement .................................................................................................................................... 8
Lecture 2: NPV, WACC, CAPM........................................................................................................................... 9
Present and future value ............................................................................................................................. 9
NPV ............................................................................................................................................................. 9
Annuity Factor ............................................................................................................................................. 9
WACC......................................................................................................................................................... 10
CAPM......................................................................................................................................................... 10
Financial leverage and beta calculation ..................................................................................................... 10
Lecture 3: intro to capital structure (Modigliani & Miller) .............................................................................. 11
Lecture 4: Capital structure - M&M with taxes ............................................................................................... 12
MM proposition 1 (with taxes) .................................................................................................................. 12
MM proposition 2 (with taxes) .................................................................................................................. 12
Lecture 5 and 6: Limits to the use of debt....................................................................................................... 13
The tradeoff theory of debt ....................................................................................................................... 13
Cost of financial distress ............................................................................................................................ 13
Where do the costs of financial distress come from? ................................................................................. 15
Agency costs of debt .................................................................................................................................. 15
The pecking order theory ........................................................................................................................... 16
Essence of the pecking order theory ..................................................................................................... 17
Lecture 7: Dividends ....................................................................................................................................... 18
Payout policy: ............................................................................................................................................ 18
“The bird in the hand” fallacy .................................................................................................................... 19
Modigliani – Miller (MM) Proposition 3 ..................................................................................................... 19
, Second MM proposition 3 statement .................................................................................................... 20
Cum–dividend Price and Ex-dividend Price ................................................................................................. 20
Homemade dividends ................................................................................................................................ 23
Lecture 8: Dividend policy .............................................................................................................................. 25
Pros and cons of dividends ......................................................................................................................... 25
Why do firms pay dividends? ..................................................................................................................... 26
Clientele effect ........................................................................................................................................... 27
Clientele effect II ................................................................................................................................... 27
Clientele effect III .................................................................................................................................. 27
Catering ..................................................................................................................................................... 28
Catering II.............................................................................................................................................. 28
Catering III............................................................................................................................................. 28
Dividend Policy Mind Map ......................................................................................................................... 29
Lecture 9: Valuation of levered firms ............................................................................................................. 30
WACC method ........................................................................................................................................... 31
Flow-to-Equity (FTE) method / Equity Residual Method ............................................................................. 32
Adjusted Present Value (APV) method ....................................................................................................... 33
Lecture 10: Introduction to options ................................................................................................................ 35
Lecture 11: Option pricing .............................................................................................................................. 37
Put-Call Parity............................................................................................................................................ 37
Binomial Trees ........................................................................................................................................... 37
Replicating Portfolio Method..................................................................................................................... 38
Lecture 12: Option pricing - risk neutral probability method .......................................................................... 43
Risk-neutral pricing.................................................................................................................................... 43
Black-Scholes Model .................................................................................................................................. 45
Lecture 13: Short term finance / efficient markets ......................................................................................... 47
Operating cycle and cash cycle .................................................................................................................. 47
Working Capital......................................................................................................................................... 48
Efficient capital market.............................................................................................................................. 49
,Simple Formula sheet
Does not include every formula – Ctrl+F in summary to find everything. These are most
common:
𝐹𝑉 = 𝑃𝑉 ∗ (1 + 𝑟)𝑡
𝐹𝑉1 𝐹𝑉2 𝐹𝑉3 𝐹𝑉𝑛
𝑁𝑃𝑉 = 𝑃𝑉 𝑡0 + 𝑡1
+ 𝑡2
+ 𝑡3
…+
(1 + 𝑟) (1 + 𝑟) (1 + 𝑟) (1 + 𝑟)𝑡𝑛
1
1−
(1+𝑟)𝑡
Annuity: PV = 𝐶𝐹 ( )
𝑟
𝐸 𝐷
𝑊𝐴𝐶𝐶 = × 𝑅𝑒 + × 𝑅𝑑 × (1 − 𝑡𝑐)
𝐷+𝐸 𝐷+𝐸
𝐶𝐴𝑃𝑀: 𝑅𝑒 = 𝑟𝑓 + 𝛽 × (𝑟𝑚 − 𝑟𝑓)
𝐸
𝛽𝑎𝑠𝑠𝑒𝑡 = × 𝛽𝑒𝑞𝑢𝑖𝑡𝑦 (“unlevered beta”)
𝐷+𝐸
𝐷
𝛽𝑒𝑞𝑢𝑖𝑡𝑦 = 𝛽𝑎𝑠𝑠𝑒𝑡 × (1 + 𝐸 ) (“levered beta”)
MM1:
𝐸𝐵𝐼𝑇 × (1 − 𝑇𝑐)
𝑉𝑈 =
𝑅𝐴
𝑉𝐿 = 𝑉𝑈 + 𝑇𝑐𝐷
MM2:
𝐷
𝑅𝐸 = 𝑅𝐴 + × (1 − 𝑇𝑐 ) × (𝑅𝐴 − 𝑅𝐷)
𝐸
Value of firm
Unlevered Cash Flow: UCF = EBIT ∗ (1 − T )
Levered Cash Flow: LCF = UCF − (1 − Tc)Rd ∗ D
UCF
NPV = −Initial investment +
∑Tt=1(1 +
R WACC )t
UCF = Unlevered cash flow = EBIT ∗ (1 − T )
Levered Cash Flow = (EBIT − I) ∗ (1 − TC )
Levered Cash Flow
VELevered = RLevered
E
VFirm = VD + VELevered
𝐴𝑃𝑉 = 𝑁𝑃𝑉𝑏𝑎𝑠𝑒 𝑐𝑎𝑠𝑒 + 𝑁𝑃𝑉𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑛𝑔 𝑠𝑖𝑑𝑒 𝑒𝑓𝑓𝑒𝑐𝑡𝑠
, Options
𝑷𝒓𝒊𝒄𝒆 𝒐𝒇 𝒖𝒏𝒅𝒆𝒓𝒍𝒚𝒊𝒏𝒈 + 𝑷𝒓𝒊𝒄𝒆 𝒐𝒇 𝒑𝒖𝒕 = 𝑷𝒓𝒊𝒄𝒆 𝒐𝒇 𝑪𝒂𝒍𝒍 + 𝑷𝑽(𝑬𝒙𝒆𝒓𝒄𝒊𝒔𝒆 𝒑𝒓𝒊𝒄𝒆)
𝑺(𝒕) + 𝑷(𝒕) = 𝑪(𝒕) + 𝒙𝒆−𝒓𝒇 𝒕
ΔS u − B(1 + r) = C u
ΔS d − B(1 + r) = C d
Cu −Cd
Δ=
Su −Sd
Price of call option (Option Premium) = ΔS0 − B
[p∗Cu +(1−p)∗Cd ]
C= 1+rf
rf (%) = p ∗ % change in stock price if price increases
+(1 − p) ∗ % change in stock price if price decreases.
Black-Scholes
C = SN(δ1 ) − Xe(−rft) N(δ2 )
Where,
S σ2
[ln( )+(rf + )t]
X 2
δ1 = √σ2 t
δ2 = δ1 − √σ2 t
Short term finance
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑟𝑎𝑡𝑖𝑜 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
𝑇𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑑𝑒𝑓𝑒𝑟𝑟𝑎𝑙 𝑝𝑒𝑟𝑖𝑜𝑑 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠
Working Capital = Inventory + Receivables - Payables
As a supplement to the Microsoft Excel Book - Nando Piree
Thanks for buying the sheet + extras! You can click on any subject in the content page for a
shortcut. You can also use the search function with CTRL+F. I hope it’s of good use to you.
Good luck with the exam!
Content
Simple Formula sheet....................................................................................................................................... 3
Lecture 1: Accounting refresher ....................................................................................................................... 5
Balance sheet .............................................................................................................................................. 5
Income statement........................................................................................................................................ 7
Link Balance sheet and income statement: ............................................................................................. 7
Cash flow statement .................................................................................................................................... 8
Lecture 2: NPV, WACC, CAPM........................................................................................................................... 9
Present and future value ............................................................................................................................. 9
NPV ............................................................................................................................................................. 9
Annuity Factor ............................................................................................................................................. 9
WACC......................................................................................................................................................... 10
CAPM......................................................................................................................................................... 10
Financial leverage and beta calculation ..................................................................................................... 10
Lecture 3: intro to capital structure (Modigliani & Miller) .............................................................................. 11
Lecture 4: Capital structure - M&M with taxes ............................................................................................... 12
MM proposition 1 (with taxes) .................................................................................................................. 12
MM proposition 2 (with taxes) .................................................................................................................. 12
Lecture 5 and 6: Limits to the use of debt....................................................................................................... 13
The tradeoff theory of debt ....................................................................................................................... 13
Cost of financial distress ............................................................................................................................ 13
Where do the costs of financial distress come from? ................................................................................. 15
Agency costs of debt .................................................................................................................................. 15
The pecking order theory ........................................................................................................................... 16
Essence of the pecking order theory ..................................................................................................... 17
Lecture 7: Dividends ....................................................................................................................................... 18
Payout policy: ............................................................................................................................................ 18
“The bird in the hand” fallacy .................................................................................................................... 19
Modigliani – Miller (MM) Proposition 3 ..................................................................................................... 19
, Second MM proposition 3 statement .................................................................................................... 20
Cum–dividend Price and Ex-dividend Price ................................................................................................. 20
Homemade dividends ................................................................................................................................ 23
Lecture 8: Dividend policy .............................................................................................................................. 25
Pros and cons of dividends ......................................................................................................................... 25
Why do firms pay dividends? ..................................................................................................................... 26
Clientele effect ........................................................................................................................................... 27
Clientele effect II ................................................................................................................................... 27
Clientele effect III .................................................................................................................................. 27
Catering ..................................................................................................................................................... 28
Catering II.............................................................................................................................................. 28
Catering III............................................................................................................................................. 28
Dividend Policy Mind Map ......................................................................................................................... 29
Lecture 9: Valuation of levered firms ............................................................................................................. 30
WACC method ........................................................................................................................................... 31
Flow-to-Equity (FTE) method / Equity Residual Method ............................................................................. 32
Adjusted Present Value (APV) method ....................................................................................................... 33
Lecture 10: Introduction to options ................................................................................................................ 35
Lecture 11: Option pricing .............................................................................................................................. 37
Put-Call Parity............................................................................................................................................ 37
Binomial Trees ........................................................................................................................................... 37
Replicating Portfolio Method..................................................................................................................... 38
Lecture 12: Option pricing - risk neutral probability method .......................................................................... 43
Risk-neutral pricing.................................................................................................................................... 43
Black-Scholes Model .................................................................................................................................. 45
Lecture 13: Short term finance / efficient markets ......................................................................................... 47
Operating cycle and cash cycle .................................................................................................................. 47
Working Capital......................................................................................................................................... 48
Efficient capital market.............................................................................................................................. 49
,Simple Formula sheet
Does not include every formula – Ctrl+F in summary to find everything. These are most
common:
𝐹𝑉 = 𝑃𝑉 ∗ (1 + 𝑟)𝑡
𝐹𝑉1 𝐹𝑉2 𝐹𝑉3 𝐹𝑉𝑛
𝑁𝑃𝑉 = 𝑃𝑉 𝑡0 + 𝑡1
+ 𝑡2
+ 𝑡3
…+
(1 + 𝑟) (1 + 𝑟) (1 + 𝑟) (1 + 𝑟)𝑡𝑛
1
1−
(1+𝑟)𝑡
Annuity: PV = 𝐶𝐹 ( )
𝑟
𝐸 𝐷
𝑊𝐴𝐶𝐶 = × 𝑅𝑒 + × 𝑅𝑑 × (1 − 𝑡𝑐)
𝐷+𝐸 𝐷+𝐸
𝐶𝐴𝑃𝑀: 𝑅𝑒 = 𝑟𝑓 + 𝛽 × (𝑟𝑚 − 𝑟𝑓)
𝐸
𝛽𝑎𝑠𝑠𝑒𝑡 = × 𝛽𝑒𝑞𝑢𝑖𝑡𝑦 (“unlevered beta”)
𝐷+𝐸
𝐷
𝛽𝑒𝑞𝑢𝑖𝑡𝑦 = 𝛽𝑎𝑠𝑠𝑒𝑡 × (1 + 𝐸 ) (“levered beta”)
MM1:
𝐸𝐵𝐼𝑇 × (1 − 𝑇𝑐)
𝑉𝑈 =
𝑅𝐴
𝑉𝐿 = 𝑉𝑈 + 𝑇𝑐𝐷
MM2:
𝐷
𝑅𝐸 = 𝑅𝐴 + × (1 − 𝑇𝑐 ) × (𝑅𝐴 − 𝑅𝐷)
𝐸
Value of firm
Unlevered Cash Flow: UCF = EBIT ∗ (1 − T )
Levered Cash Flow: LCF = UCF − (1 − Tc)Rd ∗ D
UCF
NPV = −Initial investment +
∑Tt=1(1 +
R WACC )t
UCF = Unlevered cash flow = EBIT ∗ (1 − T )
Levered Cash Flow = (EBIT − I) ∗ (1 − TC )
Levered Cash Flow
VELevered = RLevered
E
VFirm = VD + VELevered
𝐴𝑃𝑉 = 𝑁𝑃𝑉𝑏𝑎𝑠𝑒 𝑐𝑎𝑠𝑒 + 𝑁𝑃𝑉𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑛𝑔 𝑠𝑖𝑑𝑒 𝑒𝑓𝑓𝑒𝑐𝑡𝑠
, Options
𝑷𝒓𝒊𝒄𝒆 𝒐𝒇 𝒖𝒏𝒅𝒆𝒓𝒍𝒚𝒊𝒏𝒈 + 𝑷𝒓𝒊𝒄𝒆 𝒐𝒇 𝒑𝒖𝒕 = 𝑷𝒓𝒊𝒄𝒆 𝒐𝒇 𝑪𝒂𝒍𝒍 + 𝑷𝑽(𝑬𝒙𝒆𝒓𝒄𝒊𝒔𝒆 𝒑𝒓𝒊𝒄𝒆)
𝑺(𝒕) + 𝑷(𝒕) = 𝑪(𝒕) + 𝒙𝒆−𝒓𝒇 𝒕
ΔS u − B(1 + r) = C u
ΔS d − B(1 + r) = C d
Cu −Cd
Δ=
Su −Sd
Price of call option (Option Premium) = ΔS0 − B
[p∗Cu +(1−p)∗Cd ]
C= 1+rf
rf (%) = p ∗ % change in stock price if price increases
+(1 − p) ∗ % change in stock price if price decreases.
Black-Scholes
C = SN(δ1 ) − Xe(−rft) N(δ2 )
Where,
S σ2
[ln( )+(rf + )t]
X 2
δ1 = √σ2 t
δ2 = δ1 − √σ2 t
Short term finance
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑟𝑎𝑡𝑖𝑜 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
𝑇𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑑𝑒𝑓𝑒𝑟𝑟𝑎𝑙 𝑝𝑒𝑟𝑖𝑜𝑑 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠
Working Capital = Inventory + Receivables - Payables
