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Formulae in Equity Securities
Formulae in Equity Securities
Equation 5: Growth Rate (g) = (1 – Payout ratio) x ROE = Retention rate (b) x ROE
where: rD = after-tax cost of debt (i.e. YTM); rP = cost of preferred equity; rE = cost of common
equity
wD, wP, and wE = weights of each capital class in the company’s market value of capital
Equation 8: Firm Value (no growth) =
Equation 11: Free Cash Flow to Firm (FCFF) = Net Income + Net non-cash charges + After-tax
Interest Expense – Net Investment in Fixed Capital – Net Investment in Working Capital
Equation 14: Free Cash Flow to Equity = After-tax EBITDA + Tax savings on Net non-cash
charges – After-tax Interest Expense – Net Investment in Fixed Capital – Net Investment in
Working Capital + Net Borrowing
FCFE = [EBITDA x (1 – t)] + (NCC x t) – [Int x (1 – t)] – FCInv – WCInv + Net Borrowing
Equation 15: Price Multiples = Price / Earnings per share or Price / Book value per share, etc.