FREQUENTLY USED SYMBOLS

ACP Average collection period

ADR American Depository Receipt
APR Annual percentage rate
AR Accounts receivable
b Beta coefficient, a measure of an asset’s market risk
bL Levered beta
bU Unlevered beta
BEP Basic earning power
BVPS Book value per share
CAPM Capital Asset Pricing Model
CCC Cash conversion cycle
CF Cash flow; CFt is the cash flow in Period t
CFPS Cash flow per share
CR Conversion ratio
CV Coefficient of variation
Δ Difference, or change (uppercase delta)
Dps Dividend of preferred stock
Dt Dividend in Period t
DCF Discounted cash flow
D/E Debt-to-equity ratio
DPS Dividends per share
DRIP Dividend reinvestment plan
DRP Default risk premium
DSO Days sales outstanding
EAR Effective annual rate, EFF%
EBIT Earnings before interest and taxes; net operating income
EBITDA Earnings before interest, taxes, depreciation, and amortization
EPS Earnings per share
EVA Economic Value Added
F (1) Fixed operating costs
(2) Flotation cost
FCF Free cash flow
FVN Future value for Year N
FVAN Future value of an annuity for N years
g Growth rate in earnings, dividends, and stock prices
I Interest rate; also denoted by r
I/YR Interest rate key on some calculators
INT Interest payment in dollars
IP Inflation premium
IPO Initial public offering
IRR Internal rate of return
LP Liquidity premium
M (1) Maturity value of a bond
(2) Margin (profit margin)
M/B Market-to-book ratio
MIRR Modified Internal Rate of Return
MRP Maturity risk premium
MVA Market Value Added
n Number of shares outstanding
N Calculator key denoting number of periods
N(di) Represents area under a standard normal distribution function
NOPAT Net operating profit after taxes
NOWC Net operating working capital
NPV Net present value
P (1) Price of a share of stock in Period t; P0 = price of the stock today
(2) Sales price per unit of product sold
Pc Conversion price
 Pf Price of good in foreign country
Ph Price of good in home country
PN A stock’s horizon, or terminal, value
P/E Price/earnings ratio
PMT Payment of an annuity
PPP Purchasing power parity
PV Present value
PVAN Present value of an annuity for N years
Q Quantity produced or sold
QBE Breakeven quantity
r (1) A percentage discount rate, or cost of capital; also denoted by i
(2) Nominal risk-adjusted required rate of return
r̄ “r bar,” historic, or realized, rate of return
^r “r hat,” an expected rate of return
r* Real risk-free rate of return
rd Before-tax cost of debt
re Cost of new common stock (outside equity)
rf Interest rate in foreign country
rh Interest rate in home country
ri Required return for an individual firm or security
rM Return for “the market” or for an “average” stock
rNOM Nominal rate of interest; also denoted by iNOM
rps (1) Cost of preferred stock
(2) Portfolio’s return
rPER Periodic rate of return
rRF Rate of return on a risk-free security
rs (1) Required return on common stock
(2) Cost of old common stock (inside equity)
ρ Correlation coefficient (lowercase rho); also denoted by R when using historical data
ROA Return on assets
ROE Return on equity
RP Risk premium
RPM Market risk premium
RR Retention rate
S (1) Sales
(2) Estimated standard deviation for sample data
(3) Intrinsic value of stock (i.e., all common equity)
SML Security Market Line
∑ Summation sign (uppercase sigma)
σ Standard deviation (lowercase sigma)
σ2 Variance
t Time period
T Marginal income tax rate
TVN A stock’s horizon, or terminal, value
TIE Times interest earned
V Variable cost per unit
VB Bond value
VL Total market value of a levered firm
Vop Value of operations
Vps Value of preferred stock
VU Total market value of an unlevered firm
VC Total variable costs
w Proportion or weight
wd Weight of debt
wps Weight of preferred stock
ws Weight of common equity raised internally by retaining earnings
wce Weight of common equity raised externally by issuing stock
WACC Weighted averaged cost of capital
X Exercise price of option
YTC Yield to call
YTM Yield to maturity
APPENDIX C
Selected Equations and Data

CHAPTER 1
FCF1 FCF2 FCF3 …þ FCF∞
Value ¼ 1þ 2þ 3þ
ð1 þ WACCÞ ð1 þ WACCÞ ð1 þ WACCÞ ð1 þ WACCÞ∞

CHAPTER 2
EBIT ¼ Earnings before interest and taxes ¼ Sales revenues − Operating costs
EBITDA ¼ Earnings before interest; taxes; depreciation and amortization
¼ EBIT þ Depreciation þ Amortization

Net cash flow ¼ Net income þ Depreciation and amortization

NOWC ¼ Net operating working capital
¼ Operating current assets − Operating current liabilities



¼ Cash þ Accounts receivable −
Accounts payable
þ Inventories þ Accruals

Total net operating capital ¼ Net operating working capital þ Operating long-term assets
NOPAT ¼ Net operating profit after taxes ¼ EBIT(1 − Tax rate)
Free cash flow ðFCFÞ ¼ NOPAT − Net

investment in operating capital 
Current year’s total Previous year’s total
¼ NOPAT − −
net operating capital net operating capital

Operating cash flow ¼ NOPAT þ Depreciation and amortization

Gross investment in Net investment
¼ þ Depreciation
operating capital in operating capital

1071
1072 Appendix C: Selected Equations and Data

Gross investment
FCF ¼ Operating cash flow −
in operating capital

NOPAT
Return on invested capital ðROICÞ ¼
Total net operating capital

MVA ¼ Market value of stock − Equity capital supplied by shareholders

¼ ðShares outstandingÞðStock priceÞ − Total common equity
MVA ¼ Total market value − Total investor-supplied capital

Market value of stock 
¼ þ Market value of debt − Total investor-supplied capital

 

Net operating profit
EVA ¼ − After-tax dollar cost of capital
after taxesðNOPATÞ used to support operations

¼ EBITð1−Tax rateÞ − ðTotal net operating capitalÞðWACCÞ

EVA ¼ ðTotal net operating capitalÞðROIC − WACCÞ

CHAPTER 3
Current assets
Current ratio ¼
Current liabilities
Current assets − Inventories
Quick; or acid test; ratio ¼
Current liabilities
Sales
Inventory turnover ratio ¼
Inventories
Receivables Receivables
DSO ¼ Days sales outstanding ¼ ¼
Average sales per day Annual sales=365

Sales
Fixed assets turnover ratio ¼
Net fixed assets
Sales
Total assets turnover ratio ¼
Total assets
Total liabilities
Debt ratio ¼
Total assets
Total liabilities
Market debt ratio ¼
Total liabilities þ Market value of equity
Total liabilities
Debt-to-equity ratio ¼
Total assets − Total liabilities
Debt ratio Debt-to-equity
Debt-to-equity ¼ and Debt ratio ¼
1 − Debt ratio 1 þ Debt-to-equity
Total assets
Equity multiplier ¼
Common equity
 Appendix C: Selected Equations and Data 1073

1
Debt ratio ¼ 1 −
Equity multiplier
EBIT
Times-interest-earned ðTIEÞ ratio ¼
Interest charges
EBITDA þ Lease payments
EBITDA coverage ratio ¼
Interest þ Principal payments þ Lease payments
Net income available to common stockholders
Net profit margin ¼
Sales
EBIT
Operating profit margin ¼
Sales
Sales − Cost of goods sold
Gross profit margin ¼
Sales
Net income available to common stockholders
Return on total assets ðROAÞ ¼
Total assets
EBIT
Basic earning power ðBEPÞ ratio ¼
Total assets
Net income Sales
ROA ¼ Profit margin × Total assets turnover ¼ ×
Sales Total assets
Net income available to common stockholders
Return on common equity ðROEÞ ¼
Common equity

ROE ¼ ROA × Equity multiplier

¼ Profit margin × Total assets turnover × Equity multiplier
Net income Sales Total assets
¼ × ×
Sales Total assets Common equity
Price per share
Price=earnings ðP=EÞ ratio ¼
Earnings per share
Price per share
Price=cash flow ratio ¼
Cash flow per share
Common equity
Book value per share ¼
Shares outstanding
Market price per share
Market=book ðM=BÞ ratio ¼
Book value per share

CHAPTER 4
FVN ¼ PV(1 + I)N
FVN
PV ¼
ð1 þ IÞN
1074 Appendix C: Selected Equations and Data

" # " #
ð1 þ IÞN 1 ð1 þ IÞN −1
FVAN ¼ PMT − ¼ PMT
I I I
FVAdue ¼ FVAordinary ð1 þ IÞ
2 1 3
" # 1−
1 1 6 ð1 þ IÞN 7
PVAN ¼ PMT − ¼ PMT6
4
7
5
I Ið1 þ IÞN I

PVADue ¼ PVAOrdinary ð1 þ IÞ
PMT
PV of a perpetuity ¼
I
XN
CFt
PVUneven stream ¼ t
t¼1 ð1 þ IÞ
X
N
FVUneven stream ¼ CFt ð1 þ IÞN−t
t¼1
INOM
IPER ¼
M

APR ¼ (IPER)M
Number of periods ¼ NM

INOM MN
FVN ¼ PVð1 þ IPER ÞNumber of periods
¼ PV 1 þ
M

M
INOM
EFF% ¼ 1þ − 1:0
M

CHAPTER 5
X
N
INT M
VB ¼ tþ
t¼1 ð1 þ rd Þ ð1 þ rd ÞN
X
2N
INT=2 M
Semiannual payments : VB ¼ t þ
t¼1 ð1 þ rd =2Þ ð1 þ rd =2Þ2N
X
N
INT M
Yield to maturity : Bond price ¼ þ
t¼1 ð1 þ YTMÞt ð1 þ YTMÞN
X
N
INT Call price
Price of callable bond ðif called at NÞ ¼ þ
t¼1 ð1 þ rd Þt ð1 þ rd ÞN
Annual interest
Current yield ¼
Bond’s current price
Current yield + Capital gains yield ¼ Yield to maturity

rd ¼ r* + IP + DRP + LP + MRP
rRF ¼ r* + IP
rd ¼ rRF + DRP + LP + MRP
I1 þ I2 þ … þ IN
IPN ¼
N
 Appendix C: Selected Equations and Data 1075

CHAPTER 6
X
n
Expected rate of return ¼ ^
r¼ Pi ri
i¼1
X
n
r̄ t
t¼1
Historical average; r̄ Avg ¼
n
X
n
Variance ¼ σ2 ¼ ðri − ^rÞ2 Pi
i¼1
sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
X n
Standard deviation ¼ σ ¼ ðri − ^rÞ2 Pi
vffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
i¼1
uX n
u
u ðr̄ t − r̄ Avg Þ2
t t¼1
Historical estimated σ ¼ S ¼
n−1

CV ¼ σ=^r
X
n
^
rp ¼ wi ^ri
i¼1
s ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
X n
σp ¼ ðrpi −^rp Þ2 Pi
i¼1
X
n
ðr̄ i;t − r̄ i;Avg Þðr̄ j;t − r̄ j;Avg Þ
t¼1
Estimated ρ ¼ R ¼ sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
X n X n
ðr̄ i;t − r̄ i;Avg Þ2 ðr̄ j;t − r̄ j;Avg Þ2
t¼1 t¼1

COViM ¼ ρiMσiσM


σi COViM
bi ¼ ρiM ¼
σM σ2M
X
n
bp ¼ wi bi
i¼1

Required return on stock market ¼ rM

Market risk premium ¼ RPM ¼ rM − rRF
RPi ¼ (rM − rRF)bi ¼ (RPM)bi
SML ¼ ri ¼ rRF + (rM − rRF)bi ¼ rRF + RPMbi

CHAPTER 7
^ ¼ PV of expected future dividends ¼ X
∞
Dt
P 0
t¼1 ð1 þ rs Þt

^ ¼ D0 ð1 þ gÞ ¼ D1
Constant growth: P 0
rs − g rs − g
1076 Appendix C: Selected Equations and Data

^r ¼ D1 þ g
s
P0
^ −P
P 1 0
Capital gains yield ¼
P0
D1
Dividend yield ¼
P0
^ ¼D
For a zero growth stock, P 0
rs

^ ¼ DNþ1
Horizon value ¼ Terminal value ¼ P N
rs − g
Dps
Vps ¼
rps
^r ¼ Dps
ps
Vps
r̄ s ¼ Actual dividend yield þ Actual capital gains yield

CHAPTER 8
Exercise value ¼ MAX[Current price of stock − Strike price, 0]
Cu − Cd
Number of stock shares in hedged portfolio ¼ N ¼
Pu − Pd

VC ¼ P½Nðd1 Þ − Xe−rRF t ½Nðd2 Þ

lnðP=XÞ þ ½rRF þ ðσ2 =2Þt

d1 ¼ pffi
pffi σ t
d2 ¼ d1 − σ t

Put–call parity: Put option ¼ VC − P + Xe−rRFt

V of put ¼ P½Nðd1 Þ − 1 − Xe−rRF t ½Nðd2 Þ − 1

CHAPTER 9
After-tax component cost of debt ¼ rd(1 − T)
XN
INTð1 − TÞ M
Mð1−FÞ ¼ tþ
t¼1 ½1 þ rd ð1 − TÞ ½1 þ rd ð1 − TÞN
Dps
rps ¼
Pps ð1 − FÞ

Expected D1 Required ;
Market equilibrium: ¼ ^rM ¼ þ g ¼ rRF þ RPM ¼ rM ¼
rate of return P0 rate of return
where D1, P0, and g are for the market, not an individual company
 Appendix C: Selected Equations and Data 1077

Rep/Div ¼ ratio of payouts via repurchases to payouts via dividends

D1
rM ¼ ^rM ¼ ð1 þ Rep=DivÞ þ g, where g is long-term growth rate in total payouts for the market and
P0
where D1 and P0 are for the market, not an individual company

CAPM: rs ¼ rRF + bi(RPM)

D1 + Expected g in dividends per share
DCF: rs ¼ ^rs ¼
P0

Company’s own Judgmental

rs ¼ þ
bond yield risk premium

g ¼ (Retention rate)(ROE) ¼ (1.0 − Payout rate)(ROE)

D1
re ¼ ^re ¼ þg
P0 ð1−FÞ

WACC ¼ wdrd(1 − T) + wpsrps + wsrs

CHAPTER 10
CF1 CF2 … þ CFN
NPV ¼ CF0 þ 1þ 2þ
ð1 þ rÞ ð1 þ rÞ ð1 þ rÞN
X N
CFt
¼ t
t¼0 ð1 þ rÞ
CF1 CF2 …þ CFN
IRR: CF0 þ 1þ 2þ ¼ 0
ð1 þ IRRÞ ð1 þ IRRÞ ð1 þ IRRÞN
XN
CFt
NPV ¼ ¼ 0
t¼0 ð1 þ IRRÞt
MIRR: PV of costs ¼ PV of terminal value
XN
CIFt ð1 þ rÞN−t
X N
COFt t¼0
t ¼
t¼0 ð1 þ rÞ ð1 þ MIRRÞN

Terminal value
PV of costs ¼
ð1 þ MIRRÞN

XN
CFt
PV of future cash flows ð1 þ rÞt
PI ¼ ¼ t¼1
Initial cost CF0
Unrecovered cost
Number of
at start of year
Payback ¼ years prior to þ
Cash flow during
full recovery
full recovery year
 Appendix C: Selected Equations and Data 1079

EROICt ¼ Expected return on invested capital

¼ NOPATtþ1 =Capitalt
¼ NOPATt ð1 þ gÞ=Capitalt
¼ OPtþ1 =CRt

For constant growth:  


SalesN ð1 þ gÞ CR
Vopðat time NÞ ¼ CapitalN þ OP − WACC
WACC − g 1þg
CapitalN ðEROICN − WACCÞ
¼ CapitalN þ
WACC − g


OPNþ1
CapitalN − WACC
CRN
¼ CapitalN þ
WACC − g

CHAPTER 14
Residual distribution ¼ Net income − [(Target equity ratio)(Total capital budget)]
CashRep
Number of shares repurchased ¼ nPrior − nPost ¼
PPrior


CashRep CashRep CashRep
nPost ¼ nPrior − ¼ nPrior − ¼ nPrior 1 −
PPrior SPrior =nPrior SPrior

CHAPTER 15
X
∞
FCFt
Vop ¼
t¼1 ð1 þ WACCÞt

WACC ¼ wd(1 − T)rd + wsrs

NOPAT EBITð1 − TÞ
ROIC ¼ ¼
Capital Capital

EBIT ¼ PQ − VQ − F

F
QBE ¼
P−V

VL ¼ D + S

MM, no taxes: VL ¼ VU
MM, corporate taxes: VL ¼ VU + TD  
ð1 − Tc Þð1 − Ts Þ
Miller, corporate and personal taxes: VL ¼ VU þ 1 − D
ð1 − Td Þ

b ¼ bU[1 + (1 − T)(D/S)]
bU ¼ b/[1 + (1 − T)(D/S)]
rs ¼ rRF + RPM(b)
1080 Appendix C: Selected Equations and Data

rs ¼ rRF + Premium for business risk + Premium for financial risk

FCF NOPAT EBITð1 − TÞ
If g ¼ 0: Vop ¼ ¼ ¼
WACC WACC WACC

Total corporate value ¼ Vop + Value of short-term investments

S ¼ Total corporate value − Value of all debt
D ¼ wdVop
S ¼ (1 − wd)Vop
Cash raised by issuing debt ¼ D − D0
PPrior ¼ SPrior/nPrior
PPost ¼ PPrior
 
VopNew − DNew
nPost ¼ nPrior
VopNew − DOld

nPost ¼ nPrior − (DNew − DOld)/PPrior

VopNew − DOld
PPost ¼
nPrior

NI ¼ (EBIT − rdD)(1 - T)
EPS ¼ NI/n

CHAPTER 16
Inventory
Inventory conversion period ¼
ðCost of goods soldÞ=365
Receivables
Receivables collection period ¼ DSO ¼
Sales=365
Payables
Payables deferral period ¼
ðCost of goods soldÞ=365

Cash Inventory Average Payables

conversion ¼ conversion þ collection − deferral
cycle period period period

Accounts Credit sales Length of

¼ ×
receivable per day collection period

ðUnits soldÞðSales priceÞ Annual sales

ADS ¼ ¼
365 365

Receivables ¼ (ADS)(DSO)
Nominal annual cost Discount percentage 365
¼ ×
of trade credit Discount Days credit is Discount
100 − −
percentage outstanding period