middle ruA B A S Intermediate qood

’ 2rischen Produet
Short run long run

IMPORTANT NORDS we only

The measurt of aggreqate output is called qros domesi c product CGDP). count e final good
’ Rnalas Arodukt
a9greqate output =GDP GDP is he value of Anal goods and Serces produced in th economy during a) final goodS
given period. (Production side
The unemploymant rate
The inflation rate GDP is the Sum of value added in the economy durtng a gen period. olways
PS
equae
|S
Okuns La4w & Philli ps Curve GOP is the vawe of incomas in the ecoromy during a uen period. Inconme side

NOMINAL & REAL CDP Can increase for two rtasonS!

-Produchon of qoods increases
Nominal GOP is also called GDP at curren! prices euros
increases Reak GOP is also colled GDP in terms of qood5 / in (onStant euros /
Nominal GDP is the Sum of price of gooda
Lhe quani Hes of inal goods Real GOP in chained prices refles adjuset for inflation / in Coase
Produced times their Current relatve Pnces 4hot change ove Hme. Base year) prces
price (QPN) Example Chained Prices Hedoic
3Beueskwngsno ang
R- 6DP( 20o9) Base geas in case of
Real GoP is the Sum of' the t Sik N-GDP changing qvaeiiy. Exam ple
2008 20 200 240 10- 24
quanti ies of final qoodS imus 42-24
Qvaiy increase of 48/% 125%
2009 42 24e 282 288 Price dacrease of ?o
onsiant pnices. (’Basigjah) 2040
Rek
43 26 338 342 43- 24 aptops oaily-adijusted price has fa'len
y: Real GOP t itpunht by about 25%%
¬y Nominal GOP

UNEMPLOYMENT RATE The unemployment rate is the ratio of the

nunber oFpople who art unemployd to th number
Bachgroun d + Importance
Labour employment + Unemploymend Effect on welfare of he
For ce of peopie in the labour force.u U/L
unemploymant rafe = un emp'oyment/ labour force unemployed
Discoucaged workerS are those,uho giue up Signal economy is not using
Vunumployment is the number of looing f&r ajob and so no longe couned as human re soUcceS efiienty
" people who do not haur ajob. unemploy ed.
bat are (oo king for one. The pariapakon rae is the ratio of tho labou Low unemplog mant rote can
Read to (abour shorlages
Not in the labour force : Mothass al home. force to the total population of woking ag
kids, rttird people, injyoried, elc.

NFLATION RATE GDP DEFLATOR Example

Inflation is a sustained iSe
in the genwal level of prices.
The inflation rak is Uhe rate
at which 4he price lertl
increases.
Deflaion is a susloined deceine
in the pn'ce level.
Bachg round + Importance
Afects incoma distribution when
not ole prices and wages rse
Proporionaey
4 Leods to distortions (vkrrUng)
dwe to Vncertoiny Some pices
Lhat are iXed by lauw or rtqulaton
and its interacion with tox BHon,
’ Best rate of inf latian : 4-4°lo
Short run moment in
output drten by mot ment
in damahd
mudium run level of ovtput
da mined by svply factors
long run economy dapends on
abiqty to innovaR.
The G0P dafiator in year t CPa)
i_ Lhe ati o of nominal GDP Eo
real aoP in yeOr t.
GDPP
Nominal GD
Deflato
Real Gpea
’l5 called an index rumbe
Nominal GDP is equal to the
GoP deflator times real GDP.
chang e
Empirisehes Mitkelusert
Ve-U- -0.+ (9y-3%)
-)
3 5
OKUNS LAW output grouth that is
htgher than vsval is asso Cia kd with a
reduchion in the unemployment rate.
ovtput grosth that is (owr than vsual
is 0ss Ocated sith an increase in {he
Unem ploymert rote.
he rak of change Real GDP Y = 400D
= rale of inflati on Nomina l Gop EY2020 4400
rale of change
GDP Deflator P2o49 =4
4400
Pro2o 1000 4,4 GP DefaBor
GOP /P4rerious TT1-4 =0,4 40% rate of
Deflator year 1 inflaHon
Ratk of growth of nominaQ GDP rakk of intlakion role of growth
of rea GDP
is equal to Ehe rak of inflation
Plus the rak of growth of real GDP. rate of growth
of nomina GOP
Change in tho inflaion
rale
Rae of inflation
3%
-S Unamp'oymant %
qroth
PHILLIPS CURVE A(ow unemploymunt rate leads
to an increase in the inflation rae. A high unamploymart
rate leoadS to a decrease in fha inflation rae .
 TII E GO0 D S MA R KE T
THE SHoRT RUN THE COM POSITION OF GDp
year- to year mouemants fo cUS Consumphion C) goods and sernrces purchased by consumers (totglemand).
IS On producion,income and
demand : Invest ment ()or ixed inrest ent The Sum of non residential investnant and
Changes in
Roducion Changes in pradwcion residenHal ines ment.
damand tad lea to changes in
to changes income Gowtrnment Spendng cG)Purchases of gocds and sericeS by he edewal,
in prodwcion
Income
Stak and lo col gorUnmentS :ercuding goutrnmend trans Fers.
Demarnd
Exports (x) Purchaises of domasHc gpods and eries by foreignas
Imports (IM): Purchaises of foreign goods and ervices by domastic
changes in income
lead to changes ih consumass idomstic firms and the domesic 40vernmnd s.
da mand fo goods.
Nel exports or trade balance Inrentory invesBment:
=X |M X> IM trade surplus Diference between producion and sales.
Compo sition of GOP erample: Per cent of GDP
IM> X trade defiit ’Prodwced but not sold nvestmert
Billions of euros

GDP () 13,958 100

1 Consumption (C) 7.696 55
Totol demand
2 Investment )
ANent spending (G)
2.707 19

DEMAND FOR G000S open

Exports 0 6,019 43 economy 6Z= C+|+G+X- M
Imports (/M)
5 Inventory investrnent
-5,631
12
40
0.1
Consumpion (C) is a functon of disposable clo sed
income (Yo).
economy
yo = Incom e afs Gouenment transes
Consumption inciases and Paying tares. Yo = y- T
with disposable income Slope c 4
lout less than one for one, Consumpion function: C-C: ( Y s ) C=(Cot Ca): Yo
A lowtr value of o
Ls behaiovral equation
C what people consume
wil Shif 4he entie autonomouS
Higher income if Yo equals ero. Propensity
to consum(Negung
e
line dowr. spen dáng hghes Consumphiog
Yo LAutonomouS
ConsumptioN
vartable Endo qenous vanobles: Depending on T (taxes) and G (qovenment
Othes
Ovariables
Exo gRnouS VariablesNot ex plained Sperdi ngs) dascribe the i'scal
poeiay and are indapendent
Taleen as and taleen as qien to Solue Q model.
given
Private Saving
DETERMINATION OF EQUILIBRIUM OUTPU T
Assume X" IM -0 (closed economy),so C+I+G! Prodwction
15-RELATIONpibic Saning
Publie saving T6
Private Saing (5)
Paplacing Cand | Budgt surplus >0< Budget deiat
from preious eqvatiohs income
demand 5 Y-T-C
Equiti brium in the goods Paplacing y aith eqvakion
Herei tung
In equiubrium it is
market requires y2
Th's is an equiibri u
yz Co+Ca (y-T)ÎG equal In equiibrium: Y:C+| +G, |-T/-0
Condition. Y-T-C l+G -T
Reon evahon: y Cot C y- CT+ 0+G|More income
more consu mption - I+G -T
amgesçh
chara ck -
iseS
Reoganise the (1-c4)-ys Co +Ì G- T hgher equiübrium J : S+(T-4)
rieloen
equation
equiibrium outonomoUS Sperding This is the I5 relation
Deride both si des, CdoesrL dapend onindome)
Output in
azaebra
by (4-C4) cotiG-cT)
Tolal Demard j Jedar Schni tt punkt Inrestment equaes Sanng
=equiibrium point
This term (s the muliplier NProducHon,Y Slope 4
Aoducion Demand
tahich is lorg when ca is closer to 4. Equilibium out put Inestment Saving
is daterminad by eha

y
Demand income
MulHPasts
effec
22
CondiHon that pro -
duction is equal to
Equilibium
Point
y= A
22 Consumphion behaniour
Demand Sy-T
c18ion demand. Slope c
re =y-T- Co- Ca ly-T)
autonomous
fAn incrtOSe in
sperding
ortangn S=-Got 4-c4) (Y-T)
Income Demand autonomouS spendng propensity to sare
hos a more thoan
one-for -one effet on befween O andA.

equtibrium output. Income Y

 FINANCIA L. MA R KE TSS
BASICS DEMAND FOR MONEY DETER MINING THE IN TEREST RATE
Money attri bute Demand for Nominol decieasing functioo
money | ihcome of inkrst rale i fusgangspunkt Central bank Supplys an amount of
Medium of exchange money gual to M fqui Gbrium in Ananciol
"Store of value amoun
móskets requi res Ehat: MS Md= M
4) -) MS M intrest rak
. Unt of a couunt Increase in interes rate decreasesS demand Money Supply Horey darond
MS
money = + transactions for moneybecowse mort people put their nonty Supply M¬yLtin
ho interest Jeaeth into bonds. Supply of money
indeperdant to i
Currency (cash) Md cure i muSt be that Sopply
intere_f rake Demand of money of mory and i of damand
daposi"Cbank account) relatton between 3 de pendS on i for moneuy equals each
bonds 4 positit inkrest damand for money M4 Mondy damand
rate i and i for a ginen ievel
of income y inkrest rotk Money
- no fransachonS Increase in
M
nomina income inkres rok MS Ms
’inceAse
Bond fAnaihe i A inierest rate money
Increase in

Investor MÀ (nonisad income cy) decrease

i .....NA Interest rak
money Ha' (ev's cy)
loan borrower
Coovesnmnent) A

after time. Giren bond paynmant pes year : 100 ¬ noney M

Je+ M
Investor einkrest Price of bond todauy: tPs Cenal bankS chanR Supply of M'
monuy
rale
CA00- cP3 ONsetng bond s In tha bond mase4
Money by busging
Interes rae on bond : opesotions
DEFINITIONS Tha higher the bond price, Central boank expands the Supply of mony by buying bonds
monuy pay for transachions the lows the interest rafe. ’ Expansionary open makat operation
income jhat you easn Cflow) The highes the interest rote the Central bank contacls tha Supply of mony by selling bonds
Saing valve of accumulation losR he price todoy. ContracBionars copen maslee} operaton
over time
inancio volve of inaniae asseks Assets sabiGties
wealth miws finanaia! iabiWies
’ stock Variable PART TWO Bonds Money
nestment purchase of aneus Angnciol inesmadiaries : finanielle Vermi ller ’Expansionasy open
capltal 9ood
hanial Pvcchase of shares ’Receine funds from people and firms and use these to buy markal opsation
estmen >or otw finanial assets financial assels or to malke loans to oHhes peopl and irmS ASset6 LabiGties
Example Bank ( money -liabihes keap Some funds as reserves Change bonds Moneb
Change,
stoce
(Resesven) holai ngs
Assets Liabilies +64 Mio +C4 Mio
The eiabiüties of tha
cntrol bank are the money Bonds Central bank money Central Bank
No Curency ’ demand money
has issved caeled Cental = Reseres Cumency =dumand chegveable
bank money Md CY LG) de posits
Reser ves
Deposi Accounts
Loans Banks
Demand rserves bank deperdS
IQU1DITY TRAP Bonds
9 reserv ratio on amoun of chequeabe daposits
ero lower ound The inferest rate Hd- demand Hd= 0:Md = :¬Y:L)
Inkres rate
annot qo below zero. Sugpy cenkol high - po
onomy is in aq eiqudity trap wtn
bonk monsy money Hdanotes the supply of
inkrest rate is doun to ero, monetasy cenkral bank noney, then
tiay Cannoft deciease it furthor. Demand central equiibrium condation :
Me Ms Ms bank money
’ people have enoug
non ychgalky H:8-¬Y L0)
J Centrap loonk
holding money Abonds H mony Increase in H ’ dacrease i
Supply cenka damand centrae Decrease in H increaseI
demand money horizontal
Gank money bonk money
i doesn' change

8 C
0 Money
 macoeeOnOmiCs
q0ods
masket
inan ciol
TI| E MO D E L
ano
sShort run
market
THE GOODS MARKET+ IS RELATION FINANCIAL MARKETS he

insereot rabe Investmant (I) depends on produchion (Y) ard Ehe inkrest ZM RELATION
rate (i)
output (9,i) So equilbrium in goods masket:
lnvestment
Framework: IsLM model u5
Soings YC-(y-T)+ 1(Y, i)+ G MCyL) davide by the pnice eeel
relaion Output
by ticks &Hansen Consun pion 1 Iresimant| Go
produ chion
inkersl ale
Spendigs AYL) ZM Relaton
Demand 2 3) 45 úne Ih equilibrium, real money supply equas
Demand2 the real money demand ,which dupends
22
(ori) on real income y and Ehe inkresl aki.
EQui ibrivm leuek Demand
22 of outpu
(for i' >i) A The damand for aoods
The centoal lcank chooses the interest
is on incveasiKq Funcion
of Output.
rate Cond adjusts the mony sppey
In quiGbrtum So as to achiee it.
demand for gpods output
Outpu y Output y
y! intreSt rate i 15 relation YC (y-T)+1 (yi D+ G
Increase inkrest ale ’ 2 is pward sloping becausei IM relation: i
Intest raki 4 decuease damand at inteest hose ok inease damand
any level of outpud rae LM The (S and (M relo ion
beawse of its efPets on consunphon
L dacvease equilibnienm and inesient
togethes delesmine
level of output ’ 2 s CarR, 22 line
Lne ünear otpat.
A Dutput Y
’ 22= flater than 45 üne
L4 inCieaSe 0n outpul ’ less ihan oNN-fer-bre
IS CUrve Incrtase in demard
Inlkrest ralei

interest rate
y
Oudput Y = equilibrium in
Is (for tayes T)
Joeds masleet
An increase in taxes shifls the cure left

and
LM
PUTTING 15 the LM RELATIONS TOGETH ER equiibrium
in financaial mas kets
DEqutibrium in the goods mauket implies that an increase in the intrest
rate eeads lo a dacrease in output.
D This is eprsened by the (S - (ur 0wlput, CIno me), y
D Equiübrium in inahcial majkets is Rpresented buy the hori2ontal Mcurve.
D On ly in point A, wch is i both cures are both qodS o nd Hnancial mas kets
in equiibri um.
Rscal
DecHeasepoeicy.
in-T
inttrest ratei ’Ascal contrachion iscal Conso i dation
A monetary <xpans ion
Monetary Poeiey shifts t LH cure down
and leods to highes
Increase in G-T
An incease in
In Crease in M A LM Oulput ( Iour inees ’ iscal expansion
4> Monetoary expansion rae inrestment taxes shfts he
increases).
Decrease in M A interest rat I5 Corve eeft.
LM!
s monet ary contaction This leads to decrease
15 in equilibrium 'evel
mone tary Hghtening Output y
of output.
y'
POLICY MIX interest ratei
The iscal expansion A
LM
A shift5 the Is curne
fiscal policy mix is LM
to Lhe rght.
Ah
ination ef monatasy ano
isal poicies. A moretasy expansion
A' LM! Shf{S CM Curve
Suppose that the economy isin doJn. Ouiput,Clnco me), y
a Rcession and odpud is too 15 Both eead to
low.
"Both fiscal and mongtosypolicies
Can be USed to increase oud put. 'output Y
 IFRS BRIAN FEROLDI
GAAP
DATA SOURCE:
WallStreet Prep IFRS GAAP
FINANCIAL STATEMENTS PRESENTATION
INCOMESTATEMENT 2 years allowed 3 years required
BALANCE SHEET Curreetrder of liquidity. Decreasng order of liquidity.

CASH FLow Flexibility with location of interest expense, n r o Operatign Lnoverdaed

Tinancing activitiet
STA interest income and dividends
IMTERIM REPORTS Each interim period is an integral part of fiscal year Each interim period is an integral part of fiscal year
ACCOUNTING The accounting policies for subsidiaries need The accounting policles for subsidiaries do not need to be
POLICIES to be uniform disclosed in consolidated financialstatements.

RECOGNITION AND CLASSIFICATION

RESEARCH & Developmentmet.is çapitalized when specificconditions are All R&D is expensed, exceptions include software for
DEVELOPMENT COST Research is always expensed. external use and movies

INCOME TAXES
Deferred Tax Assets are only recognized asa for e Adeferred tax assets (DAs) are recognized and nettedt
when probat valuation alonere is no need
not -5ö% that the company will not be able to use the btA
INVESTMENT Aseparate category Not separate from Property, Plane, &Equipment
ROPERTY

BIOLOGICAL ASSETS Measured at fair value, separate from Inventory. Included in inventory
included in fixed assets
Categoriesfor operating andfinance leases on
LEASES Single category on balance sheet (eg Rights of use) balance sheet
cONTINTGENT Recognized when 50% likely, Recognized when 75% ikely,
measurement methods dite

cONSOLIDATION
PunoWn acconank not alowable, there is an

proportionate interest in the net assets or at fair

circ measuremeeetain
Pushcown oonanies and is optional
for private companiesnoncontrolling interest (NCI)
MEASUREMENT
LIFO allowed with other methods, Method can vary acros
LIFO not allowed, Same method required with inventory of
INVENTORIES similar nature; write- backs of previously recognised write
mula is and eas comoaniesto minimise taxabie income, Noosrmit
downs reguiredd to the al inventories of same nature
formula tor all inventories.
IRS allows companies to elect fair value treatment of fiaed
FIXED ASSETS assets, meaning their reported value can increase or decrease Fixed assets are measured at thelie initial cost, their value
depreciatian orocess forseOarable compOnents tPPAE cannot increase
INTANGIBLES Fair value allowed Historical cost
IRS 15, effective 2o18Comverged standard focusing ona ASC 606, effective 2018-US GAAP allows an entity to make a
conceptuameouuntpproceorrecoing handling activtles that occur after the customer has obtalned
REVENUES Revenue for similar licenses under iRS 15 may be recognired control ofagood as an activity to fuiithe promise to transter
that signiticantly affect the ablity ofthe customer to obtain revenüe for all licenses to symbolic intellectual property
from the i ectual property

SIMILARITIES IN RECENT CHANGES

IRS 16 effective 2019. ASC 842 effective 2010
LEASES Leases over 12 months recognlzed as Right of Use Assets on Leases over 12 months recognized as Right of Use Assets on
No Finance/Operating Lease categories Distinguishes between Operating and Finance Leases
No change ASU 2015-03
DEBTISSUANCE Debt issuance costs are netted Debt issuance costs are now netted
against the outstanding debt against the outstanding debt
 Corporate Finance lnstitute Financial Ratios

Multiples Valuation Ratios

31 Multiples valuation ratios are used by financial analysts to calculate the value
of a company. These ratios can be used to determine the share price of a
company going public, a target price for an equity research report, or if a
company is under- or over-valued relative to its peers.

A. Price Ratios
Price ratios use the most recent company share price to drive insights
about company value for financial analysts. These ratios are quick to
calculate but can be affected by different accounting policies and
treatment.

Price-to-Earnings Ratio

B. Enterprise Value Ratios

Enterprise value ratios are calculated using a company's enterprise
value to drive the valuation process. These ratios measure the return on
a company's capital investments. Many enterprise value ratios also
isolate earnings from accounting-affected items such as interest and
depreciation.

EV/EBITDA Ratio
EV/EBIT Ratio
EV/Revenue Ratio

corporatefinanceinstitute.com 31
 Corporate Finance lnstitute Financial Ratios

Price-to-Earnings (P/E) Ratio

Overview
The price-to-earnings(P/E) ratio comparesa company's stock price with its earnings per share (EPS).
This ratio is commonly used as a valuation metric to compare the relative value of different
companies. The P/E ratio shows the expectations of the market and is the price paid per unit of
current earnings.

Formula

Share Price
Price-to-Earnings
Ratio
Earnings per Share
Interpretation
To calculate this ratio, the following formulas are required:
Earnings per Share = (Net Income - Preferred Dividends)/Weighted Avg. Shares Outstanding

Companies with a high P/E ratio are often considered growth stocks. This indicates positive future
performance and earnings growth as investors are willing to pay more per dollar of current
earnings. However, growth stocks are usually more volatile and have more investor pressure to
perform well. Stocks with high P/E ratios may also be considered overvalued.

Conversely,companies with a low P/E ratio are often considered value stocks. They are undervalued
relative to their competitors and company intrinsic value. These stocks are a bargain that investors
aim for before the markets correct their valuations on them.

The P/E ratio can also be used to compare stocks at different prices. For example, if Stock A is
trading at $30 and Stock Bat $20, StockA appears to be more expensive. However, if Stock Ahad
a lower P/E ratio than Stock B, its price per unit of earnings would be lower than Stock B, thus
making Stock Acheaper from an earnings perspective.

corporatefinanceinstitute.com 32
 Corporate Finance Institute Financial Ratios

EV/EBITDA Ratio
Overvievw
The EV/EBITDA ratio compares a company's enterprise value (E) to its earnings before interest,
taxes, depreciation and amortization (EBITDA). EV/EBITDA is commonly used as a valuation metric
to compare the relative value of different businesses.

Formula
Enterprise Value

Market Capitalization + Net Debt

EV/EBITDA
Earnings before Interest, Taxes, Depreciation, and Amortization

Interpretation
To calculate this ratio, the following formulas are required:
Market Capitalization = Share Price x Number of Shares
Net Debt = Market Value of Debt - Cash and Cash Equivalents

Like the price-to-earnings ratio, EV/EBITDA is an important ratio when it comes to valuation. It can
be used to determine a target price in an equity research report or value a company compared to
its peers.

For example, Company Ais going public and analysts need to determine its share price. Company
Ahas five similar companies that operate in its industry, Companies B, C, D, E, and F. The EV/EBITDA
ratios for these companies respectively are 12.1x, 11.3x, 10.8x, 9.2x, and 13.4x. The average of
EV/EBITDA would be 11.4x. Afinancial analyst would apply this 11.4x multiple to Company A's
EBITDA to find its EV, and consequently its equity value and share price.

33
corporatefinanceinstitute.com
 Corporate Finance Institute Financial Ratios

EV/EBIT Ratio
Overview
The EV/EBIT ratio compares acompany's enterprise value (E) to its earnings before interest and
taxes (EBIT). EV/EBIT 0s commonly used as avaluation metric to compare the relative value of
different businesses, While similar to the EV/EBITDA ratio, EV/EBIT incorporates depreciation and
amortization.

Formula
Enterprise Value

Market Capitalization + Net Debt

EV/EBIT
Earnings before Interest and Taxes

Interpretation
To calculate this ratio, the following formulas are required:
Market Capitalization = Share Price x Number of Shares
Net Debt = Market Value of Debt - Cash and Cash Equivalents

Though less commonly used than EV/EBITDA, EV/EBIT is an important ratio when it comes to
valuation. Itcan be used to determine a target price in an equity research report or value a company
compared to its peers. The major difference between the two ratio is EV/EBIT's inclusion of
depreciation and amortization. This is useful for capital intensive businesses where depreciation is
a true economiccOst.

In this example, Company Ais going public and analysts need to determine its share price. Company
Ahas five similar companies that operate in its industry, Companies B, C, D, E, and F. The EV/EBIT
ratios for these companies respectively are 11.3x, 8.3x, 7.1x, 6.8x, and 10.2x. The average of EV/EBIT
would be 8.7x. Afinancial analyst would apply this 8.7x multiple to Company A's EBIT to find its EV,
and consequently its equity value and share price.

corporatefinanceinstitute.com 34
 l CFI Corporate Finance Institute Financial Ratios

EV/Revenue Ratio
Overview
The EV/Revenue is a ratio that compares a company's enterprise value (EV) to its revenue. The
EV/EBITDA ratio is commonly used as a valuation metric to compare the relative value of different
businesses. EV/Revenue is one of the only performance-related multiples valuation ratios available
for companies with negative EBITDA.

Formula

Enterprise Value

Market Capitalization + Net Debt

EV/Revenue
Revenue

Interpretation
Tocalculate this ratio, the following formulas are required:
Market Capitalization = Share Price x Number of Shares
Net Debt = Market Value of Debt - Cash and Cash Equivalents

Compared to other ratios, EV/Revenue is most often used when a company does not have a positive
EBITDA or net income. It can be used to determine atarget price in an equity research report or
value a company compared to its peers.

For example, Company Aisgoing public and analysts need to determine its share price. Company
A has five similar companies that operate in its industry, Companies B, C, D, E, and F. The
EV/Revenue ratios for these companies respectively are 12.1x, 11.3x, 10.8x, 9.2x, and 13.4x. The
average of EV/Revenue would be 11.4x. Afinancial analyst would apply this 11.4x multiple to
Company As Revenue to find its EV, and consequently its equity value and share price.

corporatefinanceinstitute.com 35

Valuation Ratios Comparison
Pros
EV/Sales
Widely used and understood
Quick and easy to source info and calculate
Useful to check DCF exit assumptions
EV/EBITDA
Incorporates profitability
Expands comparable universe as most
companies are EBITDA positive
Ignores significant accounting differences from There may be inconsistencies in treatment of
goodwill
Limited exposure to accounting differences
EV/EBIT
Incorporates profitability
Useful for capital intensive businesses where
depreciation is a true economic cost
Good for companies in the same reporting
environment where accounting differences
are minimized
EV/Sales
Suitable for companies with similar business
models/development stages
Possibly the only performance-related multiple There may be inconsistencies in treatment of
available for companies with negative EBITDA
Useful for sectors with similar operating
margins between companies or where market
share is important
Limited exposure to accounting differences
corporatefinanceinstitute.com
Corporate Finance Institute Financial Ratios
Cons
Depends on corporate structure
Accounting policies impact earnings
lgnores depreciation, CAPEX,tax regimes, and
tax profiles
Does not account for varying EBITDA growth
rates
EBITDA for joint ventures in different reporting
environments
Other accounting differences such as revenue
recognition and operating leases
Ignores depreciation, CAPEX, tax regimes, and
tax profiles
Does not account for varying EBITDA growth
rates
There may be inconsisterncies in treatment of
EBITDA for joint ventures in different reporting
environments
Other accounting differences such as revenue
recognition and operating leases
Does not address quality of revenues, varying
revenue growth rates, or profitability issues
sales for joint ventures in different reporting
environments
There may be different revenue recognition
rules between comparable companies
36
Corporate Finance, Financial Management and Investments Formula Sheet

Equity Gordon two-stage

(Last year's dividend Do)
Holding Period Return e.g. 3 years' variable growth g1, g2 and g3, after which growth
For a stock of price S, with dividend D becomes constant g4
Er)= P +Si-S
So Dividends are
D, = D(1 + 91)
Dividend Yield D, = D,(1 + 92)
Ta = D,/S% D, = D,(1+ 9:)
D, = D,(1+ g4) [Caution!]
Gordon model
Present value of futureconstant growth at t= 3 is
Assume constant growth of dividends g, req. rate of return r D4
(Last year's dividend Do) Ps =
T-g4
Next year's dividend D, = D,(1 + g)
Present value of future cash payments in perpetuity Stage 1: Sum of discounted D1, D, and D, to t=0
3
D, D;
P=
r=r+ßx (rM-) Stage 2: Discount Ps to t=0
s-Za+r
P D,(1 + g4)
g = Plowback ratio XReturn on equity
Dividend per share
S2(1+r)3 r-g4) (1 +r)³
Payout ratio = Earnings per share PV = Stage 1 + Stage 2
Plowback ratio = 1- Payout ratio
EBITDA multiples
Earnings per share
Return on equity = Book value per share EV 1
EBITDA Multiple =
Net income EBITDA r-9
Book value of equity multipletr(risk) or g(growth)
Net income
Earnings per share = Number of outstanding shares Calculate multiples for comparable companies, to work out
enterprise value
Book value = Common stock + Retained earnings
Enterprise value = EBITDA × Multiple
Common stock = Face value of shares
Fair val. of Equity = EV + excess cash - long term debt
No-Growth Value
Dividend @ 100% payout Fair value = Equity
EPS, #shares outstanding
NGV =
Residual income model
Present Value of Growth Opportunities PV of stock price in terms of ROE and book value of firm equity
PVGO = P- NGV (per share) projected. PV increases when ROE>re:
PVGO o(1 +g) E,
r-g PV = BVo + (ROE -T)BVO,(ROE, -T)BV,
PE Ratios with growth (1 +r) (1+r)?
+
(ROE, r)BV, +..

Po =
DË E,(1 b) (1+r)3
r-(bxROE) Dupont
1-b Net income
Po ROE =
Shareholder equity
E r-(b x ROE)
How effectively has the firm been run to benefit shareholders
(b= plowback ratio)
Return from ops for shareholders+creditors
NOPAT = NI + int. exp.x (1-T) How well did the firm use debt financing to
benefit shareholders
Residual dividend approach ROA =
Average assets
Project returns: r Asset turnover
Shareholder cost of equity: r Operating efficiency Interest efficiency Leverage
Sales NOPAT N.I. Av. assets
If r, >e, company creates value for shareholders Av. assets sales NOPAT X Av. sh. equity
What p of each S
If r, =, shareholders indifferent How much revenue
from assets
revenue is left for
reditors shareholders
"What potion of eadh
NOPAT S is left after
What assets beyond
equity e company
If r < te, company destroys value for shareholders after covering operating
expenses?
covering interest
expense
hold

"Stipulate whether average or year-end equity is used

Corporate Finance, Financial Management and Investments Formula Sheet
NPV
Debt CE, CF2 CFr
Effective annual rate NPV = -CFo t 1+r)1+r2*** (1+r)
With a compounding period T (measured in years e.g. 1 month
IRR: Expected rate of return. Use IRR({Cashflows) in excel
T=1/12), return over that period r,(T) IRR =r NPV = 0
EAR = [1+r(]'-1 IRR > discount accept
(1+ APRX T)1/T 1 IRR < discount ’ reject
exp(rcc)-1
Annual percentage rate: APR = r () x (1/T) Bonds: YTM = IRR. (BBB+ investor, BBB- junk)
Continuously compounding rate: Tee = In(1+ EAR) YTM = coupon ’ "Par'
Real and nominal interest rates YTM < coupon > 'Premium'
i=inflation YTM > coupon ’ 'Discount'
Tnom -l
Treal = 1+i YTM & RFR + Default risk + Interest rate risk
i=
Tnom - Treal + Premium for embedded options
Treat +1
Interest rates ‘ ’ bond price , Interest rates ’ bond price ‘
Treat Tnom - i
E.g. with coupons C, YTM r, num periods T, and face value F
Forward rates
t=n-1 t=r
PV(coupon + FV) = PV(r, T, C, FV)
t=0
PV(coupon only) = PV(r, T, C)
In-t ?
PV(FV only) = PV(r,T, 0, FV)
YTM = RATE(#periods, payments, PV, FV) or IRR({Cashflows)
*NOT THE DISCOUNTED CASHFLOws, and with -ve PV

(1+r" [Check semi-annual, for rates +yields. PV must be negative.]

n-year forward rate = -1
(1 +r¡-1)a-1 Bid = sell$ to broker, Ask = buy $from broker
Forward rates give expectation of interest rates, as short-rates Liquidity « 1/(Ask - Bid)
based on yields to maturity of different-duration assets. Discount
future cashflows by product of relevant forward rates (taken from Duration
t=0, these products are just the compounded yields). =weighted average of the times when the bond's cash payments
are received.
Liquidity preference theory Tx PV(C)
This theory asserts that forward rates reflect expectations about Duration=
1x PV(C,), 2x PV(Cz) + +
PV PV PV
future interest rates plus a liquidity premium that increases with
maturity: Portfolio duration
Interest rate = Forward Rate - Liquidity Prenmium Total equity in portfolio = E Assets - E Liabilities
Deferred loans
Portfolio duration = Multiply component durations by their values
Implied annually compounded forward rate for a deferred loan of (liabilities negative), divide by total equity.
length Xbeginning in year Y, based on the yields ris
Asset x Durat.-2 Liab.xDurat.
-tor
(1+ry-)
Portfolio duration =
Total equity in portfolio
Bond equivalent ytm Modified duration
Convention: work out semi-annual yield to maturity, (i.e. 2x
number of periods) then double it. = percentage change in bond price for a l percentage-point
change in yield (adjusts for accuracy). Approximates %change in
Realised compounding yield to maturity bond price for 1% change in yield. Units is 'years', so %A(price) =
=yield with reinvestment of coupons at a given interest rate. Add lyr] * (%Arate/year] =%.
Duration
up total proceeds, including T-compounded value of all coupons. Mod dur = volatility (%) =
1/T 1+ yield
Real.ytm (Total proceedsy -1
Current price Mod dur=
Equivalent annual costs (Loan repayments) ()
Take out a loan of NPV=sL, paid over a period of n with interest Trade discounts
rate r. n-year annuity factor is
1 Discount ra for payment at t, days rather than usual t, day
AF, = 1 r(1+ r)" payment terms
365

Equivalent per-period costs (repayments) is WACC - - 1

NPV
C=
AFA
Corporate Finance, Financial Management and Investments Formula Sheet

Buybacks
Capital structure ADebt = excess cash used + new debt raised
Cost of debt
Ta =rf t credit spread PV (Tax shields) = ADxT
Debt shield Value to share sellers = Premium x Volume
Credit spread =default risk for firms of similar interest coverage
EBIT %to sellers = Value to sellers / PV (Tax)
1C=
Interest expenses Enew = Eola - AD + AD x T
Cost of equity (From CAPM): Total Enterprise Value (TEV)
re=tBX Market risk premium TEV = D+ E- non-operating cashflows

Weighted Average Cost of Capital (WACc) During buybacks, incorporate changes including-cost of buyback
+ PV tax shields + cash value of new debt
Financial +systematicrisk: V= D +E
D E Equate to PV of sustainable cash flows
WACC =(1 -T) *,X Ta tXe EBIT x(1- T)
TEV
WACC
Levered/unlevered return (concentration of risk)
ris return on unlevered equity =return on assets, leverage D/E, Metrics
gives r as cost of levered equity, and: Economic Value Added (Stern-Stewart)
EVA = residual income = income earned - income required
r=+(a-t)ol-) = income earned - cost of capital x investment
Economic Profit (Mckinsey)
Levered/unlevered beta EP = (RO! -)x capital invested
When determining cost of equity, consider current firm leverage Earnings per share
D/Eç vs target leverage D,/E. Levered beta = business risk + Net income
financial risk. EPS =
Number of shares outstanding
Return on equity (net less re)
Net income
ROE =
Book value of common equity
By = D Return on assets (net less WACC)
|1+x(1-T)) ROA =
Net operating profit after taxes (NOPAT)
So, to determine target beta: Total assets
Price-Earnings ratio
Share price
B =Bx
1+(1-) PE =
EPS

1+(1-T) Personal vs Corporate tax rates for dividends

Tax shields Corp. tax rate Te, personal tax rate T,. Compare:
1. Distribute $1 today, shareholder invest for 1 year will have
When value of debt Dis permanent, tax shields with deductions at
tax rate T increases firm value:
s(1 -7,) x(1+rx (1-7,))
2. Firm invest $1 today, distribute next year, shareholder will have
Value of leveredfirm= Value ifall equity-financed + T, x D $(1 -T,)>x (1 +rx (1-T))
Leverage => add financial distress (measure as PV, -ve). Optimise! T, > T, » payout 1, T, <T, payout I
Franking credit
Value of government claim on firm
Tax rate Te, PV of taxes paid is If T is corp tax rate and DIV is franked credit distributed, then
Ex Te franking credit is
PV(T) = (E +T) XT 1-T. T
FC = DIV X1-T.
Sustainable Growth Rate (SGR) Dividend policy
Rate at which firm can grow in without further equity raise, Tproj < r poor projects, FCFE to shareholders: Dividends /
assuming new debt can be taken on. (Uses book value of equity) buybacks, review policies/management
SGR =
Retained earnings Tproj >T good projects, invest where cash available
Beginning equity
R.E. N. I. Sales D +E
X X Working capital management
N.I. " Sales N.A. E
AWorking capital =AACC rec. + AInv -AAcc payable
Plowback xN. Margin x Asset util.x (1+
Work out PV cash flow perpetuity after tax for r = WACC
Net assets = BV.E. + Liabilities(Loans) AEBIT
PV = (1-T) x
NPV =-AWC- PV
Corporate Finance, Financial Management and Investments Formula Sheet

For the CML portfolio, utility is

Markets
Synthetic bonds / law of one price U= (1 -a,)r+ azky 4ao;
So to maximise utility,
Consider three cash flows C, Cz and Cz. If dU
= -T tH - Aw,a ’0
Cq= Ax C+(1- A) xCz dw,
then

A C - Cz
= C-C7' Aoj
with
Capital Asset Pricing Model /CAPM
PV, = A x PV, + (1-A) x PV2
e.g. C=$100, C, = $0 and C = $50, Then Market risk premium = m-f
$50 - $0
A= 50% Required return on risky asset (systematic risk only!)
$100- $0
r=tßx (Tm -T)
Two-asset portfolio Asset Beta:
Mean returns AB risk (StDev) OA.B, Correlation cov(stock, market)
cov(a He) B=
PAB = var (market)
risk-free rate r. Weights w, and awp = 1- A B>1»Aggressive stock
B<1» Defensive stock
Mean portfolio return Realised CAPM in terms of risk premium: R=r-rf, a is anomalous
return and e is random term

Variance of portfolio R = a+ BiRM te

Risk is expressed in terms of systematic and firm specific
components of variance
=

of =Bio+ o'(e)
Minimum-variance portfolio With R-square, expressing portion of variation in stock movement
o - cov(raTa) that is systematic:
o + o -2 cov(ra, Th)
Optimal (tangent) portfolio is given by A-stock weighting:
When there is a portfolio of stocks P with weight w, so that
(HA-)o +(M8-T)oi - Hat Ma - 2r)PABOAOp Rp = ap +BpRM tep
Sharpe ratio / 'reward to risk is
Sharpe ratio ="pI

*Sharpe is max. along Tangent line/Capital Market Line (CML')

Hp =Sharpe x op +rf
For CML portfolio with risky asset allocation w, =1- wf
And for two stocks i andj
Cov(R, R,) =Pß,Cov(Ru,R)=Pß,o
To achieve a target return AT,
Py =

utility Fama-French
U
= E(r) -0.5Ao² CAPM, but with three betas for market, firm size and book-to
A>0: Risk aversion, preference for lower risk market ratios.
A=0: Risk neutral, highest return sought
A<0: Pathological risk seeking, lower returns ok with t risk Bmarket X(n - )
+ Bsize x (Tsmall -Tharge)
With risk-free rate r, and risky asset rp, Op, maximum level of risk + BreM x (TRtMT -TBEMi)
aversion for which risky asset is preferred:
2(,-) a>0’ +ve risk-adjusted returns
A= a<0’ -ve risk-adjusted returns
Corporate Finance, Financial Management and Investments Formula Sheet

Hedge ratio or delta

Options and risk management The number of stocks required to hedge against the price risk of
Sellcall: "You buy this stock in future at a set price" holding one option (d, from B-S)
Buy call: "I can buy this stock at set price in future" Call = N(d)
Sell put: You can sel this stock to me at a set price in future" Put = Nd) - 1
Buy put: "I can sell this stock to you at set price in future"
delta =
Change in the value of the option
Channge in the value of the stock
IR Swaps
Lay off risk: Pay fixed and receive floating in IR swap (-ve duration)
Party that receives fixed has duration equivalent to owning the Treasury yield curve, swap curve and funding curve
bond (+ve). Party that pays has -ve. Change in equity AP for a
change in yield is backed out from duration of bond with price P Yield
NAB's cost of fixed rate borrowing for
three years Swap 85 bps

Dur =
( 6.25%
NAB'S cost of funds curve
Swap curve
5.40%
Treasury yeld curve
(1+y 5.15%

180 day B8SW

Binomial pricing: 4.35%
Portfolio is perfectly hedged if one holds Hshares of stock for 90 day B8SW Compensation at commencement of
415% IR swap to party paying floating for
each call option written, where Cand S are the prices in future absorbing IR risk 5.404.35 =1.05%
outcomes:
H= Cu -Ca Maturity
Su-Sa 0.25 05 1 2 3

Equivalent portfolio is holding (1-H) shares and placing
remaining funds (from stock + put/call portfolio) into T-bills
Black Scholes
Value of call option = [delta x share price]- [bank loan]
The cost to NAB of fxing the interest rate for three yearss an extra 125 bps per
year (5.40%-4.15%) at the time the bonds are issued. The extra 125 bps buys
NAB protection against interest rale rises over the three years.
Collars
Natural long positions (e.g. Gold miner):
Payoff increase with increase of asset price

where
[N(a) x P]- [N(d2) xEXe-r"] Protect downside with long put
Pay for put by selling call, limiting upside
d, = In[P/EX] +(r + o*/2)T APAY-oFiy NATUeAL
aVT PostrzON
dz = d,- ovT;
NC) = NORMSIDST(d);
EX = Exercise price of option;
T= number of periods to expiration;
P= stock price now; and
o= standard deviation per period of (continuously compounded) Kp
rate of return of stock
r=continuously compounded risk free rate
B-S With dividends <AL
ra = annual dividend yield

Value of call option = [N(d,) x Soee]- [N(d,) x EXe-"]

Natural short positions (e.g. Airline in oil):
Value of put = EXe-[1- Na)]- Soe-raT[1- N(d,)] Payoff decrease with increase of asset price
Protect downside with long call
where Pay of call by selling put, limiting upside
d,
In[P/EX] +(r-ra to²/2)T PAy-oFer
aVT
d, = d, - ovT;
Lonl
Put call parity (ex-dividend So)
Po = Co t PV(X) - S%
Factor increase Call value Put value
NATUHON
S
Stock price Increases Decreases
PuT
Exercise price Decreases Increases ZEko CoST CouL.
Volatility Increases Increases
Time to expiration Increases Increases
Interest rate Increases Decreases
Dividend rate Decreases Increases
Corporate Finance, Financial Management and Investments Formula Sheet

Cash Flow, $
Year: 0 1 2.. ... t-1 t t+1... Present Value

Perpetuity 1 1,.. 1 1 1...

1
t-period annuity 1 1... 1 1 1
7 r(1+r)
t-period annuity 1
due

Growing
1 1

1
1...

1x (1 +g).. 1x (1 +g)-2 1x(1+ g)-1 1x (1+9)...

(1+n(-a 1
perpetuity

t-period growing
annuity
1 1x (1+ g).. 1x (1+g)-2 1x (1 + 9)-1 r-g
1

-:
(1+g)
(1+r))

Useful maths General propagation of uncertainty

Mean and stDev For f(x), with o, at a particular value xo

For outcomes x with probabilities p

ldxlx
For f(x, y), with covariance agy = O,yPxy
af of
1

Quadratic formula (Sanity check)

ax? + bx+c= 0
Continuous random variables with pdf p(x)
-b±Vb24ac
H=*p() X=
2a

Taylor

n!
m=0
Sample standard deviation
L'Hôpital
With a sample x, approximation g s [Often] when f(x ’ c) = g(x’ c) = 0 or to,
N
lim
f(*)
S=
1 lim
*c g(x) *g'*)

Confidence intervals
Covariance For a confidence interval CI%

Qvalue = NORMSINV| 1 C
2
So that the confidence interval
Cl= Mean t Q x o
Correlation
Pearson product-moment correlation coeffiient Gaussian PDF
Pxy = Ixy =
Cxy E"(x-)(y- ) fx) =
1 (-p)
2g2
V2na
Least Squares Geometric average
Variables x, y have least squares slope
Returns (e.g. time series) HieN, Compounding average

Intercept
m=Ty oy 1/N
Geometric mean
C= By -mux

V(1+4)(1+42).. (1 + #w)
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LIQUIDITY RATIOS

Current Ratio
Current Assets Benchmark: at least
Will we have enough money
to pay suppliers? Current Liabilities 1.00, preferably 2.00

Quick Ratio (Acid Test)

Willwe be able to pay our Current Assets -Inventory Benchmark: 0.5 - 1.00
Current Liabilities
suppliers in the near future?

Absolute Liquidity Ratio

How much of our suppliers' debts Cash and its equivalents Benchmark: 0.05 - 0.20
will we be able tO COver with the Current Liabilities
funds in the account?

Do not include such items in your calculations:

-short-term loans from owners,
-payments of the next period,
- unpaid dividends,
- short-term loans to owners,
- liabilities for unused leave, etc.
BUSINESS ACTIVITY RATIOS

Debtor Days
Average Debtors
How quickly do our debtors pay us Turnover
X365
after the transaction?

Inventory Days
How fast can we sell our stock Average Inventory X365
COGS
after purchase?
Creditor Days
How long do our suppliers allow Average Creditors X365
them to not pay for stocks after Purchases
purchasing them?
Cash Conversion Cycle
How long is cash tied up in inventory Inventory Days + Debtor Days -Creditor Days
before the inventory is sold and cash
is collected from customers?

To calculate average receivables or stocks, the average between the year-start and year-end balance sheets is
used. Accordingly, these indicators are significantly affected by the closing balance! It is worth following them
every month in your company.
Turnover's cost of sales is not equal to production cost -the cost of purchasing and delivering items must be
taken into account.
Accounts payable should only be used for trade receivables. Depending on the situation, the bank's short-term
liabilities, which are taken directly to finance inventories, can be used.
" All turnover figures are measurable in days.
1
Debt-Service Coverage Ratio (DSCR)
EBITDA
Do we earn more than we have to pay the Benchmark: >120%
bank? %+ principal
payments

Debt/EBITDA

In how many years Would the company be Bank loans balance Benchmark: <4.00, for
long-term real estate
able to return all its loans to the bank? EBITDA projects - more.

To calculate the average balance sheet ratios (assets, loan balances), the average between the
beginning and the endof the year balance sheet is used. Accordingly, these figures are affected by
the closing balance (but not as significant as receivables, inventories or trade receivables)! It is worth
following them every month in your company.
EBITDA =earnings before interest, taxes, depreciation and amortization
EBITDA = net profit +CIT +% payments +depreciation + amortization

ALTMAN Z-SCORE

Z-Score

What is the probability of bankruptcy Z=1.2A+1.4B+3.3C+0.6D+1.0E

of the company?

Z<1.8. Very high 1.8<Z <2.7. Moderate Z> 2.7. Minimal probability
probability of bankruptcy probability of bankruptcy of bankruptcy in the next 2
in the near future in the next 2 years years

Working Capital Share of working

A. Proportion of working capital Total Assets capital in assets

Retained EarningsS Proportion of retained

B. Proportion of retained Total ASsets earnings in assets
earnings
Earnings Before
Interest and Tax EBIT to asset ratio
C. EBIT Yield
Total Assets

Market Value of Equity Equity to liabilities ratio

D. Equity versus liabilities Total Liabilities

Sales Asset turnover ratio

E. Movement of assets Total Assets

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