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173A - Review

173A - Review. February 14, 2007 Please NOTE this is not a document limiting what will be on the midterm. Anything covered in book or class is fair game. It is mostly 170 review to this point. Goal: Maximize SHW (=Stock Price); Minimize Agency Conflict. EVA????. Economic Value Added

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173A - Review

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  1. 173A - Review February 14, 2007Please NOTE this is not a document limiting what will be on the midterm. Anything covered in book or class is fair game. It is mostly 170 review to this point

  2. Goal: Maximize SHW (=Stock Price); Minimize Agency Conflict. EVA???? • Economic Value Added • Profit over and beyond paying for the cost of capital • $NOPAT - $Cost of Capital • NOPAT=EBIT-Taxes • $Cost of Capital = Capital (NWC+FA) * % WACC • Capital: CA-CL+FA=LTD+Equity (CA+FA=CL+D+E) • CofC: cost of debt after tax, cost of equity, impact of risk • How do you impact the components???

  3. What else • Risk Return Tradeoff= Expected Return (weighted average)= Required Rate of Return (CAPM!)= Portfolio Return/RRR (weighted average)= Expected Return = Required Rate of Return (Price?)= Undervalued vs Overvalued Securities= Fisher Effect and Impact of Inflation on RRR= Risk aversion change and RRR

  4. 0 1 2 n Value CF1 CF2 CFn Marriage of FCF and TVMDiscounted Cash FlowApplies to valuing ALL Financial Assets(Future Cash Flows & Required Rates) r ... CF CF CF 1 2 n + + + PV = . . . .       1 2 n 1 + r 1 + r 1 + r

  5. What is the value of Bond, and What is its return? • Value of bond = PVa of INT + PV of Par • What if Coupon Rate = Discount Rate • What if CR < Discount Rate • What if CR > Discount Rate • YTM, YTC

  6. Excel Solution

  7. Time and Value of 10 Yr Bond

  8. YTM in Excel

  9. YTM = Current Yield + Capital Gains Yield • ThereforeCapital Gains Yield = YTM-CY • CY = INT/Price

  10. Semiannual and Monthly Bonds 1. Multiply years by 2 to get periods = 2n. 2. Divide nominal rate by 2 to get periodic rate = rd/2. 3. Divide annual INT by 2 to get PMT = INT/2. • 1. Multiply years by 12 to get periods = 12n. • 2. Divide nominal rate by 12 to get periodic rate = rd/12. • Divide annual INT by 12 to get PMT = INT/12.

  11. Valuing Stocks and Expected Return • Constant Growth Stock • Non-constant Growth • Dividend Yield vs. Capital Gains Yield

  12. Constant Growth : P0=D1/(rrr-gr) Price in Future Year: Pn=D(n+1)/(rrr-gr)

  13. Non-constant Growth: Individual PVs plus CG PV

  14. Dividend Yield vs Capital Gains Yield • Dividend Yield = Next Div/Today’s Price • Future DY = Div (n+1)/Pn • Capital Gains Yield = (Price1-Price0)/Price0 • Future Period CGY = [Price(n+1)-Pricen]/Pricen

  15. Income Statement

  16. Balance Sheet

  17. Cash Flow Statement

  18. And Back to EVA: EVA = $ NOPAT - $CostOfCapitalCA+FA = CL+LTD+E OR (CA-CL)+FA = LTD+E • Operating Working Capital= Excludes Short Term Investments (CA)= Excludes Notes Payable (CL) • Total Operating Capital = OWC+FA • $ NOPAT = $EBIT (1-Tax%) • $ CoC = $TOC * %WACC • MVA vs. EVA? • MVA = # shares * stock price – Equity

  19. Ratios, Common Size and % change all tell the same story • Liquidity, Asset Management, Debt, Profitability • Common size: TA=100%, Sales = 100% • Percent Change: (This Year – Last Year)/Last Year • DuPont=ROE=PM*TATO*EM can start the analysis • PM measures profitability, TATO asset management, EM debt use (leverage) • Then you peel the onion further

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