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June 2014
June 2014
June 2014
Expected Value = EV = px
p= Probability if an outcome
x= The value of an outcome
A.
Do= current dividend
Dn- dividend n years ago
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2) CAPM= Rf + (Rm-Rf)
Ke= Required return from individual security
Rf= Risk free rate of interest
Rm= Return on market portfolio
B= Beta factor of individual security
P0
I (1-T)
RV
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June 2014
Gearing Ratos
Operational grearing=
Equity Gearing=
Capital or Total Gearing=
Interest Cover=
PE Ratio=
PE Ratio=
Dividend Cover=
Dividend Cover=
Dividend Yield=
Dividend Yield=
]
]
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Value of rights + Issue price of new share = Total paid by third party
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Liquidity Ratio
Current Ratio =
Acid Test Ratio =
_____________________________________________________________________________________
Interest rate
_____________________________________________________________________________________
Discount for early settlement
(Ex.4 pg.257)
STEPS
1) Calculate the receivable balance for those who continue with existing terms
= 10m
60%
= 1800,000
2) Calculate the receivable balance for those who pay after 30 days
= 10m
40%
= 328,767
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Managing Cash
There are 3 areas associated with managing cash:
1) Miller Orr model
It involves upper and lower limits of cash.
Difference between upper and lower limit is called Spread
Calculating the spread:
Spread=
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2) Baumol Model
Using EOQ model to manage the cash
(same formula as previously studied)
Q=
Q= Economic Order Quantity
Co= Cost per order
D= Annual demand
Ch= Cost of holding one unit for one year
3) Cash Budget
(Using Example on pg.270)
Reqd. Calculate the material purchased for two months
STEPS
A) Calculate sale units for each month ( Sales Revenue / Unit Selling price)
B) Calculate production units (sale units + cl.stock op.stock = Production units)
C) Calculate cost of raw material used (raw material cost + cl.stock op.stock= Material
purchased). State in which month payments are made- usually after a month.
D) Calculate all relevant overheads.
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CHAPTER 11 VALUATION
BUSINESS AND ASSETS VALUATION (for exam purpose mean valuing shares or debts). There are 3
methods:
1) Asset Basis
Net Assets= Total Assets Total Liabilities
G=
1
Total no. of shares
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PE Ratio=
PE Ratio=
]
]
EPS=
This can be used to value shares in unquoted companies as:
Value per Share= EPS P/E Ratio
Value of Company= PAT P/E Ratio
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D) Finally calculate the present value of cash flows over time horizon less value of any
debt.
Valuation of Debt
Assume Debt= 100 Always
1) Irredeemable of Debt
MV=
If you are given taxation details then:
MV=
MV= Market price of debenture now (Yr0)
I= Annual interest starting in one year tme
R= Debt holder required return
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2) Redeemable Debt
The market value is the present value of future cash flows which include:
Interest payments for years in issue
Redemption value
3) Convertible Debt
With convertible debt the holder have option at conversion date to either
Convert to shares
Retain the debt until redemption
Choose the option which is higher
The market value is present value of future cash flows which include:
Interest payments
Conversion/Redemption value
Floor Value= PV of interest + PV of redemption money
4) Preference Shares
Recall formula for cost of capital formula:
Ke/kp=
This could be re-arranged for preference shares as
P0=
D= Constant annual preference dividend
P0= Ex-div market value of share
Kp= Cost of preference shares
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June 2014
CHAPTER 12 RISK
Impact of Purchasing Power Parity (PPP)
=
Impact of Interest Rate Parity (IRP)
=
]
If converting first currency second currency = DIVIDE
If converting second currency first currency = MULTIPLY
If company is buying first currency ($)
If company is selling first currency ($)
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LOWER RATE
HIGHER RATE
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