Price of CPN bonds= PV(coupons) + PV(par value)

Price = Cpn/(1+YTM) + Cpn/(1+YTM)

2
++ Cpn/(1+YTM)
n
+
Par/(1+YTM)
n

CPN in $s= (CPN rate/m)*Face value





Retention rate = 1 dividend payout rate (or payout ratio) = fraction of a
firms earnings that is retained in the company
ROE = return on equity
Return on retained earnings = retention rate * RoE
g = retention rate * RoE
g = (1 payout ratio)*RoE
Stock price at time N (after Div
N
is received:


Cap gains = r div yield
Multiple growth rates:
Price of stock= PV of D1, D2, D3 + PV [Div*(1+g1)
3*
(1+g2)] / [(r-g2)]
Corporate Valuation/ Discounted FCF Model:
stock price:
value of the company = PV of FCFs
Company value = FCF
1
/(1+WACC) + FCF
2
/(1+WACC)
2
...

Discount rate = WACC
Value of stockholders equity = Value of the company value of debt
and preferred.
Price per stock = Stockholders equity/ shares outstanding

Valuation based on Comparable Firms:
PE based comparable method:
Estimated firm1 price= PE
Comparable
* EPS of firm1
Price to sales based method:
(firm1 sales)*(firm2 P/S ratio)= mkt value of equity
price per share = (firm1 price or mkt value of equity) / (firm1 shares
outstanding or number of shares)

Payback period = # of years + (Unrecovered cost at start of year prior to
full recovery ) / Cash flow during full recovery year
Indifferent IRR= IRR of project A IRR of project B
Expected return = p
i
.R
i
= p
1
R
1
+ p
2
R
2

Measuring average return:
E(R)=
Measuring risk: Variance = Var(R) = p
i
.(R
i
-

E(R))
2

Standard deviation (or SD) = [Var(R)]
1/2

Weight of any asset i =
w
i
= (Value invested in asset i)/Total portfolio value
Total portfolio value = Sum of value of all assets in the portfolio
Return on portfolio:
Portfolio E(R
P
) = w
1
E(R
1
) + w
2
E(R
2
) .. w
n
E(R
n
)
Portfolio SD = [(w
1
)
2
(sd(R
1
))
2
+ (w
2
)
2
(sd(R
2
))
2
+
2w
1
w
2

sd(R
1
) sd(R
2
) ]
1/2

Value of portfolio= (Invested amount)(1+R
P
)


df
Risk premium= R r
f
Capital Asset Pricing Model (CAPM), also required return


also: E(R
i
) r
f
=
i
[E(R
m
) r
f
]
Market risk premium= E(R
m
) r
f

Risk premium of stock I= E(R
i
) r
f
Portfolio Beta:
Cost of preferred Stock:
Price: P
p
= Div
p
/r
p
r
p
= Div
p
/P
p
= Cost of Preferred Stock
Cost of Debt:
After tax cost of debt = r
D
(1 - T
C
).
T
C
= Corporate tax rate
Cost of equity:
a) CAPM:
b) Dividend discount model:

WACC = r = w
e
r
e
+ w
d
r
d
(1-t) + w
p
r
p

w
e
= (Mkt value of equity)/(Total mkt value of assets)
w
d
= (Mkt value of debt)/(Total mkt value of assets)
w
p
= (Mkt value of preferred stock)/(Total mkt value of
assets)
Market Value of Equity + Market value of Preferred
Stock + Market Value of Debt = Total Market Value
of Assets

V
C
= V
A
+ V
B
+ Synergy Cash
Total price paid for the target = P
B

Premium = P
B
V
B -> Gains to the target shareholders
Gain Acq. shares = (Synergy Premium) ->Gains to
Acq. shareholders
n = # of old shares of Acq.
m = # of shares issued for the acquisition
P
C
= price per share of the Acq. after the
announcement or the hypothetical price per share of
the merged firm.
P
C
= V
C
= V
A
+ V
B
+ Synergy Cash
m + n m + n
m= (exchange ratio) x (# old shares of target)
P
B
= m x P
C

Gains on Per share basis:
- Target: Premium / #old shares Targ
- Acq: (Synergy Premium) / # old shares Acq
Break-even synergy P
C
= P
A

Synergy = Premium
P
B
= m x P
C
+ cash
= m x P
A
+ cash
So Premium = mP
A
+ Cash V
B
= Break-even synergy.


1
0
E
Div
P
r g
=

1
0
E
Div
r g
P
= +
1 1
0
1
E
Div P
P
r
+
=
+
1 0 1 1 1
0 0 0
Dividend Yield Capital Gain Rate
1
E
P P Div P Div
r
P P P
+
= = +
Earnings
Dividend Payout Rate
Shares Outstanding
t
t
t t
t
Eps
Div =
1 N
N
E
Div
P
r g
+
=

N
N N
N
N
N
N
N
r g r
Div
r Div r Div r Div
r P r Div r Div r Div P
) 1 (
1
) (
) 1 /( ....... ) 1 /( ) 1 /(
) 1 /( ) 1 /( ....... ) 1 /( ) 1 /(
1 2
2
1
1
2
2
1
1
+
(

+ + + + + =
+ + + + + + =
+
1 2
1
( ... )
T
T
R R R R = + + +
( )
2 2 2
1 2
1
( ) ( ) ( ) ... ( )
1
T
Var R R R R R R R
T
= + + +

1 1 2 2
...
P n n
R wR w R w R = + + +
( )
Risk Premium for Security
[ ] [ ]
i f i Mkt f
i
E R r E R r = + |
1 1 2 2
...
P n n
w w w | | | | = + + +