Finance for Executives: Managing for Value Creation PDF
Preview Finance for Executives: Managing for Value Creation
Some Notations ADF Annuity discount factor MVA Market value added APR Annual percentage rate MVR Market value at risk APV Adjusted present value NOPAT Net operating profit after tax b Levered beta (also called equity or NOPLAT Net operating profit less adjusted tax U market beta) NPV Net present value bL Unlevered beta (also called asset beta) P Price of a bond, a stock, or a put option C Call price PBR Price-to-book ratio CAPM Capital asset pricing model PI Profitability index CAPEX Capital expenditures PER Price earnings ratio CF Cash flow PPP Purchasing power parity CFE Cash flow to equity holders PV Present value CML Capital market line r Correlation coefficient between asset i ij CP Coupon payment (of a bond) and asset j returns Cov R, R Covariance between asset i and asset j R Risk-free rate i j F returns R Return on the market portfolio 1 2 M D Debt value ROCE Return on capital employed DCF Discounted cash flow ROE Return on equity D Option’s delta or hedge ratio ROIC Return on invested capital DDM Dividend discount model SGR Self-sustainable growth rate DF Discount factor s Standard deviation of asset i returns i DPS Dividend per share (volatility) E Equity value s2 Variance of asset i returns (variability) i EAT Earnings after tax s Covariance between asset i and asset j ij EBIT Earnings before interest and tax returns EBITDA Earnings before interest, tax, SML Security market line depreciation and amortization T Time in years EIL Efficient investment line T Corporate tax rate C EPS Earnings per share TV Terminal value E R Expected return of asset i V Value of the firm’s equity (same as E) i E EV Enterprise value V Value of the firm with debt (levered 1 2 L EVA® Economic value added value) F Face value of a bond VU Value of the firm without debt (unlevered value) FCF Free cash flow Var R Variance of asset i returns IPO Initial public offering i (same as s2) i ITS Interest tax shield 1 2 WCR Working capital requirement k Cost of debt D WACC Weighted average cost of capital k Cost of equity E X Exercise or strike price of an option LBO Leverage buyout y Yield to maturity (of a bond) Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Some Useful Formulas 1. Discount factor (Chapter 2, equation 2.3) Value of $1 to be received at time T, discounted to the present at the rate k $1 $1 T DF 5 5 5$1 3 1 1k 2T T,k 11k T 11k 1 2 2. Present value (Chapter 2)1 2 Value today of a T-year cash-flow stream discounted at rate k PV 5 CF 3DF 1... ¢CF 3≤DF 1...1 CF 3DF 1 1,k t t,k T T,k 3. Present value of3 a perpetuity4 (Chap3ter 2, equatio4n 2.6) 3 4 The present value of an infinite stream of identical cash flows discounted at rate k CF PV5 k 4. Present value of a constant growing perpetuity (Chapter 2, equation 2.9) Present value, at rate k, of a perpetuity growing at the constant rate g where the cash flow at the end of the first year is CF 1 CF PV5 1 with k .g k2g 5. Present value of an annuity (Chapter 2, equation 2.11) Present value of a T-year annuity at a rate k with a cash flow CF PV 5CF3ADF with T,k 1 1 ADF 5 1 2 T,k k 11k T 6. Sharpe ratio of asset i (Chapter 3, equation 31.8) 2 E R 2R Sharpe ratio of asset i5 i F B sR 1 2 i 7. Beta coefficient of stock i (Chapter 3, equation 3.11) Cov R, R r ss s b 5 i M 5 iM i M 5r i i Var R s2 iM s 1 M 2 M M 8. Capital asset pricing model (Chapter 3, equation 3.13a, Chapter 10, 1 2 equation 10.11a and Chapter 12, equation 12.10) E R 5R 1 E R 2R b i F M F ¢i ≤ 9. Invested capital (Chapter 41, eq2uation 4.35)1 2 4 Invested capital5Cash 1Working capital requirement1Net fixed assets 10. Capital employed (Chapter 4, equation 4.6) Capital employed 5Short-term debt1Long-term debt1Owners’ equity Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Some Useful Formulas 11. Working capital requirement (Chapter 4, equation 4.7) WCR 5 Accounts receivable1Inventories 1Prepaid expenses 2 Accounts payable1Net accruals 3 4 12. Earnings before in3 terest, tax, depreciation, and a4mortization (Chapter 4, equation 4.10) EBITDA 5EBIT1Depreciation expense1Amortization expense 13. Free cash flow (Chapter 4, equation 4.15) FCF5EBIT 1 2T 1Depreciation expense c 2DWCR 2Capital expenditures net of disposals 1 2 14. Return on equity (Chapter 6, equation 6.1) 1 2 Earnings after tax ROE5 Owners’ equity 15. Return on invested capital before tax (Chapter 6, equation 6.4) EBIT EBIT Sales ROIC 5 5 3 BT Invested capital Sales Invested capital 16. The structure of a firm’s return on equity (Chapter 6, equation 6.9) EBIT Sales EBT Invested capital EAT ROE5 3 3 3 3 Sales Invested capital EBIT Owners’ equity EBT 17. Self-sustainable growth rate (Chapter 6, equation 6.12) SGR 5Profit retention rate3Return on equity 18. Net present value (Chapter 7) CF CF CF CF NPV k,T 52CF 1 1 1 2 1...1 t 1...1 T 0 11k 1 11k 2 11k t 11k T 1 2 T CF 52CF 1 1 2 t 1 2 1 2 1 2 0 a 11k t t51 19. Bond price (Chapter 10, equa1tion 120.2) CP CP CP 1F P 5 1 1 2 1...1 T 11y 11y 2 11y T 20. Share price (Chapter 10, equation 10.9) 1 2 1 2 1 2 DPS DPS DPS P 5 1 1 2 1...1 t 1... 11k 11k 2 11k t E E E 21. Constant dividend gro1wth m2ode1l (Chap2ter 10, equ1ation 210.10) DPS P 5 1 k 2g E Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 22. Enterprise value and Equity value (Chapter 10, equation 10.13) Enterprise Value (EV) 5 Equity Value 1 Debt 2 Cash and other financial assets Equity Value V 5Enterprise Value EV 1Cash 2Debt E 23. Equity (levered) beta (1Cha2pter 12, equation 12.16) 2 Debt b 5b 1 1 equity asset Equity 24. Weighted average cost of capital (Chapter 12, equation 12.12) D E WACC 5k 1 2T 1k D BC E1D RE E1D 25. Interest tax shield (Chapter 13, e1quation2 13.3) ITS5T 3k 3D C D 26. Market value of a levered firm (Chapter 13, equation 13.4) V 5V 1PV L U ITS 27. Market value at risk (Chapter 15, equation 15.1) MVR 5 Reduction in the firm’s value if the risk will occur 3 Probability that the risk will occur 3 4 28. Put-call parity relation3ship (Chapter 16, equation 16.5) 4 P0 5C0 1Xe2RFT 2S0 29. Black-Scholes option pricing formula (Chapter 16, equation 16.6 and 16.7) C0 call option 5S0N d1 2Xe2RFTN d2 P01put option2 5Xe2R1FT 12 2N d2 21 S20 1 2N d2 30. Market value a1dded (Chap2ter 18, equ3ation 181.12)4 3 1 24 Market value added MVA 5Market value of capital2Capital employed 31. Return on invested cap1ital (Ch2apter 18) NOPAT EBIT 1 2T ROIC 5 5 C Invested capital Invested capital 1 2 32. Economic value added (Chapter 18, equation 18.6) EVA5 Return spread 3Invested capital5 ROIC2WACC 3Invested capital 3 4 3 4 Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Finance For Executives Managing for Value Creation Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Finance For Executives Managing for Value Creation sixth Edition Gabriel Hawawini INSEAD Claude Viallet INSEAD Australia • Brazil • Mexico • Singapore • United Kingdom • United States Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Finance for Executives: Managing for © 2019, Cengage Learning EMEA Value Creation, Sixth Edition WCN: 02-300 Gabriel Hawawini & Claude Viallet ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced or distributed in any form or Publisher: Annabel Ainscow by any means, except as permitted by U.S. copyright law, without List Manager: Jenny Grene the prior written permission of the copyright owner. Marketing Manager: Sophie Clarke Senior Content Project Manager: Sue Povey For product information and technology assistance, contact us at [email protected] Manufacturing Manager: Eyvett Davis Typesetter: SPi Global For permission to use material from this text or product and for Cover Design: Elisabeth Heissler permission queries, email [email protected] Cover Images: Sebastian Kaulitzki/ Shutterstock; WHYFRAME/Shutterstock; one line man/Shutterstock British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN: 978-1-4737-4924-5 Cengage Learning, EMEA Cheriton House, North Way Andover, Hampshire, SP10 5BE United Kingdom Cengage Learning is a leading provider of customized learning solutions with employees residing in nearly 40 different countries and sales in more than 125 countries around the world. Find your local representative at: www.cengage.co.uk. Cengage Learning products are represented in Canada by Nelson Education, Ltd. For your course and learning solutions, visit www.cengage.co.uk. Purchase any of our products at your local college store or at our preferred online store www.cengagebrain.com. Printed in China by RR Donnelley Print Number: 01 Print Year: 2019 Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. To our spouses, children and grandchildren, with love and gratitude. GH and CV, 2018 This edition of Finance for Executives is dedicated to the memory of Claude Viallet, my friend, colleague and co-author. Gabriel Hawawini, 2019 Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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