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MindMap Gallery 2024 CPA-Financial Cost Management-Capital Cost-Summary of Knowledge Points
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2024 CPA-Financial Cost Management-Capital Cost-Summary of Knowledge Points
This is a mind map about the capital budget of investment projects in Chapter 5. The main contents include: estimated cash flow, sensitivity analysis of investment projects, estimated discount rate of investment projects, evaluation methods of investment projects, types and evaluation of investment projects program.
Edited at 2024-03-16 20:41:38
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2024 CPA-Financial Cost Management-Capital Cost-Summary of Knowledge Points
- bacteria
This is a mind map about bacteria, and its main contents include: overview, morphology, types, structure, reproduction, distribution, application, and expansion. The summary is comprehensive and meticulous, suitable as review materials.
- Plant asexual reproduction
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- Reproductive development of animals
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- Outline
Basic principles of financial management
1. Enterprise organizational form and financial management content
1. Enterprise organizational form
1. Personal owned enterprises
2. partnership
3. corporate enterprise
2. Main contents of financial management
1. Long-term investment
2. long term financing
3. working capital management
2. Financial management objectives and stakeholder requirements
1. financial management goals
1. profit maximization
2. Maximize earnings per share
3. Maximize shareholder wealth
2. Stakeholder requirements
1. Operators
2. creditor
3. other stakeholders
3. Core concepts and basic theories of financial management
1. Core Concepts of Financial Management
1. time value of money
2. Risk and reward
2. Basic theories of financial management
1. cash flow theory
2. value appraisal theory
3. risk assessment theory
4. portfolio theory
5. capital structure theory
4. Financial instruments and financial markets
1. Types of financial instruments
1. Fixed income securities
2. equity securities
3. Derivative securities
2. Types of financial markets
1. Money market and capital market
2. debt market and equity market
3. Primary market and secondary market
4. On-exchange market and over-the-counter market
3. financial market participants
1. resident
2. company
3. government
4. financial intermediaries
1. Commercial banks, insurance companies, investment funds, securities market institutions
5. functions of financial markets
1. basic skills
1. Financial intermediation
2. risk allocation
2. Additional features
1. price discovery
2. Regulate the economy
3. Save information costs
6. capital market efficiency
1. The meaning of capital market efficiency
1. The meaning of efficient capital market
2. Basic conditions for effective capital markets
1. rational investor
2. independent rational bias
3. arbitrage
3. The significance of effective capital market to financial management
1. Managers cannot increase stock value by changing accounting methods
2. Managers cannot profit from financial speculation
3. It’s good to keep an eye on your own company’s share price
4. Rational Study of Market Efficiency
2. The degree of capital market efficiency
1. Weak and effective
1. random walk model
2. filter test
2. Semi-strong and effective
1. event study method
2. investment fund performance research method
3. Strong and effective
1. inside information
Financial Statement Analysis
1. Analytical method
1. comparative analysis
2. factor analysis
2. ratio analysis
1. Short-term solvency
1. Cash ratio = (monetary funds) / current liabilities
2. Quick ratio = (monetary funds, financial assets, receivables)/current liabilities
3. Current ratio = current assets/current liabilities
4. Cash flow ratio = cash flow from operating activities/current liabilities
5. Working capital = current assets - current liabilities = long-term capital - long-term assets = shareholders' equity long-term liabilities - long-term assets
6. Influencing factors
1. Advantages: Available bank credit lines, non-current assets that can be quickly converted into cash, reputation for solvency
2. Disadvantages: Contingent liabilities related to guarantees and payment commitments in operating lease contracts
2. long term solvency
1. Asset-liability ratio = total liabilities/total assets
2. Equity ratio = total liabilities/total equity
3. Equity multiplier = total assets/total equity = 1 Equity ratio
1. Applicable: Chapter 8 Enterprise Value Assessment, Loading Beta and Unloading Beta
4. Long-term capital gearing ratio = non-current liabilities/(non-current liabilities shareholders’ equity)
5. Interest coverage ratio = profit before interest and tax / interest = net profit interest expense income tax / interest expense (the interest in the denominator is "big interest")
6. Cash flow interest coverage ratio = operating cash flow/interest expense
7. Cash flow to debt ratio = net operating cash flow/total debt
8. Influencing factors: long-term leases, debt guarantees, pending litigation
3. Operating capacity
1. Accounts receivable turnover rate = sales revenue/accounts receivable
2. Inventory turnover rate = sales revenue/inventory or cost of sales/inventory
3. Total asset turnover rate = sales revenue/total assets
4. General:
1. Number of turnovers = turnover rate = sales revenue/assets
2. Turnover days = 365/turnover rate = 365/turnover times
4. Profitability
1. Operating net profit margin = net profit/operating income
2. Net interest rate on assets = net profit/total assets = net operating interest rate & total asset turnover times
3. Net interest rate on equity = net profit/shareholders’ equity
5. market price ratio
1. P/E ratio = market price per share/net profit per share
1. 1. Price-to-earnings ratio = market price per share/earnings per share Core: The price shareholders are willing to pay for every 1 yuan of net profit Earnings per share = (net profit - preferred stock dividends) / number of outstanding common shares
2. Price-to-sales ratio = market price per share/operating income per share
1. Core: The price shareholders are willing to pay for 1 yuan of net assets Net assets per share = (shareholders’ equity – preferred stock equity) / number of outstanding common shares Preferred stock equity = liquidation value of preferred stock total dividends in arrears The number of common shares outstanding = the number of common shares outstanding on the balance sheet date, with the numerator and denominator at the same point in time.
3. Price-to-book ratio = market price per share/net assets per share
6. Dupont System
1. Net interest rate on equity = net profit/shareholders’ equity = net operating interest rate * total asset turnover rate * equity multiplier
2. limitation:
1. (1) The "total assets" and "net profit" of the total asset net interest rate do not match and cannot reflect the actual rate of return.
2. (2) There is no distinction between profits and losses from operating activities and profits and losses from financial activities
3. (3) There is no distinction between financial liabilities and financial liabilities
3. Financial statement analysis for management
1. balance sheet
1. Net operating assets = net liabilities owners’ equity
1. extended formula
1. Net operating assets = operating assets - operating liabilities = operating working capital Net operating long-term assets
2. Net liabilities = financial liabilities – financial assets
3. Net invested capital = net operating assets = net liabilities shareholders’ equity
2. income statement
1. After-tax operating net profit = after-tax interest net profit
3. cash flow statement
1. Gross operating cash flow
1. =Net operating profit after tax, depreciation and amortization
2. net operating cash flow
1. = operating net profit after tax, depreciation and amortization - increase in operating working capital
3. entity cash flow
1. = operating net profit after tax - depreciation and amortization - increase in operating working capital - capital expenditures
2. = operating net profit after tax, depreciation and amortization - increase in operating working capital - (increase in net operating long-term assets, depreciation and amortization)
3. = After-tax operating net profit Depreciation and amortization – Increase in operating working capital – Increase in net operating long-term assets – Depreciation and amortization
4. = After-tax operating net profit - (increase in operating working capital increase in net operating long-term assets)
5. = Net operating profit after tax - Increase in net operating assets
4. Operating cash flow = entity cash flow = debt cash flow equity cash flow Debt cash flow = after-tax interest - increase in net debt Equity cash flow = net profit - increase in shareholders' equity = dividend distribution - net increase in equity capital = cash dividend - (stock issuance - stock repurchase)
4. Analysis system
1. Net interest rate on equity = net profit/shareholders’ equity = (net operating profit after tax – interest expense after tax)/shareholders’ equity; net operating profit after tax = net profit interest expense after tax
2. Net interest rate on equity = Net interest rate on net operating assets (Net interest rate on net operating assets – After-tax interest rate) * Net financial leverage
3. Net interest rate on equity = Net interest rate on net operating assets Leverage contribution rate
4. financial forecasting methods
1. percentage of sales method
1. Premise:
1. There is a stable percentage relationship between assets, liabilities and income
2. The planned operating net interest rate can cover the increase in borrowing interest
2. prediction step
1. step1: How much do you want?
1. Total financing requirements = increase in net operating assets
2. step2: How many (internal)
1. (1) Available financial assets (base period) (2) Estimated retained earnings (estimated operating income * estimated operating profit margin * retention rate)
2. (3) Relying solely on internal solutions—embedded growth rate
3. step3: How much to melt (external)
1. Amount of external financing = total financing needs (increase in net operating assets) - available financial assets - estimated retained earnings
2. Expansion: External financing sales% = divide both sides of the above formula by the increase in operating income
3. It cannot be solved internally and requires external financing---sustainable growth rate
4. Relationship between changes in external financing sales growth ratio
1. Changes in the same direction: operating asset sales %; sales growth rate %; dividend payout rate; inflation rate
2. Reverse changes: Operating negative sales %; Estimated operating net profit margin %; Estimated profit retention rate %; Net operating asset turnover times
4. step4: Growth method
1. embedded growth rate
1. Basic assumption: no reliance on external financing
2. formula:
1. g=(estimated net profit/estimated net operating assets *estimated profit retention rate)/(1-numerator)
2. g=(Estimated operating net profit margin*Net operating asset turnover rate*Estimated retention rate)/(1-numerator)
3.
4. g = net profit * profit retention rate / (net operating assets - net profit * profit retention rate) = profit retention amount / (net operating assets - profit retention amount)
3. Change relationship:
1. In the same direction: net operating asset turnover times; operating liability sales %; operating net profit rate %, estimated profit retention rate %
2. Inverse: net operating asset sales %; operating asset sales %; dividend payout ratio; inflation rate
2. sustainable growth rate
1. Basic assumptions
1. No new shares are issued
1. Increased stockholders’ equity = increased retained earnings
1. The increase in stockholders' equity comes only from the increase in retained earnings.
2. Operating net profit margin remains at current level
1. Operating net profit margin remains unchanged
1. Net profit and revenue increased year-on-year
3. Asset turnover rate remains unchanged
1. Asset turnover rate remains unchanged
1. Total assets and income increased year-on-year
4. Maintain current capital structure
1. Equity multiplier unchanged
1. Liabilities and shareholders' equity increased year-on-year
5. Maintain current profit retention rate
1. Profit retention rate remains unchanged
1. The increase in dividends, retained earnings and net profit increased year-on-year
2. in conclusion
1. Next period’s sales growth rate = Current period’s sustainable growth rate
2. Sales growth rate for the next period = Asset growth rate = Liability growth rate = Equity growth rate = Net profit growth rate = Dividend growth rate = Profit retention growth rate
3. The 7 projects in the next period will grow year-on-year, and their growth rate = the sustainable growth rate in this period
3. formula
1. Sustainable growth rate = Growth rate of shareholders’ equity = Increase in shareholders’ equity/Beginning shareholders’ equity
2. Sustainable growth rate = net equity interest rate at the end of the period * profit retention rate / (1-numerator)
3. Sustainable growth rate =
1. Sustainable growth rate = growth rate of shareholders’ equity
4. hint
1. To calculate the sustainable growth rate for the current period, it is not required that the current period meets the five assumptions of sustainable growth.
2. The sustainable growth rate is a forecasting tool that satisfies five assumptions for the next period.
2. Regression analysis method (understanding)
3. Computer prediction method (understanding)
Basis of Valuation
1. interest rate
1. Base rate and its characteristics
1. The benchmark interest rate is an interest rate that has a universal reference role in the financial market.
2. In China, the benchmark interest rate is the deposit and loan interest rates stipulated by the People's Bank of China for national specialized banks and other financial institutions.
3. feature:
Marketization
The base interest rate must be determined by market supply and demand, and must also reflect market expectations for the future.
basic
The benchmark interest rate occupies a fundamental position in the interest rate system and financial product price system.
Transitivity
The market signals reflected by the benchmark interest rate, or the regulatory signals sent by the central bank through the benchmark interest rate, can be effectively transmitted to other financial markets and financial product prices.
2. Factors affecting market interest rates
1. Pure rate of interest r* (Pure Rate of Interest)
The average interest rate in the capital market without inflation and risk
2. Inflation Premium IP (Inflation Premium)
The expected average rate of inflation over the life of the security
Risk-free interest rate=rRF=r* IP
3. Default Risk Premium
Compensation given to creditors for the risk of failure to pay principal or interest in full as agreed
4. Liquidity Risk Premium
Compensation given to creditors for the risk that they cannot be realized at a reasonable price within a short period of time
5. Maturity Risk Premium
Compensation given to creditors for facing the risk of falling prices due to rising market interest rates during the duration; "market interest rate risk premium"
3. interest rate term structure
1. meaning
The relationship between long-term interest rates and short-term interest rates
2. interest rate term structure theory
1. Unbiased Expectations Theory (Expectancy Theory)
1. View:
Depends entirely on market expectations for future interest rates
2. The relationship between long/short interest rates
Long-term spot interest rate = average of future short-term expected interest rates
3. Expectations theory explains the yield curve
1. Upsloping yield curve: The market expects short-term interest rates to rise in the future
2. Downward sloping yield curve: The market expects short-term interest rates to fall in the future;
3. Horizontal yield curve: The market expects short-term interest rates to remain stable in the future
4. Peaked yield curve; the market expects short-term interest rates to rise in the near future, while the market expects short-term interest rates to fall in the more distant future
4. Basic assumptions
(1) Assume that people have certain expectations for future short-term interest rates; (2) It is assumed that the flow of funds between the long-term capital market and the short-term capital market is completely free.
5. limitation
The assumptions are too idealistic and far from the reality of financial markets.
2. liquidity premium theory
1. View:
In order to reduce risks, investors prefer short-term bonds with good liquidity. Therefore, long-term bonds must give investors a certain liquidity premium.
2. The relationship between long/short interest rates
Long-term spot interest rate = average future short-term expected interest rate A certain liquidity risk premium
3. Liquidity premium theory explains the yield curve
1. Upsloping yield curve: The market expects that short-term interest rates may rise or remain unchanged in the future.
2. Downward sloping yield curve: The market expects that short-term interest rates will fall in the future, and the decline will be greater than unbiased expectations.
3. Horizontal yield curve: The market expects short-term interest rates to fall in the future by an amount equal to the liquidity premium
4. Peak-shaped yield curve: The market expects that short-term interest rates may rise or remain unchanged in the near future, but in the distant future, the market expects short-term interest rates to fall, and the decline will be greater than unbiased expectations.
4. specific
It combines the characteristics of expectation theory and market segmentation theory.
3. market segmentation theory
1. View
Investors will invest relatively regularly in bonds of a certain maturity
2. The relationship between long-term and short-term interest rates
Long-term spot interest rate ≠ average future short-term expected interest rate
3. Market segmentation theory explains the yield curve
Up-sloping yield curve: The equilibrium interest rate in the short-term bond market is lower than the equilibrium interest rate in the long-term bond market.
Downward sloping yield curve: the equilibrium interest rate in the short-term bond market is higher than the equilibrium interest rate in the long-term bond market;
Horizontal yield curve: The equilibrium interest rate level in the market is the same across all maturities.
Peaked yield curve: The equilibrium interest rate level in the medium-term bond market is the highest
4. Basic assumptions
Bond markets with different maturities are uncorrelated with each other
3. Comparison of three theories
2. time value of money
1. Compound interest future value and compound interest present value
1. compound interest future value
(F/P, i, n)
2. present value of compound interest
(P/F, i, n)
2. Annuity future value and annuity present value
1. annuity future value
1. ordinary annuity future value
(F/A, i, n)
2. Prepaid annuity future value
Ordinary annuity future value*(1i)
3. sinking fund
The reciprocal of the future value coefficient of ordinary annuity = 1/(F/A, i, n)
2. Annuity present value
1. Ordinary annuity present value
(P/A, i, n)
2. Present value of prepaid annuity
Present value of ordinary annuity* (1i)
3. investment recovery coefficient
The reciprocal of the future value coefficient of ordinary annuity = 1/(P/A, i, n)
3. expand
1. deferred annuity
end value
The same as the ordinary annuity coefficient (the future value of the deferred annuity is only related to the continuous income and expenditure period (n), and has nothing to do with the deferral period (m))
Present value
Formula 1: P=A(P/A,i,n)*(P/F,i,m)
Principle---twice discounting
Formula 2: P=A(P/A,i,m n)-(P/A,i,m)
Principle---combine first and then subtract
Deferred period (m): the period in which there are no income or expenditures in the previous periods Continuous revenue and expenditure period (n): number of A
2. perpetuity
Perpetual annuity present value =A/i
3. Flexible use
1. Know three things and seek four things
1. Ask for A
2. Find i
1. Interpolation
2. Multiple interest payments during the year
1. Quoted interest rate (r) = nominal interest rate = coupon rate
2. Interest rate during the interest period (r/m) = semi-annual interest rate & quarterly interest rate
3. Effective annual interest rate = Effective annual interest rate (i) = [1 (r/m)]m-1
3. Risk and reward
1. single investment
1. How to measure risk
1. Probability distributions
Probability (Pi): Probability is a numerical value used to express the likelihood of a random event occurring.
2. Expected value
Reflects the average of expected returns and cannot be used directly to measure risk
3. variance
When the expected values are the same, the greater the variance, the greater the risk
4. standard deviation
When the expected values are the same, the larger the standard deviation, the greater the risk
5. coefficient of variation
Coefficient of variation = standard deviation/expected value
The coefficient of variation measures risk regardless of whether the expected values are the same
2. portfolio
1. expected rate of return
2. risk measurement
1. Covariance (understanding)
2. Correlation coefficient r = covariance/product of standard deviations of two assets (objective question)
3. Risk measurement for two portfolios of securities
Standard deviation of a two-asset portfolio
4. Influencing factors
1. Investment proportion
2. individual asset standard deviation
3. Correlation coefficient
Covariance
5. .Investment Opportunity Set Curve
1. .Illustration of Investment Opportunity Set Curve
1. .Illustration of Investment Opportunity Set Curve
2. The meaning of investment opportunity set curve
(1) The investment opportunity set curves of the two investment portfolios describe the trade-off relationship between the risks and returns of different investment proportion portfolios;
(2) All possible combinations of two or more securities will fall on a plane
3. valid set
Efficient set: The efficient set or efficient frontier is located at the top of the opportunity set, starting from the minimum variance combination point to the maximum expected return point.
Invalid set: same standard deviation and lower expected return; same expected return and higher standard deviation; lower expected return and higher standard deviation
4. The relationship between correlation coefficient and opportunity set
Conclusion: The smaller the correlation coefficient between security returns, the more curved the opportunity set curve, and the stronger the risk diversification effect.
(1) r=1, the opportunity set is a straight line and has no risk diversification effect;
(2) r<1, the opportunity set is curved, and there is a risk diversification effect;
(3) r is small enough, the curve bulges to the left, and the risk diversification effect is strong; it will produce a minimum variance combination that is lower than the standard deviation of the lowest risk security, and an invalid set will appear.
6. capital market line
1. capital market line illustration
2. meaning
Efficient set when there is a risk-free investment opportunity
3. basic formula
Total expected rate of return = Q × (expected rate of return of the risk portfolio) (1-Q) × total standard deviation of risk-free rate of return = Q × standard deviation of the risk portfolio
Q=Total funds/funds invested and risky assets
Tip: If funds are lent, Q will be less than 1; if funds are borrowed, Q will be greater than 1
4. in conclusion
(1) The capital market line reveals the trade-off relationship between risk and expected return when holding different proportions of risk-free assets and market portfolios. To the left of point M, you will hold both the risk-free asset and the risky asset portfolio. To the right of point M, you would only hold market portfolio M and borrow funds to further invest in portfolio M.
(2) The tangent point M between the capital market line and the opportunity set is the market equilibrium point, which represents the only most effective risk asset portfolio. It is a weighted average portfolio of all securities weighted by their respective total market values.
(3) Personal utility preferences are independent (or separated) from the optimal risk asset portfolio
7. Types of risk
1. unsystematic risk
Enterprise individual risks can be diversified
2. Systemic risk
Market risk cannot be diversified
3. Systematic risk and unsystematic risk diagram
4. capital asset pricing model
1. Research object: The equilibrium relationship between risk and required rate of return in a fully combined system
2. A measure of systemic risk
1. Beta coefficient of a single asset
1. formula
2. Influencing factors
1. The stock's correlation with the overall stock market (in the same direction)
2. The standard deviation of the stock itself (in the same direction)
3. Standard deviation of the entire market (inverse)
3. in conclusion
The beta of the market portfolio relative to itself is 1
β=1, indicating that the asset’s systematic risk is consistent with the risk of the market portfolio
β>1, indicating that the asset’s systematic risk is greater than the risk of the entire market portfolio
β<1, indicating that the asset’s systematic risk is less than the risk of the entire market portfolio;
β=0, indicating that the asset’s systematic risk is equal to 0
hint:
(1) The beta coefficient reflects the size of the systematic risk of a single asset relative to the average risk of the market portfolio. (2) The beta coefficient of most assets is greater than zero. If the beta coefficient is negative, it indicates that the return of this type of asset changes in the opposite direction to the average market return.
2. Systematic risk coefficient of securities asset portfolio
1. formula
2. meaning
The beta coefficient of a portfolio is the weighted average of the beta coefficients of all individual assets, and the weights are the proportions of various assets in the portfolio.
3. Portfolio risk coefficient VS capital market line
Standard deviation: measures overall risk. The standard deviation of the portfolio is not the weighted average standard deviation (unless r=1) β: measures systematic risk. The β of the portfolio is the weighted average β.
3. securities market line
1. formula:
1. Horizontal axis (independent variable): β coefficient
2. Vertical axis (dependent variable): Ri required rate of return;
3. Slope: (Rm-Rf) market risk premium rate (market risk compensation rate)
4. Intercept: Rf risk-free rate of return
2. Special Note
1. The market risk premium rate (Rm-Rf) reflects the overall market preference for risk. If the degree of risk aversion is high, the value of the slope of the security market line (Rm-Rf) will be large.
3. Securities market line VS capital market line
Chapter 4 Capital Cost
1. Concepts and uses
1. The concept of capital cost
1. meaning
Capital cost refers to the opportunity cost of invested capital, also known as the trade-off rate of investment projects and the minimum acceptable rate of return.
2. understand
Funding angle (cost of raising funds)
Fund raising fee: handling fee/issuance fee
Fund occupation fee: interest/dividends
Investment perspective (cost of investment)
The required rate of return required by investors
Special note: the required rate of return is not equal to the internal rate of return
3. Influencing factors:
risk free rate of return
operating risk premium
financial risk premium
4. Company Capital Capital Cost Vs Project Capital Cost
The risk of the company's new investment project = the average risk of the company's existing assets, then the project capital cost = the company's capital cost
The risk of the new investment project > the average risk of the company's existing assets, then the project capital cost > the company's capital cost
The risk of the new investment project < the average risk of the company's existing assets, then the project capital cost < the company's capital cost
Three risks
2. use
Assessing business value (Chapter 8)
Investment Decisions (Chapter 5)
Financing Decisions (Chapter 9)
Working Capital Management (Chapter 12)
Corporate Performance Evaluation (Chapter 20)
3. Influencing factors
1. external
(1) Interest rate
(2) Market risk premium
(3) Tax rate
2. internal
(1) Capital structure
(2) Dividend policy
(3) Investment policy
2. Debt cost of capital
1. principle
1. meaning
The cost of debt is the rate of return required by creditors
2. hint
1. Distinguish between historical costs and future costs
The cost of capital, which is the basis for investment decisions and enterprise value assessment, can only be the cost of borrowing new debt in the future.
2. Distinguish between promised returns and expected returns on debt
For a financier, a creditor’s expected return is the true cost of its debt
3. Distinguish between long-term debt and short-term debt
Consider long-term debt and ignore various short-term debts
2. estimate
1. pre-tax cost of debt
1. yield to maturity method
1. principle
Find the discount rate that makes the present value of future cash outflows equal the present value of cash inflows
2. Scope of application
The company currently has listed long-term bonds
3. Calculation formula:
P0——the market price of the bond
Kd——Yield to maturity, which is the cost of debt capital before tax
n - the remaining maturity of the debt, usually expressed in years
4. Special Note
Conversion and unification of quoted interest rate and effective annual interest rate
2. Comparable Companies Act
1. Scope of application
The company has no listed bonds, is in the same industry, and has a similar business model. It is best if the scale, debt ratio and financial status of the two are relatively similar.
2. formula
Calculate the yield to maturity of comparable corporate long-term bonds as the company's long-term debt cost
3. pay attention
Comparable companies should be the same as the target company
3. risk adjustment approach
Scope of application
There are no listed bonds and no suitable comparable companies can be found.
Formula: Pre-tax debt cost = Market rate of return on government bonds during the same period Corporate credit risk compensation rate
Determination 1: Market rate of return on government bonds
Same expected term as corporate bonds (closer to maturity)
yield to maturity
Determination 2: Corporate credit risk compensation rate
step1:
Calculate a number of listed corporate bonds with the same credit rating as the company (core: same credit rating)
step2:
Calculate the yield to maturity of these bonds (generally given on the exam)
step3:
Calculate the yield to maturity of long-term government bonds over the same period as these listed corporate bonds (core: will match)
step4:
Calculate several differences = step2-step3
step5:
step4/n
4. financial ratio method
formula
You need to know the key financial ratios of the target company. Based on these ratios, you can generally judge the company's credit rating. With the credit rating, you can use the risk adjustment method to determine its cost of debt.
2. after-tax cost of debt
1. After-tax debt capital cost = pre-tax debt capital cost × (1-income tax rate)
2. Consider issuance costs
1. formula:
2. Formula description:
P-bond issue price; M-bond face value; F-issuance expense rate; n-bond maturity time; T-the income tax rate of the company; I-the annual interest amount; Kd - pre-tax cost of bonds adjusted for issuance costs
3. Conclusion: The company's cost of tax debt is less than the creditor's required pre-tax earnings (creditor's required rate of return)
3. cost of common equity capital
1. Does not take into account issuance costs
1. capital asset pricing model
1. Core formula:
2. Formula description:
risk free rate of return
Nominal yield to maturity on long-term government bonds
Nominal interest rate calculation formula: 1 r nominal = (1 r real) × (1 inflation rate)
Scenarios using real interest rates: hyperinflation exists; the forecast period is particularly long
The beta of the stock
1. Selection of key variables
1. The length of the forecast period
① When there is no significant change in the company’s risk characteristics, a forecast period of 5 years or longer can be used; ② If the company's risk characteristics change significantly, the year after the change should be used as the length of the forecast period.
Special note: Longer is not always better
2. Time interval for revenue measurement
Weekly or monthly yield
2. Prerequisites for estimating equity capital using historical beta values
If there are no significant changes in the company's operating leverage, financial leverage, and earnings cyclicality, the historical beta value can be used to estimate the cost of equity.
average risk stock return
market risk premium
Choose a longer time span. Includes both boom and recession periods
The market average return under the geometric mean method
The stock’s risk premium
2. dividend growth model
formula
estimate of g
Historical dividend growth rate
Geometric mean = terminal value of dividend = present value * (1 g), find g
sustainable growth rate
Utilizing initial shareholders’ equity: Dividend growth rate = sustainable growth rate = expected profit retention rate × opening equity expected net interest rate = profit retention / opening equity
Utilizing shareholders' equity at the end of the period: Growth rate of dividends = Sustainable growth rate = (Estimated profit retention rate × net equity interest rate) / (1 - Estimated profit retention rate × net equity interest rate)
Analyst Forecast: Possibly the Best
3. Bond Yield Risk Adjustment Model
Equity cost = the company’s after-tax debt cost, the risk premium required by shareholders and creditors to bear Gengdan’s risks
Risk premium: empirical estimate or historical data
formula:
The company’s after-tax debt cost
The risk premium required by shareholders to bear greater risks than creditors
2. Consider issuance costs
formula:
4. preferred stock cost of capital
1. principle
Required rate of return required by preferred shareholders
2. content
Preferred stock capital cost includes dividends and issuance expenses
3. formula:
rp represents the capital cost of preferred shares; Dp represents the annual dividend per share of preferred shares; Pp represents the issuance price of preferred shares; F represents the preferred stock issuance expense rate
5. Capital cost of perpetual bonds
1. meaning
For bonds with no clear maturity date or very long term, the bond issuer only needs to pay interest and has no obligation to repay the principal (in actual operation, redemption and interest rate adjustment terms will be attached)
2. Pre-tax cost of capital
formula:
Represents the capital cost of perpetual bonds
Represents the annual interest on perpetual bonds
Indicates the issuance price of perpetual bonds
F represents the perpetual bond issuance expense rate
6. weighted average cost of capital
1. formula:
weighted average cost of capital
The jth individual capital cost
The proportion of the jth type of individual capital to all capital
Indicates different types of financing
2. Choice of weights
7. Practice questions
[Example questions•2017 Volume I•Calculation questions]
[Example Question·Calculation Question] Company A is a listed company, mainly engaged in the production and sales of health care products. On July 1, 2017, in order to evaluate the company's performance, it is necessary to estimate its cost of capital. Relevant information is as follows: (1) Company A currently has 10,000 long-term bonds, 6 million shares of common stock, and no other long-term debt and preference shares in its long-term capital. The long-term bond was issued on July 1, 2016, with a term of 5 years, a face value of 1,000 yuan, and a coupon rate of 8%. Interest is paid on June 30 and December 31 each year. The company's current market price of long-term bonds is 935.33 yuan per share, and the price of common shares is 10 yuan per share. (2) The current risk-free interest rate is 6%, the average stock market return rate is 11%, and the beta coefficient of Company A's common stock is 1.4. (3) Company A’s corporate income tax rate is 25%. Require: (1) Calculate the pre-tax capital cost of Company A’s long-term bonds. (2) Use the capital asset pricing model to calculate the capital cost of Company A’s common stock. (3) Calculate Company A’s weighted average cost of capital using the company’s current actual market value as the weight. (4) What are the weight calculation methods when calculating a company's weighted average cost of capital? Briefly explain the various weight calculation methods and compare their advantages and disadvantages.
【Answer】 (1) Assume that the debt capital cost during the interest-bearing period is rd: 1000×8%/2×(P/A,rd,8) 1000×(P/F,rd,8)=935.33 When rd=5%, 1000×8%/2×(P/A, 5%, 8) 1000×(P/F, 5%, 8) =40×6.4632 1000×0.6768=935.33 So: rd=5% Long-term bond pre-tax capital cost = (1 5%) 2-1 = 10.25% (2) Common stock capital cost = 6% 1.4 × (11%-6%) = 13% (3) Weighted average capital cost = 10.25% × (1-25%) × 1 × 935.33/ (1 × 935.33 600 × 10) 13% × 600 × 10/ (1 × 935.33 600 × 10) = 12.28% (4) To calculate the company's weighted average cost of capital, there are three weighting bases to choose from, namely book value weight, actual market value weight and target capital structure weight. ① Book value weight: refers to the proportion of each type of capital measured based on the accounting value shown on the company's balance sheet. The balance sheet provides amounts for liabilities and equity, making them easy to calculate. However, the book structure reflects the historical structure and does not necessarily conform to the future state; the book value will distort the cost of capital because there is a huge difference between the book value and the market value. ② Actual market value weight: It measures the proportion of each type of capital based on the current market value ratio of liabilities and equity. Because market values continue to change, so do the ratios of debt and equity, and the calculated weighted average cost of capital amounts often change. ③ Target capital structure weight: It measures the proportion of each capital element based on the target capital structure measured by market value. A company's target capital structure represents its best estimate of how it will raise capital in the future. If the company is moving toward a target capital structure, target capital structure weights are more appropriate. This weight can use the average market price to avoid the inconvenience of frequent changes in securities market prices; it can be applied to the company's evaluation of its future capital structure, while the book value weight and actual market value weight only reflect the past and present capital structure.
[Example questions•Volume 2016•Calculation questions]
[Example Question·Calculation Question] Company B is a manufacturing company. The relevant data in the 2016 financial statements are as follows: Company B has no preferred shares and currently has 10 million common shares outstanding. Assume that all of Company B's assets are operating assets, all current liabilities are operating liabilities, and all long-term liabilities are financial liabilities. The company has now reached a state of stable growth. In the coming years, the operating efficiency and financial policies of 2016 will remain unchanged (including not issuing new shares and repurchasing shares). It can obtain borrowings when needed according to the current interest rate level, and sales will remain unchanged. The net interest rate can cover the increasing interest on the debt. The ending long-term liabilities in 2016 represent the average liabilities for the whole year, and the interest expenses in 2016 are all interest paid on long-term liabilities. The applicable income tax rate for companies is 25%. Require: (1) Calculate Company B’s expected sales growth rate in 2017. (2) Calculate Company B’s expected future dividend growth rate. (3) Assume that Company B’s stock price at the beginning of 2017 is 9.45 yuan, calculate Company B’s equity capital cost and weighted average cost of capital. (year 2010)
【Answer】 (1) Expected sales growth rate in 2017 = sustainable growth rate in 2016 Sustainable growth rate = [500/2025×150/500]/[（1-500/2025×150/500）=8% (2) Dividend growth rate = sustainable growth rate = 8% (3) Equity cost = [350/1000×(1 8%)]/9.45 8% = 12% Net operating assets = 4075-700 = 3375 (10,000 yuan) Debt pre-tax capital cost=135/1350=10% Weighted average cost of capital = 12% × (2025/3375) 10% × (1-25%) × 1350/3375 = 10.2%
[Example questions•Volume 2016•Calculation questions]
[Example Question·Calculation Question] Xiao W borrowed 300,000 yuan from Bank A to purchase a personal house, with an annual interest rate of 6%, and the interest is calculated every six months; the period is 5 years, from January 1, 2014 to January 2019 End of day. Xiao W chooses to repay the principal and interest of the loan in equal installments. The repayment dates are July 1 and January 1 of each year. At the end of December 2015, Xiao W received a one-time year-end bonus of 60,000 yuan from a single person and is considering two ways to use this bonus: (1) The bank loan of 60,000 yuan was repaid in advance on January 1, 2016 (the original repayment amount of each installment still needs to be repaid on that day). (2) Purchase B treasury bonds and hold them until maturity. Government bond B is a 5-year bond. Each bond has a face value of 1,000 yuan, a coupon rate of 4%, simple interest, and a lump sum of principal and interest upon maturity. Government bond B has three years to mature, and its current price is 1,020 yuan. Require: (1) Calculate the yield to maturity of investment in government bonds B. Should Xiao W choose to repay the bank loan in advance or invest in government bonds? Why? (2) Calculate the current repayment amount of each period; if Xiao W chooses to repay the bank loan early, calculate the repayment amount of each period after early repayment.
Answer ① Calculate the yield to maturity of government bond B The due principal and interest amount of B’s treasury bond = 1 000 × (1 + 4% × 5) = 1,200 (yuan) Assume that the yield to maturity of government bond B is I, 1020 = 1200 × (P/F, I, 3) trial and error When I=5%, 1200×(P/F, 5%, 3)=1 200×0.8638=1 036.56 (yuan) When I=6%, 1200×(P/F, 6%, 3)=1 200×0.8396=1 007.52 (yuan) Interpolation The yield to maturity of investing in government bond B = 5.57% ②The effective annual interest rate of bank borrowing = (1 + 6%/2) 2-1 = 6.09% The yield to maturity of investment in government bonds B is less than the effective annual interest rate of bank borrowings, so Xiao W should choose to repay in advance. (2) Current repayment amount per period = 300 000÷ (P/A, 3%, 10) = 300 000÷8.5302 = 35 l69.16 (yuan) Remaining principal during early repayment = 35 169.16 × (P/A, 3%, 6) = 35 169.16 × 5.4172 = 190518.37 (yuan) Remaining principal after early repayment = 190518.37-60 000 = 130518.37 (yuan) Repayment amount per period after early repayment = 130518.37÷ (P/A, 3%, 6) = 130518.37÷5.4172 = 24 093.33 (yuan)
Chapter 5 Capital Budget for Investment Projects
1. Types of investment projects and evaluation procedures
2. Evaluation methods for investment projects
1. independent project evaluation
1. Net Present Value Method (NPV)
1. meaning
1. The difference between the present value of future cash inflows and the present value of future cash outflows
2. Calculation formula
1. Net present value (NPV) = Σ Present value of net cash flows in each year = Σ Present value of future cash inflows - Σ Present value of future cash outflows
3. Determination of discount rate
1. Project capital cost.
4. Decision principles
1. NPV>0, the investment project is feasible
5. Applicable conditions
1. The amount is an absolute value and is not suitable for comparing projects with different investment amounts.
2. Present Value Index (PI)
1. meaning
1. The ratio of the total present value of future net cash flows to the total present value of the original investment
2. Calculation formula
1. Present value index (PI) = total present value of future net cash flows/total present value of original investment
3. Decision principles
1. PI>1, the investment project is feasible
4. VS net present value
1. The present value index is a relative index, reflecting the efficiency of investment; while the net present value index is an absolute index, reflecting the efficiency of investment.
3. Internal rate of return (IRR)
1. meaning
1. The internal rate of return refers to the discount rate that can make the present value of future cash inflows equal to the present value of future cash outflows, or the investment decision-making principle.
2. Calculation formula
1.
3. Decision principles
1. An investment project is feasible when the internal rate of return is higher than the capital cost of the investment project.
4. VS Net Present Value/Present Value Index
1. When the net present value>0, the present value index>1, the internal rate of return>capital cost; When net present value = 0, present value index = 1, internal rate of return = capital cost; When the net present value <0, the present value index <1, the internal rate of return <capital cost
4. payback period method
1. static payback period
1. Calculation method
1. Payback period = initial investment/annual net cash inflow
2. Payback period = M uncollected amount in year M/net cash inflow in year M 1
2. Advantages and Disadvantages of Indicators
1. The payback period method is simple to calculate and easily understood by decision-makers, and can generally measure the liquidity and risk of the project.
2. Ignore the value of time; fail to consider cash flow after the payback period, that is, fail to measure profitability; abandon long-term projects of strategic significance
2. Dynamic payback period
1. Investment payback period = M The present value of the uncollected amount in year M / The present value of the net cash inflow in year M 1
3. Polyline payback period for the same project > Static payback period
5. accounting rate of return
1. Accounting rate of return = average annual net profit/original investment
2. Advantages and Disadvantages
1. Easy to understand; data is easy to obtain; considers all profits over the entire project life
2. Ignores the impact of depreciation on cash flow; ignores the impact of the time distribution of net profits on the economic value of the project
(Solution: Can I invest? How many can I invest?)
2. Mutually exclusive project evaluation (solution: rent or buy)
1. Project life is the same
1. net present value method
2. Project life spans vary
1. Net present value method (adjusted)
1. Common years method--reset according to the least common multiple
2. Equal Annuity Method (Mastery)
1. step1: Calculate the net present value of the two projects
2. step2: Calculate the equal annual amount of the net present value = net present value/(P/A,i,n)
3. step3: Perpetual net present value = equal annuity/capital cost
4. step4: Choose the plan with the largest present value of the perpetual annuity
summary
1. Limitations of both methods:
1. (1) In some fields, technology advances rapidly and it is impossible to copy the original; (2) If inflation is serious, the increase in replacement costs must be considered, which is not considered by either method; (3) In the long run, competition will reduce the net profit of the project or even eliminate it. Neither method is considered
3. Limited total amount of capital allocation
1. step1: Present value index sorting,
2. step2: Use up the investment amount and the combination with the largest net present value
Limitations: Not in line with capital market principles; not applicable to multi-period capital allocation
3. estimated cash flow
3.1. Estimating Cash Flows (New Decision)
1. cash flow estimates
1. Initial period (5 considered)
1. Equipment acquisition expenses, advanced working capital, opportunity costs
1. Long-term asset investment (expenditures for new fixed assets, freight, installation and other capital expenditures)
2. Inflow from the realization of original assets (income from disposal of plants, equipment, etc.)
3. Realization loss tax deduction (realizable value < book value)
4. Tax on realized gains (realizable value > book value)
5. Working capital advanced (incremental)
2. =-long-term asset investment-advanced working capital inflow from the realization of original assets/-tax deduction for realization losses/tax payment for realization gains
2. During life (2 formulas)
1. After-tax cash inflows and outflows (gross operating cash flow), excluding outflows from financing activities
2. two formulas
1. = After-tax income – After-tax cash cost Depreciation and amortization tax deduction (direct method)
2. =Net operating profit after tax, depreciation and amortization (indirect method)
3. End of life (4 things not to forget)
1. Net cash inflow after tax from equipment realization, recovery of working capital, disposal of business and other cash outflows
1. Income from changes in price of long-term assets
2. Tax deduction for losses on sale of long-term assets (realizable value < book value)
3. Tax on gains from sale of long-term assets (realizable value > book value
4. Recovery of advanced working capital
2. =Income from price change of long-term assets/-Tax deduction for loss on sale of long-term assets/tax on gains Recover advance working capital
2. Special Note
1. incremental cash flow
1. implementation will happen
1. Relevant costs:
1. Example: Whether or not the original factory building will be used has nothing to do with the new project, so it is a non-related cost.
2. opportunity cost
1. Example: If you occupy rented equipment, the lost rent is an opportunity cost; in the above example, if you occupy the original factory building
3. cash flow from operating activities
1. Example: excluding cash flow from financing activities
3.2. Estimate Cash Flow (Update Decision)
1. Fixed assets renewal decision (continue to use old vs. purchase new)
1. step1: Total cost of continuing to use the old equipment
1. Cash flow in the initial period: [-realizable income/realizable loss tax deduction/income tax]
2. Cash flow during the operating period: [-Operating costs-Repair expenses, etc. Depreciation and tax deduction]
3. End point cash flow: [realizable value / tax deduction for disposal losses / tax on income]
2. step2: Total cost of using new equipment
1. Cash flow in the initial period: [-Purchasing equipment expenses)]
2. Cash flow during the operating period: [-Operating costs-Repair expenses, etc. Depreciation and tax deduction]
3. End point cash flow: [realizable value / tax deduction for disposal losses / tax on income]
4. Estimated investment project discount rate
1. The company's capital cost
1. Two conditions are met: the same operating risks and the same capital structure
2. Cost of capital of comparable companies
1. Same operating risks but different capital structures - use the company's beta assets
1. step1: Determine the company’s current β assets; β assets = the company’s current β equity ÷ [1 + the company’s current equity ratio × (1 – income tax rate)]
2. Step 2: Determine the β equity of the company’s new project; β equity = β assets × [1 + company target equity ratio × (1 – income tax rate)]
3. step3: Calculate the cost of equity capital based on the capital asset pricing model; cost of equity capital = Rf + β equity × (Rm - Rf)
4. Step 4: Determine the pre-tax and after-tax capital costs of debt (such as yield-to-maturity method, risk adjustment method, debt capital cost calculation considering issuance costs, etc.);
5. step5: Determine the weighted average cost of capital. Weighted average cost of capital = debt after-tax capital cost × debt target proportion + equity capital cost × equity target proportion
2. -Different operating risks and different capital structures---use beta assets of other companies
1. step1: Convert the beta equity of the comparable company into beta assets; β assets = the beta equity of the comparable company ÷ [1 + the property rights ratio of the comparable company × (1 - the income tax rate of the comparable company)]
2. Step 2: Convert β assets into β equity of the target company; β equity = β assets × [1 + equity ratio of the target company × (1 – target company income tax rate)]
3. step3: Same as above
4. step4: Same as above
5. step5: Same as above
5. Investment project sensitivity analysis
1. Maximum and minimum method (absolute numbers)
1. step1: Calculate net present value (NPV) using conventional methods
2. step2: Select a variable and assume that other variables remain unchanged, set NPV=0, and calculate the critical value of the selected variable.
3. Key points: NPV=(P-V)*Q*(P/A, i, n), knowing 5NPV P V Q I N, find 1
2. Sensitivity method (relative number)
1. step1: Calculate net present value (NPV) using conventional methods
2. Step 2: Assuming that a certain variable changes to a certain extent and other factors remain unchanged, recalculate the net present value.
3. step3: Calculate the sensitivity coefficient of the selected variable: Sensitivity coefficient = target value change percentage/selected variable change percentage
Bond and stock valuation
1. bond
1. Type of debt
1. Classification of claims (understanding)
2. Basic elements of debt (understanding)
2. evaluation
1. bond valuation model
1. The meaning of bond value
The intrinsic value of a bond is the present value of future cash inflows
2. Calculating Bond Value
1. Quiet bonds
A bond whose interest is paid evenly over the maturity period (note: distinguish between quoted interest rate and effective annual interest rate)
2. pure discount bond
A bond that promises a single payment at a certain date in the future (zero-coupon bond)
3. outstanding bonds
Bonds that have been issued and circulated in the secondary market
3. Decision principles
A bond can be purchased when its value is higher than the purchase price
2. Factors affecting bond value (objective questions)
1. Face value (same direction)
2. Coupon rate (same direction)
3. Discount rate (inverse)
Special reminder: The discount rate and coupon rate are the same interest calculation rules and interest calculation methods.
4. Expire date
1. Quiet bonds
premium
Changes between payment periods: Volatility decreases (first rises, then falls after interest cut, but always above face value)
As time to maturity shortens: bond value gradually decreases
parity
Changes between payment periods: fluctuations (first rises, then falls after interest cut, may be higher than or equal to face value)
As time to maturity decreases, bond value remains unchanged
Discount
Changes between payment periods: rising volatility (first rises, then falls after interest cut, may be higher than, equal to or less than the face value)
As the time to maturity shortens, the value of the bond gradually increases
2. zero coupon bond
As the maturity time shortens, the bond value gradually increases and approaches the face value.
3. Bonds with one-time principal and interest repayment upon maturity
As the time to maturity shortens, the value of the bond gradually increases
5. Interest payment frequency
Premium (same direction)
Accelerate interest payment frequency and increase value
Parity (unchanged)
Accelerate interest payment frequency and keep value unchanged
Discount (reverse)
Accelerate interest payment frequency and decrease in value
6. The combined impact of discount rate and maturity time
As the time to maturity shortens, changes in the discount rate have less and less impact on the value of the bond.
3. Evaluate yield to maturity
1. meaning
The discount rate that makes the present value of future cash flows equal the purchase price of the bond
2. calculate
Interpolation
3. decision making
When the yield to maturity is higher than the necessary yield required by investors, the bond is worth investing in
2. common stock
1. evaluation
1. meaning
The present value of all future cash flows expected to be provided
2. Model
1. zero growth
Formula: V=D/r (similar to perpetual bonds)
2. Fixed growth
1. formula:
2. Special Note
1.
capital asset pricing model
2. g
1. Fixed dividend payout rate policy, g=net profit growth rate.
2. No shares are issued, operating efficiency and financial policies remain unchanged, g=sustainable growth rate
3. Decision principles
The stock value is higher than the market price (purchase price), the stock is worth buying
2. Evaluate expected rate of return
1. Calculation method
principle
The discount rate at which the present value of future cash inflows equals the present value of the cash inflows
Zero Growth Stocks
fixed growth stocks
non-constant growth stocks
Segment calculation, step-by-step testing (interpolation method)
2. Decision principles
The expected rate of return of the stock is higher than the necessary rate of return required by stock investors and is worth investing in
3. preferred stock
1. Characteristics of preferred shares
1. Priority in distribution of profits/priority in distribution of remaining property/restrictions on voting rights
2. evaluation
(Same as Perpetual Bonds/Zero Growth Stocks)
preferred stock value
Preferred stock annual dividend
Annual discount rate, generally using capital cost rate or required rate of return on investment
3. Evaluate expected rate of return
4. Summary: Two methods of evaluating the value of bonds/common stocks/preferred stocks: value and expected rate of return
Chapter 7 Option Value Assessment
1. Concepts and types of options
1. The concept of options
2. Type of option
1. Types of options
What are options:
call option
put option
2. Option expiration value and net profit or loss
call option
1. maturity value
Long Call = Max(St-X,0)
Short Call = -Max(St-X,0)
2. net profit or loss
Long call = expiration value of long call option - option price
Short Call = Short Call Option Expiration Value Option Price
3. Summarize:
Long: The net loss is limited (the maximum value is the option price), but the net gain potential is huge.
Short position: The net gain is limited (the maximum value is the option price), while the net loss is uncertain
put option
1. maturity value
Long put option expiration value = Max (X-St, 0)
Short call option expiration value = -Max(X-St, 0)
2. net profit or loss
Net profit and loss from long call options = expiration value of long call options - option price
Net profit or loss from short call option = expiration value of short call option option price
2. Options Investment Strategy
1. core concept
Net profit and loss = revenue - cost
2. protective put option
Build: Buy Stocks Buy Puts
Calculate net profit and loss: Net profit and loss = revenue-cost=X(St)-So-P
Features: Locked in the lowest net income (execution price) and lowest net profit and loss
3. covered call option
Build: Buy Stock Sell Call
Calculate net profit and loss: Net profit and loss = revenue-cost=C St(X)-So
Features: Locked in the highest net income (execution price) and net income
4. Bull fight
5. Build: Buy calls Buy puts
Calculate net profit and loss: Net profit and loss = revenue - cost = |St-X|-C-P
Applicable conditions: drastic changes in market prices are expected
5. short selling
Build: Sell Calls Sell Puts
Calculate net profit and loss: Net profit and loss = revenue-cost=P C-|St-X|
Applicable conditions: The market price is expected to be relatively stable
3. Factors affecting the value of financial options
1. Financial option value composition
2. Main factors affecting option value
3. range of option values
in conclusion: 1. The value of a put option is capped at the strike price. 2. The stock price is 0 and the option value is 0; (bullish) 3. The lower limit of option value is intrinsic value. 4. Before the execution date, the option value will never be lower than the minimum value line; 5. The upper limit of the value of a call option is the stock price, and the upper limit of the value of a put option is the exercise price.
4. How to evaluate the value of financial options
1. Option Valuation Principles
1. The replication principle and the hedging principle
step1: Calculate Su, Sd
step1: Calculate Cu, Cd
step1: Calculate the hedging rate H,
step1: Calculate loan D,
step5: Calculate option value Co=H*So-D
Su: rising stock price Sd: falling stock price
2. risk neutrality principle
step1:
step2:
step3:
W: Upward probability C1: Expected value u: Upward multiplier = 1, stock price rises % d: Downside multiplier = 1 - stock price drops %
2. Binary tree option pricing model
1. Single-period binary tree option pricing model
risk neutrality principle
2. Two-period binary tree option pricing model
Applying the Risk Neutrality Principle Twice
step1:
step2:
step3:
step4:
step5:
3. Multi-period binary tree option pricing model (understand)
3. Black-Scholes option pricing model (BS model for short)
Basic assumptions of BS model (understand)
Calculation formula of BS model (understand)
4. Call Option-Put Option Parity Theorem
Formula: Put option price P Price of the underlying asset S = Call option price C Current value of the exercise price PV (X)
5. Build: Buy calls Buy puts
Calculate net profit and loss: Net profit and loss = revenue - cost = |St-X|-C-P
Applicable conditions: drastic changes in market prices are expected
Chapter 8 Enterprise Value Assessment
The concept and purpose of enterprise value assessment
1. Concept: Fair Market Value
2. Purpose (understanding)
3. The meaning of the overall economic value of an enterprise
①The whole is not the simple sum of its parts; ②The overall value comes from the combination of elements; ③The value of the part can only be reflected in the whole; ④The overall value can only be reflected during operation.
4. Categories of the overall economic value of the enterprise
1. Entity value and equity value: Enterprise entity value = equity value (fair market) + net debt value (fair market)
2. Going Concern Value vs. Liquidation Value: Which Is Higher?
3. Minority equity value (current management and strategy; daily trading price) vs. controlling interest value (after improved management and strategy): Controlling interest premium = V (improved management) – V (current management)
discounted cash flow model
1. basic formula
2. Application steps
1. Determine the cost of capital
Chapter Four
2. Determine the forecast period
Forecast base period
Detailed forecast period and subsequent periods
3. Determine cash flow
entity cash flow
Entity cash flow = net operating profit after tax + depreciation and amortization - increase in operating working capital - capital expenditure
Entity cash flow = net operating profit after tax – increase in net operating assets
equity cash flow
Equity cash flow = net profit after tax – increase in shareholders’ equity
debt cash flow
Debt cash flow = after-tax interest - increase in net debt
Relative value valuation model
Fundamental
The relative value method compares the target company with comparable companies and uses the value of comparable companies to measure the value of the target company. It is a relative value, not an intrinsic value
Commonly used models
1. P/E ratio model
Key driver: Growth rate
Price-to-earnings ratio for the current period = dividend payout rate (1 growth rate)/(cost of equity - growth rate) Intrinsic price-to-earnings ratio = dividend payout rate during the forecast period/(cost of equity - growth rate)
The valuation model must follow the matching principle, that is, "current period's price-to-earnings ratio" corresponds to "current period's earnings per share"; "intrinsic (expected) price-to-earnings ratio" corresponds to "expected earnings per share"
Valuation model
Value per share of the target company = Price-to-earnings ratio of comparable companies × Earnings per share of the target company
applicability
advantage
①The data for calculating the P/E ratio is easy to obtain and the calculation is simple ②The price-to-earnings ratio links price and income and intuitively reflects the relationship between input and output. ③P/E ratio covers the impact of risk compensation rate, growth rate, and dividend payout rate, and is highly comprehensive.
Limitations: If earnings are negative, the P/E ratio loses meaning
Scope of application: The price-to-earnings ratio model is most suitable for companies that are continuously profitable
Modifications to the model
Modified average price-to-earnings ratio method (average first and then correct)
Value per share of the target company = average price-earnings ratio of comparable companies / average growth rate of comparable companies * growth rate of target company * earnings per share of target company
Stock price averaging method (correct first and then average)
Value per share of target company = (P/E ratio of comparable company/Growth rate of comparable company*Growth rate of target company*Earnings per share of target company)/n
Principle: Comparable companies uninstall key driving factors and then load target companies to load key driving factors, and use the price-earnings ratio model relationship to calculate the enterprise value per share. That is: P = market price = fair market value = price-to-earnings ratio * earnings per share)
2. Price to Book Ratio Model
1. Key driver: Net equity margin
Current period's price-to-book ratio = current period's net equity interest rate * current period's price-to-earnings ratio Intrinsic price-to-book ratio = net interest rate of equity during the forecast period * price-to-earnings ratio for the current period
2. Valuation model
Value per share of the target company = price-to-book ratio of comparable companies * net assets per share of the target company
3. Practicality
advantage
①The price-to-book ratio is rarely negative and can be used for most companies ② Data on the book value of net assets are easy to obtain and easy to understand. ③The book value of net assets is stable compared to net profit ④If the accounting standards are reasonable and the accounting policies of each enterprise are consistent, changes in the price-to-book ratio can reflect changes in enterprise value.
limitation
① Enterprises implement different accounting standards or accounting policies, and the price-to-book ratio loses comparability ②For service companies and high-tech companies with few fixed assets, net assets have little relationship with corporate value, and comparing price-to-book ratios has no practical significance. ③The net assets of a few companies are negative, and the price-to-book ratio is meaningless.
Scope of application
Suitable for companies that need to have a large amount of assets and a positive net worth
4. Modifications to the model
Modified average price-to-earnings ratio method (average first and then correct)
Value per share of target company = average price-to-book ratio of comparable companies/average net interest rate of equity of comparable companies*net interest rate of equity of target company*net assets per share of target company
Stock price averaging method (correct first and then average)
Target company’s value per share = (comparable company’s price-to-book ratio/comparable company’s net equity interest rate* target company’s net equity interest rate* target company’s net assets per share)/n
3. price to sales ratio model
1. Key Driver: Operating Net Margin
Price-to-sales ratio for the current period = net operating interest rate for the current period * price-earnings ratio for the current period Intrinsic price-to-sales ratio = operating net profit rate during the forecast period * current period’s price-to-earnings ratio
2. Valuation model
Value per share of the target company = price-to-sales ratio of comparable companies × operating income per share of the target company
3. applicability
advantage
① It will not have a negative value. For loss-making companies and insolvent companies, a meaningful price-to-sales ratio can also be calculated ②It is relatively stable, reliable and not easy to be manipulated ③Price-to-sales ratio is sensitive to changes in price policy and corporate strategy and can reflect the consequences of such changes
limitation
It cannot reflect changes in costs, which is one of the important factors affecting corporate cash flow and value.
Scope of application
Applicable to service companies with low operating cost rates, or companies in traditional industries with similar operating cost rates
4. Modifications to the model
Modified average price-to-earnings ratio method (average first and then correct)
Value per share of the target company = average price-to-sales ratio of comparable companies/average net operating profit rate of comparable companies * net operating profit margin of the target company * operating income per share of the target company
Stock price averaging method (correct first and then average)
Value per share of the target company = (Price-to-sales ratio of the comparable company/Net operating profit margin of the comparable company*Net operating profit margin of the target company*Operating income per share of the target company)/n
Chapter 9 Capital Structure
1. capital structure theory
1. MM theory
1. Assumptions of MM theory
(1) Operating risk can be measured by the variance of profit before interest and tax. Companies with the same operating risk are called risk homogeneous; (2) Investors and other market participants have the same expectations for the company’s future returns and risks; (3) Perfect capital market (no transaction costs); (4) Borrowing is risk-free (expressed as risk-free rate of return, regardless of the amount of debt); (5) All cash flows are sustainable (zero growth in profits before interest and taxes)
2. No tax MM theory
Proposition 1
1. Basic point
The capital structure of an enterprise has nothing to do with its value, and the weighted average cost of capital of an enterprise has nothing to do with its capital structure.
Expressed as:
2. in conclusion
(1) The value of a company with debt = the value of a company without debt (2) The weighted average cost of capital of a company with debt = the cost of equity capital of a company without debt with the same operating risk level (3) The weighted average capital cost of an enterprise has nothing to do with the capital structure. The value of an enterprise only depends on its operating risks.
Proposition 2
1. Basic point
The cost of equity capital for companies with debt increases as financial leverage increases
Expressed as:
2. in conclusion
(1) Cost of equity capital for companies with debt = Cost of equity capital for companies without debt Risk premium (2) Risk premium is proportional to financial leverage (debt/equity) calculated by market value
3. Taxed MM theory
Proposition 1
1. Basic point
As the debt ratio of a company increases, the value of the company also increases. In theory, when all financing comes from debt, the value of the company reaches its maximum.
Expressed as:
2. in conclusion
The value of a company with debt = the value of a debt-free company with the same operating risk level, the present value of debt interest tax deduction income
Proposition 2
1. Basic point
The cost of equity capital for companies with debt increases as financial leverage increases
Expressed as:
2. in conclusion
(1) Equity capital cost of a debt-ridden enterprise = Equity capital cost of a debt-free enterprise with the same risk level. Risk reward proportional to the ratio of debt to equity calculated based on market value. (2) Risk reward depends on the company’s debt ratio and income tax rate
4. The connection between the two
2. trade-off theory
Emphasizes the optimal capital structure to maximize corporate value on the basis of balancing the tax deductible benefits of debt interest and the cost of financial distress.
The value of a company with debt = the value of a company without debt + the present value of the interest tax deduction - the present value of the cost of financial distress
3. agency theory
Agency costs of debt due to information asymmetry, conflicts of interest between managers and shareholders and creditors
The value of a company with debt = the value of a company without debt + the present value of interest tax deductions - the present value of financial distress costs - the present value of agency costs of debt + the present value of agency benefits of debt
agency cost
Overinvestment:
It refers to the phenomenon that damages the interests of shareholders and creditors and reduces the value of the enterprise due to the adoption of unprofitable projects or high-risk projects.
Underinvestment
It refers to the phenomenon that the interests of creditors are damaged and the value of the enterprise is reduced because the enterprise abandons investment projects with positive net present value.
Agency income
The introduction of creditor protection clauses, incentives for managers to improve corporate performance, and constraints on managers to arbitrarily use cash flow and waste corporate resources
4. pecking order theory
Retained earnings---common bonds---convertible bonds----preferred stocks----common stocks
2. Capital structure decision analysis
1. capital cost comparison method
Calculate the weighted average capital cost of various long-term financing portfolio options based on market value, and select the financing option with the smallest weighted average capital cost based on the calculation results to determine the relatively optimal capital structure
2. Earnings per share indifference point method
Step1: Calculate EBIT?
Step2: Decision-making principles
Negative financing: projected EBIT > indifference point EBIT
Equity financing: Projected EBIT < indifference point EBIT
Summarize: Step 1: Comparison between pure new debt financing and pure new preferred stock financing: (1) There is no indifference point (parallel line) between the two (2) It is better if the new financial burden (after tax) is small; Or: It is better if the indifference point of earnings per share is smaller than that of ordinary shares. Step 2: When the company's total pre-interest and tax profit is expected to be greater than the pre-interest and tax profit at the indifference point of earnings per share, choose a plan with large financial leverage; when the company's total pre-interest and tax profit is expected to be less than the earnings per share When there is no point of difference in profit before interest and tax, choose the common stock plan with small financial leverage.
3. business value comparison method
Optimum Capital Structure Judgment Criteria
The optimal capital structure should be the one that maximizes the company's total value, that is, the highest price-to-book ratio, not necessarily the one that maximizes earnings per share. At the same time, under the capital structure with the largest total value of the company, the company's weighted average cost of capital is also the lowest.
Specific steps for determining capital structure using enterprise value comparison method
Calculate cost of debt capital
Calculate the cost of equity capital (Capital Asset Pricing Model)
Calculate the weighted average cost of capital = debt pre-tax capital cost × (1 - income tax rate) × debt value as a proportion of the total value + equity capital cost × stock value as a proportion of the total value + preferred stock capital cost × preferred stock value as a total value proportion of
3. Measurement of Leverage Factor
1. Measurement of operating leverage coefficient
1. Definition: Due to the existence of fixed operating costs, the phenomenon that small changes in sales volume cause large changes in EBIT is operating leverage.
2. formula:
EBIT - profit before interest and tax; Q - product sales volume; P - product sales price; V-variable cost per unit of product; M-total contribution margin; F-total fixed costs. EBIT＝Q（P－V）－F M＝Q（P－V）
(1) Existence premise: As long as a company has fixed operating costs, there will be an operating leverage amplification effect. Fixed operating costs are the root cause of operating leverage (2) Relationship with operating risk: The higher the operating leverage coefficient, the greater the operating risk. The operating leverage coefficient is equal to 1, and there is no amplification effect. (3) Influencing factors: fixed costs (change in the same direction), variable costs (change in the same direction), product sales quantity (change in the opposite direction), sales price level (change in the opposite direction) (4) Control methods: Enterprises can generally reduce operating leverage coefficients and reduce operating risks through measures such as increasing operating income, reducing variable costs per product unit, and reducing the proportion of fixed costs.
2. Measurement of financial leverage coefficient
1. Definition: Due to the existence of fixed financing costs, debt interest or preferred stock dividends, the phenomenon that changes in earnings before interest and taxes cause greater changes in earnings per share is called the financial leverage effect.
2. formula:
(1) Existence premise: As long as there is debt or preferred stock with fixed financing costs, there will be a financial leverage effect. Fixed financing costs are the root cause of financial leverage effect (2) Relationship with financial risk: Financial leverage amplifies the impact of changes in corporate profits before interest and taxes on changes in earnings per share. The higher the financial leverage coefficient, the greater the financial leverage and the greater the financial risk. If fixed financing costs, debt interest or preferred stock dividends equal zero, the financial leverage coefficient is 1, and there is no financial leverage effect. (3) Influencing factors: The higher the proportion of debt capital, the higher the fixed financing cost, the lower the level of profit before interest and tax, the greater the financial leverage effect.
3. Measurement of joint leverage coefficient
Definition: Due to the existence of fixed production and operating costs and fixed financing costs, the phenomenon that changes in sales cause greater changes in earnings per share is called the joint leverage effect.
formula:
(1) Existence premise: As long as the enterprise has both fixed operating costs and fixed financing costs, debt interest or preferred stock dividends, there will be a joint leverage effect (2) Influencing factors: Factors affecting operating leverage and financial leverage will affect joint leverage
Chapter 11 Long-term Financing
1. common stock financing
1. Characteristics of common stock financing
1. advantage
1. (1) There is no fixed interest burden; (2) There is no fixed maturity date; (3) Financing risk is small; (4) It can increase the company’s credibility; (5) Fewer financing restrictions; (6) Easy to absorb funds
2. shortcoming
1. (1) Capital cost is high; (2) It may disperse the company’s control; (3) Bear high information disclosure costs, making it more difficult for companies to protect trade secrets; (4) Stock listing will increase the risk of a company being acquired
2. Initial Offering of Common Stock
1. Distribution method
1. public indirect offering
1. advantage
1. (1) The issuance scope is wide, the issuance targets are many, and it is easy to raise sufficient capital; (2) The stock has strong liquidity and good liquidity; (3) Helps increase the issuing company’s visibility and expand its influence
2. shortcoming
1. Complex procedures and high issuance costs
2. Direct issuance without public disclosure
1. advantage
1. Greater flexibility and low issuance costs
2. shortcoming
1. Small issuance scope and poor liquidity of stocks
2. method of sales
1. self-sales method
1. Features: Save issuance costs; longer financing time; bear all risks
2. Entrusted sales method
1. underwriting
1. Features: Raise enough capital in a timely manner without bearing issuance risks; high issuance costs
2. consignment
1. Features: Earn part of premium income, reduce issuance costs; bear issuance risks
3. Pricing of common stock issuance: issuance at a discount is not allowed
3. equity refinancing
1. Allotment of shares
1. meaning and characteristics
1. Allotment of shares is the financing act of publicly placing (issuing) a certain number of new shares (short-term call options) to original ordinary shareholders in proportion to their shareholdings at a price lower than the market price.
2. Purpose
1. ①Do not change the control rights and various rights enjoyed by the original controlling shareholder over the company; ② Since the issuance of new shares will lead to the dilution of earnings per share in the short term, certain compensation can be given to existing shareholders through discount placement; ③Encourage old shareholders to subscribe for new shares to increase issuance
3. Rights issue conditions
1. ①The number of shares to be placed does not exceed 30% of the total share capital before the placement of shares; ② The controlling shareholder shall publicly commit to the number of shares subscribed before the shareholders’ meeting; ③Issuance using the agency sales method stipulated in the Securities Law
4. Allotment price
5. Allotment ex-rights reference price
1.
2.
2. Issuance of new shares
1. Public additional issuance and private additional issuance (understand)
3. The impact of equity refinancing on enterprises
1. Impact on corporate capital structure
1. It helps to reduce the asset-liability ratio, enhance financial stability, and reduce financial risks; it helps to achieve the target capital structure, reduce the weighted average cost of capital, and enhance corporate value.
2. Impact on corporate financial status
1. As long as the company's operations and profitability remain unchanged, financial leverage will be reduced and the return on net assets will be reduced.
3. Impact on corporate control
1. If shareholders do not give up allotment rights, their control rights will not be weakened; shareholders' control rights are affected by the number of new shareholders introduced through public additional issuance; non-public additional issuance to financial investors and strategic investors will not threaten control rights, and additional issuance to controlling shareholders will increase The controlling shareholder’s shareholding ratio.
2. long-term borrowing financing
1. Protective terms for long-term borrowings
1. Banks usually put forward conditions for borrowing enterprises to ensure that the loan is repaid in full and on time, and write them into the contract, including general protection clauses, special protection clauses, revolving credit agreements and compensatory balances, etc.
2. The cost of long-term borrowing
1. Interest, commitment fees under revolving credit agreements, overhead costs incurred in maintaining compensation balances
3. Repayment methods for long-term loans (understand)
4. Characteristics of long-term loan financing
1. Advantages: fast financing; good borrowing flexibility
2. Disadvantages: high financial risk; more restrictions
3. long term bond financing
1. bond issue price
1. Bond issue price = face value × coupon rate during the interest period × (P/A, i, n) + face value × (P/F, i, n)
2. When the market interest rate = coupon rate, the issuance price = the face value of the bond, it is a par-price issuance; When market interest rate > coupon rate, the issuance price < face value of the bond, it is a discount issue; When the market interest rate <coupon rate, the issuance price>the face value of the bond, it is a premium issue
2. Bond Repayment (Learn About)
3. Bond financing characteristics
1. advantage:
1. (1) The scale of financing is large. (2) Long-term and stable. (3) Conducive to optimal allocation of resources
2. shortcoming:
1. (1) Issuance costs are high. (2) The cost of information disclosure is high. (3) There are many restrictions.
4. Preferred stock financing
1. Conditions for listed companies to issue preferred shares
1. 1. The average annual distributable profit achieved in the last three fiscal years should be no less than one year’s dividend of preferred shares. 2. Cash dividends in the past three years should comply with the company's articles of association and the relevant regulatory regulations of the China Securities Regulatory Commission. 3. There were no major accounting violations during the reporting period. 4. The issued preference shares shall not exceed 50% of the total number of common shares of the company, and the amount of funds raised shall not exceed 50% of the net assets before issuance. Preference shares that have been repurchased and converted are not included in the calculation.
2. Preferred stock financing costs
1. Bond financing cost<Preferred stock financing cost<Common stock financing cost
3. Advantages and Disadvantages of Preferred Stock Financing
1. advantage
1. (1) Compared with bonds, failure to pay dividends will not cause the company to go bankrupt; there is no maturity period and no principal needs to be repaid. (2) Compared with ordinary shares, shareholders' equity will not be diluted.
2. shortcoming
1. (1) Preferred stock dividends cannot be deducted before tax, and there is no tax deduction advantage. (2) Fixed dividend burden will increase the company's financial risk and thereby increase the cost of common shares.
5. Warrant Bond Financing
1. Characteristics of Warrants
1. concept
1. A warrant is a certificate issued by a company to shareholders that authorizes its holder to purchase a specific number of company shares at a specific price during a specific period.
2. use
1. (1) When the company issues new shares, in order to prevent the original shareholders’ earnings per share and stock price from being diluted, a certain number of warrants are allotted to the original shareholders (initial function); (2) Issued to company managers as incentives (essentially "award options", which are not exactly the same as stock call options); (3) As a financing tool (usually issued together with bonds)
3. Warrants vs. Call Options
1. difference
1. Warrants
1. ① From newly issued stocks, the number of shares increases, earnings per share and market price decrease ②The term is long, dividends are paid within the validity period, and the BS model cannot be used
2. call option
1. ①The underlying stocks come from the secondary market and do not involve stock transactions. ② The term is short, no dividends may be paid during the validity period, and the BS model is used for pricing.
2. Same point
1. ① All use stocks as underlying assets, and their value changes with the stock price. ②You have the option before expiration to execute or not execute ③All have a fixed execution price
2. Financing costs of bonds with warrants
1. calculation steps
1. Step1: Purchase price = present value of bond interest, present value of maturity face value (present value of stock market price obtained from exercise of warrant - exercise expense)
2. Step2: Calculate the discount rate, which is the pre-tax capital cost of bonds with warrants
2. decision making method
1. The required return rate (market interest rate) of equal-risk bonds < discount rate < pre-tax common stock capital cost, this plan is acceptable
3. Advantages and Disadvantages of Warrant Bond Financing
1. advantage
1. One issuance serves two financing functions, effectively reducing financing costs.
2. shortcoming
1. (1) Poor flexibility. Since there are no redemption clauses or forced conversion clauses, the issuer may bear a certain opportunity cost when market interest rates drop significantly. (2) If the market price of the stock is much higher than the execution price, the original shareholders will also suffer heavy losses. (3) Underwriting fees are higher than ordinary debt financing.
6. convertible bond financing
1. Key terms of convertible bonds
1. Conversion ratio (number of shares available)
1. Conversion ratio = face value of bond ÷ conversion price
2. Redemption terms (facilitating share conversions)
1. Avoid losses incurred by continuing to pay interest to bondholders at a higher bond coupon rate after market interest rates drop.
3. Putback clauses (protecting creditors)
4. Mandatory conversion clause (guaranteed conversion)
2. Funding costs of convertible bonds
1. Bottom-line value of convertible bonds
1. Pure bond value = present value of future interest + present value of principal
2. Conversion value = stock market price × conversion ratio
Which is higher
2. Pre-tax capital cost of convertible bonds
1. Formula: Purchase price = present value of interest before conversion + present value of the bottom line value (or redemption price) of the convertible bond
2. Calculate: Discount Rate
3. Decision: The required rate of return on equal-risk bonds (market interest rate) < discount rate < pre-tax common stock capital cost, this plan is feasible
1. If this is not possible, then:
1. Option 1: Increase the coupon rate
2. Option 2: Lower the conversion price
3. Option 3: Extend the redemption protection period
3. Advantages and Disadvantages of Convertible Bond Financing
1. advantage
1. (1) Compared with ordinary bonds, convertible bonds allow companies to obtain funds at lower interest rates; (2) Compared with ordinary shares, convertible bonds allow the company to obtain the possibility of selling ordinary shares at a higher than the current stock price, avoiding the direct issuance of new shares that will cause the company's stock price to fall further.
2. shortcoming
1. (1) Risk of stock price rise. If the stock price rises significantly at the time of conversion, the company can only exchange the shares at a lower fixed conversion price, which will reduce the company's equity financing amount (2) Risk of stock price downturn. The stock price continues to be lower than the conversion price, convertible bond holders are unwilling to convert into stocks, and the company continues to bear debt; if there is a sell-back clause, it will increase the pressure to repay short-term debt. (3) Financing costs are higher than pure bonds. Although the coupon rate of convertible bonds is lower than that of ordinary bonds, the total financing cost after adding the conversion cost is higher than that of ordinary bonds.
4. Convertible bonds VS warrants
1.
7. Lease Financing
1. Reasons for leasing to exist
1. Tax savings/reduce transaction costs/reduce uncertainty
2. Classification of rentals
1. relationship between parties
1. Direct lease (two parties)/Leveraged lease (three parties)/Sale and leaseback (two parties)
2. Lease period length
1. Long term lease/short term lease
3. Is the lessor responsible for the maintenance of the leased asset?
1. Gross lease (lessor’s responsibility)/net lease (lessee’s responsibility)
4. Does the total lease fee exceed the cost of the asset?
1. Incomplete reimbursement of rental fees/Fully reimbursement of rental fees
5. Can the lease be terminated at any time?
1. Revokable/Irrevocable
3. Rental costs
1. The lessor’s total rental costs and profits
4. Operating leases and finance leases
1. Determine whether it is a finance lease
1. ① At the expiration of the lease term, the ownership of the leased asset is transferred to the lessee; ② The lessee has the option to purchase the leased asset, and the purchase price established is expected to be much lower than the fair value of the leased asset when the option is exercised. Therefore, it is reasonably certain that the lessee will exercise this option on the lease commencement date; ③The lease period accounts for the majority of the useful life of the leased asset (usually interpreted as equal to or greater than 75%) ④The present value of the minimum lease payment on the lease commencement date is almost equal to (usually interpreted as equal to or greater than 90%) the fair value of the leased asset on the lease commencement date; ⑤The leased assets are of special nature. If they are not restructured, only the lessee can use them.
2. the difference
1. The most important external characteristic of operating leases is the short lease period. A typical operating lease refers to a short-term, revocable, incompletely compensated gross lease.
2. The most important external feature of finance lease is the long lease period. A typical finance lease refers to a long-term, irrevocable, fully compensated net lease.
3. tax treatment
1. ① The leasing expenses incurred when renting fixed assets under operating lease shall be deducted evenly according to the lease period.
2. ② For leasing expenses incurred by leasing fixed assets under financial leasing, depreciation expenses should be extracted and deducted in installments as part of the value of the fixed assets rented under financial leasing according to regulations.
5. Decision analysis for leasing (lessee)
1. basic model
1. Lease net present value = Total present value of lease cash flows – Total present value of borrowing to purchase cash flows
1. If the net present value of leasing is greater than zero, the leasing option is adopted; on the contrary, the purchasing option is adopted.
2. Discount rate: the after-tax interest rate on a secured bond
2. Determination of cash flows at the end of the lease term
1. Determination of cash flows during the lease period
1. ①-Rent (pay attention to the timing of rent payment) ② Depreciation tax deduction = depreciation × corporate income tax rate
2. Determination of cash flows at the end of the lease term
1. Ownership does not transfer
1. Realization income is 0, realization loss = book value = value included in fixed assets – depreciation has been provided, Then the realization loss is tax deductible: Realization loss × corporate income tax rate
2. transfer of ownership
1. ①The nominal purchase price paid to the lessor (-) ② Realized income (+) ③ If the realized income is greater than the book value, more income tax will be paid on the realized income (-) Or: Realization income is less than book value, causing realization loss to be deducted from income tax (+)
3. Determination of purchase plan cash flow
1. initial cash flow
1. - Asset acquisition expenses
2. operating cash flow
1. Depreciation × income tax rate
3. Cash flow from residual value of assets at maturity
1. Realizable value of residual asset value at the end of the period + tax deduction for realization losses (or – tax on realization gains)
4. [Tip] For expenses such as equipment maintenance costs, if the contract stipulates that the lessee will bear it, the expense will be regarded as irrelevant cash flow in the two plans; if the contract stipulates that the lessor will bear it, the expense will need to be paid in the purchase plan. Calculate the after-tax cost and treat it as a cash outflow.
4. Discount rates for lease analysis
1. After-tax interest rate on secured bonds
5. The impact of leasing decisions on investment decisions
6. Sale and leaseback (understand)
8. theme
Chapter 10 Dividend Distribution, Stock Splits and Stock Repurchases
1. Dividend Theory and Dividend Policy
1. dividend theory
1. Dividend irrelevance theory (complete market theory)
(1) Investors do not care about the distribution of company dividends (2) The dividend payout ratio does not affect the company’s value
2. dividend correlation theory
tax gap theory
Core point of view: Dividend rate income tax rate VS capital gains tax rate
customer effect theory
High-income class/risk enthusiast---like capital appreciation--low dividend policy
Low-income class/risk averse---prefer cash dividends--high dividend policy
The "bird in hand" theory
Shareholders prefer cash dividends and prefer stocks with high dividend payout ratios
agency theory
Shareholders PK Creditors
In order to protect their own interests, creditors hope that companies will adopt low dividend payout ratios
Manager PK Shareholder
A high dividend payout ratio policy is conducive to curbing the agency costs of managers arbitrarily controlling free cash flow.
Small shareholders PK large shareholders
Small shareholders hope that the company will adopt a high dividend payout rate policy to prevent the interests of controlling shareholders from being infringed.
signaling theory
There is information asymmetry between internal managers and external investors. Dividend distribution can be used as an information transmission mechanism to judge the company's operating status and development prospects based on dividend information;
2. Types of dividend policies
residual dividend policy
Raise funds according to the target capital structure to ensure the lowest weighted capital cost, embodying the pecking order financing theory Advantages: Guarantee the lowest weighted capital cost, embodying the pecking order financing theory
Special Note: (1) Capital structure is the ratio of long-term interest-bearing liabilities to owners' equity, not the asset-liability ratio remains unchanged. (2) The cash problem of dividend distribution is a working capital management problem. If the cash stock is insufficient, it can be solved through short-term borrowing and has no direct relationship with raising long-term capital. (3) Undistributed profits from previous years will not be used, and only the remaining portion of this year’s profits will be distributed to shareholders.
fixed dividend policy
Advantages: Helps stabilize the company's stock price and enhance investors' confidence in the company; helps investors arrange income and expenses Disadvantages: Dividend payments are disconnected from earnings; difficult to maintain low cost of capital for residual dividend policy
Fixed dividend payout rate policy
Advantages: Closely integrate dividends with the company's earnings to reflect the principle of sharing more profits, less profits, and no profits. Disadvantages: Dividends vary greatly from year to year, which can easily cause the company to feel unstable, which is detrimental to stabilizing stock prices.
Low normal dividend plus extra dividend policy
Having greater flexibility is conducive to shareholders increasing their confidence in the company and stabilizing stock prices; shareholders can at least receive lower but relatively stable dividend income every year, which is conducive to attracting shareholders who prefer cash dividends.
3. Factors affecting dividend policy
1. legal restrictions
Capital preservation restrictions
Limitations on corporate accumulation
net profit limit
Limitations on excess accumulated profits
Insolvency Limitations
2. shareholder factors
Stable income and tax avoidance considerations
Prevent dilution of control considerations
3. company factors
Earnings Stability
Company Liquidity
debt capacity
4. Investment Opportunities
capital cost
debt needs
4. Other restrictions
debt contract constraints
inflation
2. Dividend types, payment procedures and distribution plans
1. Types of dividends
cash dividend
Stock dividends (additional issuance)
property dividends
debt dividend
2. Dividend payment procedure
3. Dividend distribution plan
The impact of stock dividends
(1) The internal structure of owners’ equity; (2) Number of shares (increase); (3) Earnings per share (decline); (4) Market price per share (decline)
Ex-rights reference price = (closing price on the equity registration date - cash dividend per share)/(1 stock bonus rate, conversion rate)
3. Stock Splits and Stock Buybacks
1. stock split
Purpose: (1) Reduce the price per share by increasing the number of shares, thereby attracting more investors (2) Giving people the impression that "the company is developing", this kind of positive information will increase the stock price in a short period of time
Impact of stock splits
(1) The face value becomes smaller; (2) The internal structure of shareholders’ equity remains unchanged; (3) It is not a dividend payment method; (4) Stock splits are used to lower the stock price when the company's stock price skyrockets and is expected to be difficult to fall.
2. stock buyback
What it means to the company
(1) It sends a signal to the market that the stock price is undervalued. (2) Using free cash flow for stock repurchases will help increase earnings per share. (3) Avoid the negative impact of dividend fluctuations. (4) Give full play to the role of financial leverage. (5) Reduces the company’s risk of being acquired to a certain extent. (6) Adjust ownership structure
4. Investment Opportunities
capital cost
debt needs
Chapter 12 Working Capital Management (Management of current assets and current liabilities)
1. working capital management strategies
1. working capital investment strategy
1. Moderate investment strategy
1. Shortage costs and holding costs are roughly equal
2. conservative investment strategy
1. Bear larger current asset holding costs and lower shortage costs
3. aggressive investment strategy
1. Bear larger current asset shortage costs and lower holding costs
2. working capital financing strategies
1. Current Asset Financing Structure
1.
2. It has a high liquidity rate, strong sustainability of funding sources, and low debt repayment pressure, which is called a conservative financing policy. The liquidity rate is low, the sustainability of the source of funds is weak, and the debt repayment pressure is high. It is called a radical financing policy.
2. Types of working capital financing strategies
1. Moderate funding strategy
1. (1) Volatile current assets = short-term financial liabilities (2) Stable current assets + long-term assets = long-term debt + operating current liabilities + shareholders’ equity
2. conservative financing strategy
1. (1) Volatile current assets > short-term financial liabilities (2) Stable current assets + long-term assets < long-term debt + operating current liabilities + shareholders’ equity
3. Aggressive Fundraising Strategy
1. (1) Volatile current assets < short-term financial liabilities (2) Stable current assets + long-term assets > long-term debt + operating current liabilities + shareholders’ equity
2. cash management
1. Cash management goals and methods:
1. Strive for cash flow synchronization
1. Use cash float
1. Accelerate collection
1. Postpone payment of accounts payable
2. Optimal cash holdings analysis
1. Cost analysis mode (relevant costs)
1. opportunity cost
1. Investment income lost due to holding
1. Move in the same direction as cash holdings
2. administrative costs
1. Management expenses incurred due to holding
1. Not proportional to cash holdings
3. shortage cost
1. Losses caused by inability to meet business needs due to shortages
1. Moves inversely with cash holdings
Decision-making principle: the sum of the three items is the smallest
2. Inventory model (related costs)
1. opportunity cost
1.
2. transaction cost
1.
total cost
1.
2.
1. Minimum total cost: opportunity cost = transaction cost
3. random pattern
1. Fundamental
1. ① When the cash stock reaches the control upper limit, use cash to purchase securities (the upper limit amount minus the optimal cash return line amount); ② When the cash stock reaches the lower control limit, sell securities in exchange for cash (the optimal cash return line amount minus the lower limit amount); ③When the cash stock fluctuates between the upper and lower limits, it is a change within the control range and is reasonable and should be ignored.
2. Calculation formula
1.
1. b: The fixed switching cost of each marketable security; σ: the standard deviation of expected daily cash balance fluctuations; i: daily interest rate of securities (reverse);
2. H＝3R－2L
1. Determination of the lower limit (L): It is affected by factors such as the company’s minimum daily cash requirements and the risk-taking tendency of managers.
3. The factors that affect the optimal cash return line are: fixed conversion cost per time (same direction), standard deviation (same direction), daily interest rate of securities (reverse), lower limit (same direction)
3.
3. Accounts receivable management
1. Contents of credit policy
1. credit period
1. Payment period from company to customer
2. credit standards
1. Quality, ability, capital, mortgage, conditions
3. Cash discount policy
1. For example: "2/10, n/60", its meaning is: "2" means a 2% cash discount, which means payment within 10 days, 98% of the invoice price is paid; "10" means the discount period is 10 days; "60" ”That is, the credit period is 60 days;
2. Costs related to accounts receivable
1. Accrued interest on funds occupied by accounts receivable
1. Accrued interest on funds occupied by accounts receivable =Funds occupied by accounts receivable×Capital cost = Average balance of accounts receivable × variable cost rate × capital cost =Daily sales (daily credit sales) × average cash collection period × variable cost rate × capital cost
2. Interest on funds occupied by inventories
1. Self-made: Interest on funds occupied by inventory = average inventory quantity × variable cost of inventory per unit × capital cost Outsourcing: Interest on funds occupied by inventory = average inventory quantity × inventory unit price × capital cost
3. Accrued Interest on Accounts Payable Savings Funds
1. Accrued interest on accounts payable savings = average balance of accounts payable × cost of capital
4. Collection fees
5. bad debt loss
1. Bad debt loss = credit sales × bad debt loss rate
6. Loss of cash discount
1. Cash discount loss = sales (credit sales) × proportion of customers enjoying cash discounts × cash discount rate
3. Decision plan
1. .Total analysis method for credit policy decision-making
1. Calculate income under each credit policy
2. Calculate relevant costs under each credit policy
3. Calculate the pre-tax profit and loss under each credit policy = income - related costs
4. Decision-making principle: Choose the credit policy plan with the largest pre-tax profit and loss (positive number)
2. Difference analysis method for credit policy decision-making
1. Calculate the incremental benefits of changing your credit policy
2. Calculate the incremental costs associated with changing your credit policy
3. Calculate increased pre-tax profit and loss
4. Decision-making principle: The increased pre-tax profit and loss is greater than 0 and can be changed
4. short term debt management
1. Characteristics of short-term debt financing
1. 1. Financing is fast and easy to obtain; 2. Financing is flexible; 3. Lower financing costs; 4. Financing risks are high.
2. Business credit financing
1. meaning
1. Commercial credit financing is a loan relationship between enterprises due to deferred payment or advance payment in commodity transactions. It is a kind of "spontaneous financing" and includes accounts payable, notes payable, and advance receipts.
2. Forgo cash discount costs
1.
3. Decision-making principles for utilizing cash discounts
1. (1) If the cost of giving up the cash discount is greater than the short-term borrowing interest rate (or short-term investment return rate), you should pay within the discount period and enjoy the cash discount; otherwise, give up the cash discount. (2) If the enterprise’s cost of giving up the cash discount reduced by the postponed payment is greater than the loss caused by the delayed payment, the enterprise can defer the payment. (3) If you are faced with two or more sellers offering different credit terms, you should measure the cost of giving up cash discounts, that is, choose the one with the smallest cost (or the greatest benefit) of giving up cash discounts.
3. short term borrowing financing
1. core principles
1. Financing cost = interest paid/available principal
5. Inventory management
1. cost of storing inventory
1. acquisition cost
1. acquisition cost
1. Annual demand (D) × unit price (U)
2. Ordering cost
1. Ordering fixed costs have nothing to do with order quantity
2. There is an inverse relationship between ordering variable cost and order quantity
1. Annual variable cost of ordering = Number of annual orders (D/Q) × Variable cost of each order (K)
2. storage cost
1. Store fixed costs
1. Regardless of order quantity
1. Such as warehouse depreciation expenses, fixed monthly wages of warehouse employees, etc.
2. storage variable costs
1. Directly proportional to order quantity
1. Storage variable cost = average inventory quantity (Q/2) × unit storage variable cost (KC)
3. stockout cost
1. Inversely proportional to order quantity
1. Including downtime losses and lost sales opportunities
2. Inventory economic batch analysis
1. basic model
1. meaning
1. The batch size that minimizes the total cost of inventory
2. Assumptions (Understanding)
3. Calculation formula
1. Total cost = ordering variable cost + storage variable cost
2. economic order quantity
1.
3. Ordering variable cost
1.
4. storage variable costs
1.
5. Total cost associated with economic batch size
1.
6. Best order times
1.
7. Economic order quantity takes up funds
1.
2. Extension of the model
1. Order lead time
1. (Extension to timely replenishment assumption)
2. Reorder point = average delivery time × average daily demand
1. Order lead time has no impact on economic order quantity
2. Inventory is supplied and used continuously
1. (Extension to centralized arrival assumption)
2.
3.
3. insurance reserve
1. (In response to possible shortages)
2. meaning
1. In order to prevent increased demand or delayed delivery during the delivery period, it is necessary to reserve more inventory to prepare for emergencies, that is, insurance reserves
3. Determine the principles
1.
1.
4. Consider reorder points for insurance reserves
1. Reorder point = delivery time × average daily demand + insurance reserve
Chapter 13 Product Cost Calculation
1. Product cost classification
1. Manufacturing costs and non-manufacturing costs
Difference: Selling expenses, administrative expenses, and financial expenses are non-production costs.
2. Product cost and period cost
Difference: Selling expenses, administrative expenses, and financial expenses are period costs
3. Direct costs and indirect costs
Difference: Indirect costs cannot be traced back to cost objects in an economically reasonable way.
2. Collection and allocation of product costs
Core principles:
Assign object
Production expenses that cannot be directly attributed
Distribution rate
allocated cost
The production expenses that should be allocated to a certain allocation object = allocation rate × the allocation standard of the allocation object
Two steps: collection---distribution
basic production costs
Same as above
Ancillary production expenses
Allocation principle
Same as above
Allocation method
direct method
Key point: The mutual supply of labor between auxiliary departments is not considered
Step1: Auxiliary unit cost = A’s total auxiliary production cost/(total labor volume – labor volume provided to department B)
Step2: The expenses that M should allocate = auxiliary unit cost × the amount of labor applicable to the M production line
allocated once
interaction method
Key point: Consider the mutual supply of labor between auxiliary departments
Step1: A and B divide each other: A’s total auxiliary cost/total labor volume*A’s auxiliary department labor volume
Step2: Total expenses of department A = total expenses of department A - expenses allocated to B Expenses allocated by B
Step3: Auxiliary unit cost = total cost of department A/amount of labor applicable to M and N
Step4: The expenses that M should allocate = auxiliary unit cost × the amount of labor applicable to the M production line
allocated twice
Cost allocation of finished product and work in progress
The basic idea
Core formula:
Cost of work in progress at the beginning of the month + production expenses incurred this month = cost of completed products this month + cost of work in progress at the end of the month
Calculate what?
Cost of finished goods this month
The above formula knows three and finds one
Allocation method
deduction allocation method (Calculate work in progress first, then squeeze out finished product)
Do not calculate the cost of work in progress (=0)
Cost of production in progress at the end of the month = 0; completed this month = expenses incurred this month
Fixed calculation of product cost at the beginning of the year
Cost of work in progress at the end of the month = fixed amount at the beginning of the month; completion at the end of the month = expenses incurred this month
The cost of work in progress is calculated based on the cost of raw materials consumed.
The cost of work in progress is calculated based on the fixed cost
Production in progress at the end of the month = Production fixed unit cost * Quantity in production at the end of the month
Completed at the end of the month = Production in progress at the beginning of the month (Quota) Expenses incurred this month - Production at the end of the month (Quota)
proportional allocation method (The costs at the beginning and end of the month are allocated between completion and production in progress)
quota proportion method
Distribution rate = (cost in progress at the beginning of the month actual expenses this month)/(completion quota consumption in progress quota consumption)
Completion cost = allocation rate * finished product quota consumption
Cost of production in progress = distribution rate * production in progress quota consumption at the end of the month
equivalent production method
Month-end weighted average
Production equivalent at the end of the month = Production quantity at the end of the month * Completion progress
Labor cost completion schedule
Material completion progress
Invest one after another
One time investment =
Unit cost of finished goods (distribution rate) = (Cost in process at the beginning of the month Actual production expenses this month)/(Completed quantity Approximate equivalent in production at the end of the month)
Allocate total cost
Completion cost = unit cost * completion quantity
Cost of production = unit cost * equivalent amount of production
first in first out
Approximately equivalent
Production in progress at the beginning of the month Approximate equivalent of completed work this month = Production in progress at the beginning of the month * (1 - Material input ratio)
Production started this month. Quantity completed this month = Quantity completed this month - Quantity in production at the beginning of the month
The equivalent equivalent of production at the end of the month = the quantity in production at the end of the month * the feed ratio for this month
Unit product cost =
Allocate total cost
Production in progress at the end of the month = Unit cost * Approximate equivalent amount of production in progress at the end of the month
Finished product (back extrusion)
Completed product = Cost of work in progress at the beginning of the month Unit cost * Work in process at the beginning of the month Completed volume for this month Unit cost * Production for this month Completed volume for this month
Completed product = Cost of production at the beginning of the month Production expenses incurred this month - Cost of production at the end of the month
Cost allocation of co-products and by-products
Allocation of co-product processing costs
selling price method
Selling price at separation point of product A = separation point output of product A * unit sales price
Joint allocation rate = joint cost/(A B C product separation point selling price)
Cost of product A distribution = A separation point selling price * distribution rate
net realizable value method
Net realizable value of A=A separation point output*sales unit price-subsequent processing cost of the product
Joint distribution rate = joint cost/(net realizable value of A B C product separation point)
Cost of product A distribution = Net realizable value of A separation point * distribution rate
physical quantity method
Allocation of by-product processing costs
3. Basic methods of product cost calculation
Comparison of three basic methods
step-by-step method
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Chapter 16 Cost-volume-profit analysis
1. The general relationship between cost, volume and profit
1. cost shape analysis
1. fixed costs
1.1. constraint fixation
1.2. discretionary fixation
2. Variable costs
2.1. binding changes
2.1.1. Utilization of production capacity must occur
2.2. discretionary changes
2.2.1. Decisions can change: sales commissions, new product development fees, technology transfer fees
3. Mixed costs
3.1. semi-variable costs
3.2. step cost
3.3. deferred variable costs
4. Breakdown of Mixed Costs
4.1. Regression straight line method
4.2. industrial engineering law
4.2.1. There is no historical data, historical data is unreliable, or historical data needs to be verified
2. variable costing
3. Assumptions of cost-volume-profit model
3.1. Relevant range assumptions
3.1.1. Period assumptions Business volume assumptions
3.2. Model linearity assumption
3.2.1. Fixed costs remain unchanged. Variable costs have a linear relationship with business volume. Sales revenue and sales volume have a linear relationship.
3.3. Production and sales balance assumption
3.3.1. Volume is sales
3.4. Assumption of unchanged variety structure
3.4.1. The proportion of single product revenue in total revenue remains unchanged
3.5. common assumptions
3.5.1. All costs can be reasonably or accurately decomposed into fixed and variable
4. Basic model of cost-volume-profit analysis
4.1. Profit and Loss Equation
4.1.1. EBIT = unit price * sales volume = (variable production, variable period) * sales volume - (fixed production, fixed period)
4.2. contribution margin equation
4.2.1. Contribution margin
4.2.1.1. Manufacturing contribution margin = sales revenue – variable production costs
4.2.1.2. Product contribution margin = sales revenue – variable production costs – variable period
4.2.1.3. M=(P-V)*Q-F
4.2.1.4. Unit contribution margin=m=p-v
4.2.1.5. Breakeven amount=F/m
4.2.2. contribution margin
4.2.2.1. m% variable cost rate=1
4.2.2.2. EBIT=sales revenue*m%-fixed costs
4.2.2.3. EBIT=safety margin*m%
4.2.2.4. EBIT%=m%*Safety margin rate
4.2.2.5. Guaranteed amount=F/m%
4.3. Cost-volume-profit relationship diagram
4.3.1. Sales volume is the horizontal axis: the slope of the V line is v; the slope of the P line is p
4.3.2. Sales is the horizontal axis. The slope of the V line is v%; the slope of the P line is 1.
2. Breakeven analysis
2.1. Profit critical point
2.1.1. Profit and loss critical point sales volume = breakeven volume = F/m
2.1.2. Profit and loss critical point sales = capital guarantee = F/m%
2.1.3. Profit and loss critical point operation rate = Q guarantee/Q actual
2.2. boundary of safety
2.2.1. Safety margin=Qactual-Qguaranteed
2.2.2. Safety margin=Sactual-Sguaranteed
2.2.3. Safety margin rate=Q safety/Q actual=1-profit and loss critical point operation rate
2.3. Multi-product capital guarantee amount and capital guarantee amount
2.3.1. Total contribution margin rate = total contribution margin/total revenue
2.3.2. Total guaranteed capital = F/total contribution margin rate
2.3.3. Capital guaranteed amount of a single product = total capital guaranteed amount * revenue ratio of a single product
2.3.4. Capital guaranteed amount of a single product = Capital guaranteed amount of a single product/Sales volume of a single product
3. Poly analysis
3.1. Target profit=(P-V)*Q-F
3.1.1. Calculate the profit amount = (target profit F)/m
3.1.2. Calculate the insurance amount = (target profit F)/m%
4. profit sensitivity analysis
4.1. Sensitivity coefficient = target change%/parameter change%
4.1.1. Sales sensitivity coefficient=EBIT%/Q%=Q actual/Q security=1/safety margin rate=M/(M-F)=operating leverage coefficient
4.2. economic significance
4.2.1. Compare with 1: the absolute value is greater than 1, the more sensitive it is
4.2.2. Compare with 0: If it is greater than 0, it will move in the same direction; if it is less than 0, it will move in the opposite direction.
5. dig a hole
5.1. When calculating critical values:
5.1.1. The question description assumes that other parameters remain unchanged, which means: p, v, Q, and F remain unchanged, not m% or v%
5.1.2. The question specifically states that m% or v% remains unchanged, and v and p change at the same time.
5.1.3. The question does not specifically state that m% or v% remains unchanged, v remains unchanged, and the basic definition formula is used to solve the problem.
5.2. Computational analysis questions or complexes
5.2.1. Note on fixed costs: time period unit (10,000 yuan)
5.2.2. Variable costs Note: Variable costs are large variable costs = variable production variable period
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