Corporate Finance Formulas and Valuation Metrics

Financial Valuation Metrics

Market Capitalization = Market value of equity = Shares × Price of share

Enterprise Value = Market Value of Equity + Debt − Cash

EBITDA and EBIT Formulas

• EBITDA = Net Income + DA, Taxes, and Interest
• EBITDA = Revenue − Expenses (excluding DA, Taxes, and Interest)
• EBITDA = EBIT + Depreciation + Amortization
• EBIT = Revenues − Costs − Depreciation

Income and Cash Flow Calculations

Income Tax = EBIT × τ

Unlevered Net Income = (Revenues − Costs − Depreciation) × (1 − τ)

Free Cash Flow = (EBIT) × (1 − τ) + Depreciation − CapEx +/− ΔNWC

Investment Decision Rules

Sunk costs are costs that have been or will be paid regardless of the decision to undertake an investment.

NPV = PV(Benefits) − PV(Costs). Invest if NPV > 0.

Cash flows for a firm are called unlevered cash flows. Cash flows to shareholders are called levered cash flows (LBO): LBO FCF (levered) = EBITDA − Interest − Taxes − ΔNWC − CapEx.

Working Capital Adjustments

ΔNWC = NWC_t − NWC_{t-1}

• An increase in Net Working Capital should be subtracted in FCF calculation (assuming NWC is positive, i.e., current assets > current liabilities).
• If NWC is negative, the increase should be added. The general formula is +/− ΔNWC.

Project Evaluation Metrics

IRR (Internal Rate of Return): The discount rate that sets the net present value of cash flows equal to zero.

Breakeven Analysis: The input level that causes the NPV of the investment to equal zero.

Sensitivity Analysis: Shows how NPV varies with a change in one assumption, holding others constant.

Scenario Analysis: Considers the effect on NPV of simultaneously changing multiple assumptions.

Payback Rule: Accept a project if its cash flow pays back the initial investment within a prespecified period (# years = investment / cash flow per year).

Bonds and Interest Rates

APR vs EAR

The EAR (Effective Annual Rate) is the true per-year compounding rate. The APR (Annual Percentage Rate) is a quoting convention; divide it by the number of compounding periods to recover the actual periodic rate.

EAR is what you actually earn; APR is a simple-interest quote. Convert APR to a periodic rate as APR/k.

Term Structure and Yields

The term structure of interest rates is the relationship between the maturity of a default-free investment and its interest rate. A yield curve is the graph of this relationship.

Yield to Maturity (YTM): The single discount rate that makes the PV of the bond’s future cash flows equal to its current market price (the bond’s IRR).

U.S. Treasury securities: Bills (≤1 year, zero-coupon), Notes (2–10 years, coupon), and Bonds (>10 years, coupon). U.S. bond yields are quoted as semi-annual APRs.

Bond Pricing Mechanics

F = Face Value, C = Coupon

Bond prices and yields move in opposite directions. Longer-maturity bonds are more sensitive to a given change in yield than shorter-maturity bonds.

A coupon bond is economically identical to a bundle of zero-coupon bonds. CPN payment = (Coupon rate × Face Value) / Number of Coupon Payments per Year.

=PMT(0.05/12, 360, -6400000)

Leveraged Buyout (LBO) Basics

LBO Enterprise Value = EBITDA × Multiple

LBO cash flow subtracts interest; unlevered FCF does not.