A-30 Appendix C Selected Equations and Tables
bp! w 1 b 1 " w 2 b 2 "... " wNbN! (^)!
i! 1
N
wi bi
RPi! (RPM)bi
ri! rRF " (rM # rRF)bi
Chapter 9
Value of stock (Pˆ 0 )! PV of expected future dividends
!
D 1
(1 " r
s)
1 "^
D 2
____(1 " r
s )
2 "^...^ "^
D%
____(1 " r
s )
%^
! (^)!
t! 1
%
Dt
(1 " r
s )
t^
Constant growth stock: Pˆ 0!
D 0 (1 " g)^1
(1 " r
s )
1 "^
D 0 (1 " g)^2
(1 " r
s )
2 "^...^ "^
D 0 (1 " g)%
(1 " r
s)
%^
!
D 0 (1 " g)
____r
s^ # g
!
D 1
r
s^ # g
Expec ted rate
of return
(^)! Expec ted
dividend yield
(^) " Expec ted growth r ate, or
capital gains yield
#rs!
D 1
P
0
" g
Growth rate! (1 – Payout ratio)ROE
Zero growth stock: Pˆ 0! Dr
s
Horizon value! PˆN!
DN " 1
_r
s^ # g
Nonconstant: Pˆ 0!
D 1
___(1 " r
s)
1 "^
D 2
___(1 " r
s)
2 "^...^ "^
DN
(1 " rs)N
"
DN" 1
(1 " rs)N"^1
"... "
D%
___(1 " r
s)
%^
!
D 1
____(1 " r
s )
1 "^
D 2
____(1 " r
s )
2 "... "^
DN
(1 " rs )N
"
(PN
(1 " rs )N
! PV of nonconstant dividends " PV of horizon value, P(N
Market value of company (V
Company
)! PV of expected future free cash ) ows
!
FCF 1
(1 " WACC) 1 "
FCF 2
(1 " WACC) 2 "... "
FCF%
____(1 " WACC) (^) %
Horizon value (VCompany at t!N)! FCFN" 1 /(WACC # gFCF)
Market value of equity! Book value " PV of all future EVAs
Vp!
Dp
r
p
#rp!
Dp
___V
p
Chapter 10
WACC! (^)!
% (^)
of^
debt^ "^!^
After-tax^ cost of
debt^ "^ "^!^
% of^ preferr (^) ed
st^ ock^ "^!^
C^ preferrost ofed
st^ ock^ "^ "^!^
% of^ common
equit^ y^ "^!^
C^ commonost of
(^) equity (^) "
! wdrd(1 – T) " wprp " wcrs