Table Of ContentSome Notations
ADF Annuity discount factor MVA Market value added
APR Annual percentage rate MVR Market value at risk
APV Adjusted present value NOPAT Net operating profit after tax
b Levered beta (also called equity or NOPLAT Net operating profit less adjusted tax
U
market beta) NPV Net present value
bL Unlevered beta (also called asset beta) P Price of a bond, a stock, or a put option
C Call price PBR Price-to-book ratio
CAPM Capital asset pricing model PI Profitability index
CAPEX Capital expenditures PER Price earnings ratio
CF Cash flow PPP Purchasing power parity
CFE Cash flow to equity holders PV Present value
CML Capital market line r Correlation coefficient between asset i
ij
CP Coupon payment (of a bond) and asset j returns
Cov R, R Covariance between asset i and asset j R Risk-free rate
i j F
returns R Return on the market portfolio
1 2 M
D Debt value ROCE Return on capital employed
DCF Discounted cash flow ROE Return on equity
D Option’s delta or hedge ratio ROIC Return on invested capital
DDM Dividend discount model SGR Self-sustainable growth rate
DF Discount factor s Standard deviation of asset i returns
i
DPS Dividend per share (volatility)
E Equity value s2 Variance of asset i returns (variability)
i
EAT Earnings after tax s Covariance between asset i and asset j
ij
EBIT Earnings before interest and tax returns
EBITDA Earnings before interest, tax, SML Security market line
depreciation and amortization T Time in years
EIL Efficient investment line T Corporate tax rate
C
EPS Earnings per share TV Terminal value
E R Expected return of asset i V Value of the firm’s equity (same as E)
i E
EV Enterprise value V Value of the firm with debt (levered
1 2 L
EVA® Economic value added value)
F Face value of a bond VU Value of the firm without debt
(unlevered value)
FCF Free cash flow
Var R Variance of asset i returns
IPO Initial public offering i
(same as s2)
i
ITS Interest tax shield 1 2
WCR Working capital requirement
k Cost of debt
D WACC Weighted average cost of capital
k Cost of equity
E X Exercise or strike price of an option
LBO Leverage buyout
y Yield to maturity (of a bond)
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Some Useful Formulas
1. Discount factor (Chapter 2, equation 2.3)
Value of $1 to be received at time T, discounted to the present at the rate k
$1 $1 T
DF 5 5 5$1 3 1 1k 2T
T,k 11k T 11k
1 2
2. Present value (Chapter 2)1 2
Value today of a T-year cash-flow stream discounted at rate k
PV 5 CF 3DF 1... ¢CF 3≤DF 1...1 CF 3DF
1 1,k t t,k T T,k
3. Present value of3 a perpetuity4 (Chap3ter 2, equatio4n 2.6) 3 4
The present value of an infinite stream of identical cash flows discounted at rate k
CF
PV5
k
4. Present value of a constant growing perpetuity (Chapter 2, equation 2.9)
Present value, at rate k, of a perpetuity growing at the constant rate g where the
cash flow at the end of the first year is CF
1
CF
PV5 1 with k .g
k2g
5. Present value of an annuity (Chapter 2, equation 2.11)
Present value of a T-year annuity at a rate k with a cash flow CF
PV 5CF3ADF with
T,k
1 1
ADF 5 1 2
T,k k 11k T
6. Sharpe ratio of asset i (Chapter 3, equation 31.8) 2
E R 2R
Sharpe ratio of asset i5 i F
B sR
1 2 i
7. Beta coefficient of stock i (Chapter 3, equation 3.11)
Cov R, R r ss s
b 5 i M 5 iM i M 5r i
i Var R s2 iM s
1 M 2 M M
8. Capital asset pricing model (Chapter 3, equation 3.13a, Chapter 10,
1 2
equation 10.11a and Chapter 12, equation 12.10)
E R 5R 1 E R 2R b
i F M F ¢i ≤
9. Invested capital (Chapter 41, eq2uation 4.35)1 2 4
Invested capital5Cash 1Working capital requirement1Net fixed assets
10. Capital employed (Chapter 4, equation 4.6)
Capital employed 5Short-term debt1Long-term debt1Owners’ equity
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Some Useful Formulas
11. Working capital requirement (Chapter 4, equation 4.7)
WCR 5 Accounts receivable1Inventories 1Prepaid expenses
2 Accounts payable1Net accruals
3 4
12. Earnings before in3 terest, tax, depreciation, and a4mortization (Chapter 4,
equation 4.10)
EBITDA 5EBIT1Depreciation expense1Amortization expense
13. Free cash flow (Chapter 4, equation 4.15)
FCF5EBIT 1 2T 1Depreciation expense
c
2DWCR 2Capital expenditures net of disposals
1 2
14. Return on equity (Chapter 6, equation 6.1) 1 2
Earnings after tax
ROE5
Owners’ equity
15. Return on invested capital before tax (Chapter 6, equation 6.4)
EBIT EBIT Sales
ROIC 5 5 3
BT Invested capital Sales Invested capital
16. The structure of a firm’s return on equity (Chapter 6, equation 6.9)
EBIT Sales EBT Invested capital EAT
ROE5 3 3 3 3
Sales Invested capital EBIT Owners’ equity EBT
17. Self-sustainable growth rate (Chapter 6, equation 6.12)
SGR 5Profit retention rate3Return on equity
18. Net present value (Chapter 7)
CF CF CF CF
NPV k,T 52CF 1 1 1 2 1...1 t 1...1 T
0 11k 1 11k 2 11k t 11k T
1 2 T CF
52CF 1 1 2 t 1 2 1 2 1 2
0 a 11k t
t51
19. Bond price (Chapter 10, equa1tion 120.2)
CP CP CP 1F
P 5 1 1 2 1...1 T
11y 11y 2 11y T
20. Share price (Chapter 10, equation 10.9)
1 2 1 2 1 2
DPS DPS DPS
P 5 1 1 2 1...1 t 1...
11k 11k 2 11k t
E E E
21. Constant dividend gro1wth m2ode1l (Chap2ter 10, equ1ation 210.10)
DPS
P 5 1
k 2g
E
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22. Enterprise value and Equity value (Chapter 10, equation 10.13)
Enterprise Value (EV) 5 Equity Value 1 Debt 2 Cash and other financial assets
Equity Value V 5Enterprise Value EV 1Cash 2Debt
E
23. Equity (levered) beta (1Cha2pter 12, equation 12.16) 2
Debt
b 5b 1 1
equity asset Equity
24. Weighted average cost of capital (Chapter 12, equation 12.12)
D E
WACC 5k 1 2T 1k
D BC E1D RE E1D
25. Interest tax shield (Chapter 13, e1quation2 13.3)
ITS5T 3k 3D
C D
26. Market value of a levered firm (Chapter 13, equation 13.4)
V 5V 1PV
L U ITS
27. Market value at risk (Chapter 15, equation 15.1)
MVR 5 Reduction in the firm’s value if the risk will occur
3 Probability that the risk will occur
3 4
28. Put-call parity relation3ship (Chapter 16, equation 16.5) 4
P0 5C0 1Xe2RFT 2S0
29. Black-Scholes option pricing formula (Chapter 16, equation 16.6 and 16.7)
C0 call option 5S0N d1 2Xe2RFTN d2
P01put option2 5Xe2R1FT 12 2N d2 21 S20 1 2N d2
30. Market value a1dded (Chap2ter 18, equ3ation 181.12)4 3 1 24
Market value added MVA 5Market value of capital2Capital employed
31. Return on invested cap1ital (Ch2apter 18)
NOPAT EBIT 1 2T
ROIC 5 5 C
Invested capital Invested capital
1 2
32. Economic value added (Chapter 18, equation 18.6)
EVA5 Return spread 3Invested capital5 ROIC2WACC 3Invested capital
3 4 3 4
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Finance For Executives
Managing for Value Creation
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Finance For Executives
Managing for Value Creation
sixth Edition
Gabriel Hawawini
INSEAD
Claude Viallet
INSEAD
Australia • Brazil • Mexico • Singapore • United Kingdom • United States
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Finance for Executives: Managing for © 2019, Cengage Learning EMEA
Value Creation, Sixth Edition
WCN: 02-300
Gabriel Hawawini & Claude Viallet
ALL RIGHTS RESERVED. No part of this work covered by the
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Print Number: 01 Print Year: 2019
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To our spouses, children and grandchildren, with love and gratitude.
GH and CV, 2018
This edition of Finance for Executives is dedicated to the memory of
Claude Viallet, my friend, colleague and co-author.
Gabriel Hawawini, 2019
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