Equity Investments

Formula Reference Sheet

Margin & Leverage

Leverage Ratio

Value of AssetInvestor’s Equity Position = 1Initial Margin Requirement

Also = MKT Value / (MKT Value − Margin Loan − Accrued Interest)

Margin Call Price (P₀)

P0 × (1 − Initial Margin) (1 − Maintenance Margin)

Price below which a margin call is triggered

Market Cap & Valuation Multiples

Market Capitalization

(# of Shares) × (Price per Share)

Price-to-Book (P/B) Ratio

Market CapBook Value

Justified P/E Ratio

Dividend per ShareEPS · (1+g) k − g

k = required return · g = growth rate

Free Cash Flow to Equity (FCFE)

FCFE = NI + Depr − ΔinWC − FCInv + Net Borrowing

FCFE = CFO − FCInv + Net Borrowing

FCFE = FCFF − Int(1 − Tax Rate) + Net Borrowing

NI = Net Income · Depr = Depreciation
ΔinWC = Change in working capital
FCInv = Fixed capital investment (capex)
CFO = Cash from operations
FCFF = Free cash flow to the firm

Dividend Discount Model (Gordon Growth)

Price at t=0 — Derivation Chain

        P0 = D1r − g
        Price at t=0
      

←

D1 = D0(1+g) Next period dividend

←

g = (ROE)(RR) Sustainable growth rate

←

RR = 1 − Div. Payout Ratio Retention / plowback rate

r = required return · g = dividend growth rate · ROE = return on equity · RR = retention rate

Enterprise Value (EV)

Enterprise Value Components

MKT Value of Common
+ Preferred Equity equity value

MKT Value of Debt total debt

−

Cash & Short-term Investments liquid assets

EV represents the total value of the firm independent of capital structure. Used in EV/EBITDA multiples.