Finance Cheat Sheet
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[pic 1][pic 2][pic 3][pic 4][pic 5] 0.05 = ɵ(0.1) and (1- ɵ)(-0.1) [pic 6] [pic 7][pic 8][pic 9]WC = Current Assets – Current Liabilities = (Cash + Short Term Receivables + Inventories) – (Short Term Accounts Payable)(1+rnom)=(1+rreal)(1+rinf)Accounting breakeven: What are the number of units that set the net income equal to zero [pic 10]Economic breakeven: What are the number of units that set the NPV = 0[pic 11]Portfolio variance = 1/n (Average variance) + (n-1)/n (Average Covariance) [pic 12][pic 13]Accept all projects whose NPV > 0 when future cash flows are discounted
at the company cost of capital, E(Ri).Accept all project whose NPV > 0 when discounted using a required rate of return calculated from the project beta.[pic 14] (1) Underlying Stock Price: For a given exercise price and maturity date, the value of a call option will increase with the price of the underlying asset. This shouldnt be too surprising since options derive the value of the underlying stock. For example, if an option has an exercise price of $40, it will be more valuable when the stock price is $60 than if the stock price is $50. Will options have any value if the stock price is below the exercise price? The answer is it depends! As long as there is any probability that the stock price will eventually exceed the exercise price at expiration, the option will have value.(2) Exercise Price: All else equal, the lower the exercise price, the greater the value of the option. For a given stock price, the probability that the price will exceed the exercise price increases as the exercise price declines.(3) Time to Maturity (Expiration): The value of an option is an increasing function of the time to maturity. With a longer time to maturity, the greater the chance that the stock price will exceed the exercise price.(4) Instantaneous Variance on the Price of the Underlying Stock: The greater the variance in the stock price, the greater the probability that the price will exceed the exercise price, and the option will be more valuable. The option holder wont receive anything if the stock price is below the exercise price, so that increasing the variability of returns (i.e. a mean-preserving spread) transfer’s payoffs to the state when the option has value.