Basic Financial Calculations

Calculations Page

This page comes from a project we had to do in my Principles of Finance class the semester I took it, in 1998. We had to compare two companies and choose one to invest in. The two companies involved in my project were Helmerich & Payne and Schlumberger. A short explanation of each calculation is at the bottom of the page.

Expected Return

SLB

HP

k_e = (D₁/P₀) + g k_e = (D₁/P₀) + g

= (.80/51.94) + .045 = (.28/20.63) + .025

= .0154 + .045 = .0136 + .025

= .0604 or 6.04% = .0386 or 3.86%

The D₁ is next year's dividend. P₀ is the current price. "g" is the expected growth of the company usually derived from a Valueline of S&P report.

Required Return

SLB

HP

k_j = r_f+ B(r_m - r_f) k_j = r_f+ B(r_m - r_f)

= .04 + .90(.12 - .04) = .04 + 1.0(.12 - .04)

= .04 + .072 = .04 + .08

= .112 or 11.2% = .120 or 12.0%

The r_fis the "risk-free" rate. B stands for Beta. r_m is the overall market risk.

Dividend Payout Ratio

SLB

HP

P₀ = D₀/EPS P₀ = D₀/EPS

= .75/2.12 = .28/2.01

= .3538 or 35.38% = .1393 or 13.93%

The P₀ is the current stock price. D₀ is the current dividend. EPS is Earnings Per Share.

Weighted Cost of Capital

SLB

HP

k_a = (E%)k_e + (D%)(k_d)(1 - T) k_a = (E%)k_e + (D%)(k_d)(1 - T)

= (.86)(.1352)+(.14)(.065)(1 -.25) = (1.0)(.1216)+(0.0)(.065)(1 -.36)

= .1163 + .0068 = .1216 + 0

= .1231 or 12.31% = .1216 or 12.16%

The E% is the percentage of equity a company is made up of, and D% is the percentage of debt. k_e is the marginal cost of equity. k_d is the marginal cost of debt. T is the tax rate.

Expected Return: Returns expected on a risky asset based on a probability distribution for the potential rates of return. Expected return equals a risk free rate (generally the prevailing U.S. Treasury note) plus a risk premium (the difference between the historic market return, based upon a well diversified index such as the S&P500) multiplied by the assets beta.
Required Return: Returns that investors require before they are willing to allocate money for an investment that has a certain risk level. The expected return must be higher than the required return for the investment to be reasonable.
Dividend Payout Ratio: The percentage of earnings paid out in dividends.
Weighted Cost of Capital: Expected return on a portfolio of all the firm's securities. It is used as a hurdle rate for capital investment.

**Expected Return**
		SLB			HP
k_e	=	(D₁/P₀) + g	k_e	=	(D₁/P₀) + g
	=	(.80/51.94) + .045		=	(.28/20.63) + .025
	=	.0154 + .045		=	.0136 + .025
	=	.0604 or 6.04%		=	.0386 or 3.86%

**Required Return**
		SLB			HP
k_j	=	r_f+ B(r_m - r_f)	k_j	=	r_f+ B(r_m - r_f)
	=	.04 + .90(.12 - .04)		=	.04 + 1.0(.12 - .04)
	=	.04 + .072		=	.04 + .08
	=	.112 or 11.2%		=	.120 or 12.0%

**Dividend Payout Ratio**
		SLB			HP
P₀	=	D₀/EPS	P₀	=	D₀/EPS
	=	.75/2.12		=	.28/2.01
	=	.3538 or 35.38%		=	.1393 or 13.93%

**Weighted Cost of Capital**
		SLB			HP
k_a	=	(E%)k_e + (D%)(k_d)(1 - T)	k_a	=	(E%)k_e + (D%)(k_d)(1 - T)
	=	(.86)(.1352)+(.14)(.065)(1 -.25)		=	(1.0)(.1216)+(0.0)(.065)(1 -.36)
	=	.1163 + .0068		=	.1216 + 0
	=	.1231 or 12.31%		=	.1216 or 12.16%

Information Related to Companies (11/98)

Schlumberger

Helmerich & Payne

Valueline's Timeliness Ranking 3 (Average) 5 (Poor)

Standard & Poor's Opinions Hold (***) Hold (***)

Stock Price $51.94 $20.63

Earning Per Share $ 2.12 $ 2.01

Price/Earnings Ratio 24.48 10.28

Dividend $ 0.75 $ 0.28

Dividend Yield 1.44% 1.36%

Return on Stockholder's Equity 15.45% 12.67%

	Schlumberger	Helmerich & Payne
Valueline's Timeliness Ranking	3 (Average)	5 (Poor)
Standard & Poor's Opinions	Hold (***)	Hold (***)
Stock Price	$51.94	$20.63
Earning Per Share	$ 2.12	$ 2.01
Price/Earnings Ratio	24.48	10.28
Dividend	$ 0.75	$ 0.28
Dividend Yield	1.44%	1.36%
Return on Stockholder's Equity	15.45%	12.67%