USEFUL FORMULA

Present Value (PV) and

Future Value (FV):
PV = FV/(1+r)
T

FV = PV (1+r)
T
where,
r = periodic interest rate
T = number of periods

PV and FV
with Continuous Compounding:
FV = PV * e
RT
where,
R = continuously compounded
interest rate
T = number of periods

Effective Annual Interest rate
1 1
where,
stated annual rate
with periodic compounding
compounding period
m
r
m
r
m

+


=
=


Perpetuity: C/r

Growing Perpetuity: C/(r-g)

Stock Valuation (Dividends):
P = D/r (no growth)
P = D/(r-g) (constant growth)

Stock Valuation (using earnings):
P = EPS/r (no growth)
P = EPS/(r-g) (constant growth)

Annuity:

PV=
C
r
1
1
(1+ r)
T








FV=
C
r
(1+ r)
T
1
[ ]


Growing Annuity:

PV =
C
r g
1
1+ g
1+ r
[
\
|

)
j
T
|
|
|
|
|
|
FV =
C
r g
(1+r)
T
(1+ g)
T
"
#
$
%


Dividend Yield
Div / P
0


Tax Liability =
(Salvage Value Book Value) x Tax Rate

Real v. Nominal Returns:
(1+r
n
) = (1+r
r
)(1+i)
r
n
= nominal rate
r
r
= real rate
i = inflation rate

Bond Value
= PV coupons (C) + PV face amount (F)
= C[1 1/(1+r)
T
]/r + F/(1+r)
T


Equivalent Annual Cost:
*
1
1
(1 )
T
PV r
r

+



Portfolio Realized Return:
1 1
1
...
n
p i i n n
i
R x R x R x R
=
= = + +

Portfolio Expected Return:
1 1
1
( ) ( ) ( ) ... ( )
n
p i i n n
i
E R x E R x E R x E R
=
= = + +

Correlation:
ij
ij
i j

=

Covariance:
( )( )
( , )
A B A A B B
Cov R R E R R R R

=


Portfolio Variance (two assets):
2 2 2 2 2
1 1 2 2 1 2 12
2 2 2 2
1 1 2 2 1 2 12 1 2
( ) ( ) ( ) 2
( ) ( ) 2 ( ) ( )
p
R x R x R x x
x R x R x x R R


= + +
= + +


USEFUL FORMULA
Portfolio Standard Deviation (two assets,
correlation = -1):
1 1 1 2
(1 ) x x


Portfolio Standard Deviation (two assets,
correlation = +1):
1 1 1 2
(1 ) x x +


Variance of random variable R:
( )
2
( ) Var R E R R

=




Beta:
2
cov( , )
( )
i p
p
R R
R

=


Portfolio Beta:

=
=
n
i
i i p
x
1


The Capital Asset Pricing Model (Security
Market Line)
[ ] ] ) ( ) (
f m i f i
R R E R R E + =


(Capital Market Line)
[ ]

+ =
m
f m
e f e
R R E
R R E

] ) (
) (

Modigliani-Miller No-Tax Propositions
V
L
= V
U

) (
B o o S
r r
S
B
r r + =

Modigliani-Miller Tax Propositions
V
L
= V
U
+
c
B
( ) ) ( 1
B o C o S
r r
S
B
r r + =


Value of Levered firm (V
l
) with constant EBIT:
WACC
c
l
r
EBIT
V
) 1 (
=


Value of Unlevered firm (V
u
) with constant
EBIT:

V
u
=
EBIT(1
c
)
r
o


Weighted Ave. Cost of Capital (no tax)
B S
r
B S
B
r
B S
S

+
+

+



Weighted Average Cost of Capital (tax)
) 1 (
c B S
r
B S
B
r
B S
S

+
+

+


Aftertax Cost of Debt = (1-Tax rate) x Borrowing
rate

Cash Flow Recipe
Revenues
-Operating Expenses
=EBITDA (earnings before interest, taxes,
depreciation and amortization)
-Depreciation
=EBIT (earnings before interest and taxes)
-Taxes
=EBIAT (earnings before interest after taxes)
+Depreciation
-Capital Expenditures
-Change in Net Working Capital
+After-Tax Proceeds from Sale of Equipment
=Cash Flow

Put-Call Parity
C P = S K/ (1+r)

Call Value at maturity
max (0, S K)

Put Value at maturity
max (0, K S)

Forward Price (F)
F = S
0
* (1+r)