Foundation Level Exams

Business Finance Formulae

Description Formula

After-tax cost of irredeemable debt I

Kd = (1 t)
capital P0

Capital asset pricing model E(ri) = rf + i(rm rf)

Covariance
Correlation coefficient xy

Cost of Equity =

Cost of equity by Gordon growth D0 (1 g)

ke +g
model P0

Cost of irredeemable debt capital

d
Cost of preference shares Kpref =
P0

Covariance p(x x)(y y)

Dividend growth g = bR

n
r = (1 + ie) 1

Effective interest rates or

1/n
ie = (1 +r) 1
Expected return of a two asset r p xr a (1 x) r b
portfolio

Future value (FV) of a cash flow n

FV = PV (1 + r)

Internal rate of return (IRR)

I I I Pn
Market value of debentures P0 ...
(1 Kb ) (1 Kb )2 (1 Kb )n

I
Market value for irredeemable debt P0 =
Kb

D 0 (1 g)
Market value of a share P0
(r g)

Payback period

1
PV FV
Present value (PV) of a cash flow (1 r) n

Annual cash flow 1

Present value (PV) of an annuity PV = 1 n
r (1 r)

Annual cash flow

Present value (PV) of a perpetuity PV =
r

Price earnings ratios

`
Sensitivity

Share price in perpetuity

Standard deviation of the returns 2 2 2 2

p = a x b (1 x) 2x (1 x)pab a b
from a two-asset portfolio

Return of capital employed (ROCE)

Return on share

Weighted average cost of capital E D

WACC Ke Kd
(WACC) E D E D