1

AP/ADMS 3530.03 Finance

Final Exam Formula Sheet

Time Value of Money
FV = ( )
n
r + 1 Investment
PV =
( )
n
r + 1
Value Future

PV of a perpetuity =
r
C
PV of a growing perpetuity =
g r
C

PV of an annuity =
(

+

n
r r r
C
) 1 (
1 1

=
(

r
r
C
n
) 1 ( 1
(easier to calculate)
FV of an annuity =
(

r
r
C
n
1 ) 1 (

PV (Growing Annuity) =
(
(

|
.
|

\
|
+
+

n
r
g
g r
C
1
1
1
FV (Growing Annuity) = ( ) ( ) | |
n n
g r
g r
C
+ +

1 1
Annuity factor =
(

n
r r r ) 1 (
1 1

=
(

+

r
r
n
) 1 ( 1

(lower version is easier to calculate)

PV (Annuity Due) = PV(Simple Annuity) (1+r)


FV (Annuity Due) = FV (Simple Annuity) (1+r)


1 + Real rate =
rate Inflation 1
rate Nomimal 1
+
+



APR = Period Rate m
EAR = ( ) 1 Rate Period 1 +
m

Period Rate = 1 ) EAR 1 (
1
+
m

where m = number of periods per year

2
Bonds and Stocks
Price of a bond = PV (Coupons) + PV (Face Value) =
n n
r r r r
C
) 1 (
Value Face
) 1 (
1 1
+
+
(

+

Current yield =
price Bond
payment Coupon Annual

Rate of return =
price Initial
loss or gain Capital Income +

Dividend yield =
price Stock
payment Dividend
Payout Ratio =
EPS
Dividend

g = ROE Plowback ratio
Equity Total
Income Net
ROE =
Dividend Discount Model:
H
H
H
r
P
r r r
P
) 1 ( ) 1 (
DIV
...
) 1 (
DIV
1
DIV
H
2
2 1
0
+
+
+
+ +
+
+
+
=
where H is the horizon date, and is the expected price of the stock at date H
Constant-Growth Dividend Discount Model:
g r
P

=
1
0
DIV

Expected Return Formula: g
P
r + =
0
1
DIV
or
0
0 1
0
1
DIV
P
P P
P
r

+ =

Net Present Value and Other Investment Criteria

Net Present Value: NPV = PV(Cash flows) Initial Investment ()

Payback = time periods it takes for the cash flows generated by the project to cover the
initial investment ()

Book rate of return = Book Income / Book Assets

Internal Rate of Return (IRR) = the discount rate at which project NPV is zero

Profitability Index: PI =
) (C Investment Initial
NPV
0

Equivalent Annual Cost =
Factor Annuity
Costs of PV

3
Capital Budgeting
Incremental cash flow = cash flow with project cash flow without project

Total project cash flows = cash flow from investment in plant and equipment
+ cash flow from investment in working capital
+ cash flow from operations, including
operating cash flows
CCA tax shield

There are three equivalent ways to compute the cash flow from operations:
1) Method 1: Cash flow from operations = revenues cash expenses taxes paid
2) Method 2: Cash flow from operations = net profit + depreciation
3) Method 3: Cash flow from operations = (revenues cash expenses) (1 tax rate)
+ (depreciation tax rate)

Taxable income = revenues expenses CCA
CCA tax shield = CCA tax rate
Present value of CCA tax shield with the half-year rule =
(

+
(

+
+
(

+
t
c c
r r d
SdT
r
r
d r
CdT
) 1 (
1
1
5 . 0 1

NPV = Total PV excluding CCA tax shield + PV of CCA tax shield

Accounting break-even level of revenues =
Sales $1 per Profit
on Depreciati costs Fixed +

NPV break-even level of sales = The sales level at which NPV is zero

The degree of operating leverage (DOL) =
sales in change Percentage
profits in change Percentage

Alternatively: DOL =
Profits Pretax
on Depreciati Costs Fixed +
+ 1

Risk and Return
Rate of return on any security = interest rate on Treasury bills + security risk premium

Expected market return = interest rate on Treasury bills + normal market risk premium

Mean (or expected) return = probability-weighted average of possible returns

Variance =
2
= probability-weighted average of squared deviations around the mean
Standard deviation = = Variance




4
Suppose a portfolio consists of only two assets:
1) Portfolio rate of return = ,
2 2 1 1
r x r x r
P
+ =
where and are fractions of the portfolio in the first and second assets, respectively, and
and are the realized rates of return on the first and second assets, respectively.

2) Portfolio expected rate of return ,
2 2 1 1
r x r x r
P
+ = =
where and are fractions of the portfolio in the first and second assets, respectively, and
and are the expected rates of return on the first and second assets, respectively.

3) Portfolio standard deviation , 2
2 1 2 1
2
2
2
2
2
1
2
1
x x x x
P
+ + = =
where and are fractions of the portfolio in the first and second assets, respectively,
1
and

2
are standard deviations of the returns on the first and second assets, respectively, and is
the correlation coefficient between the two assets.

Correlation:
m j
m j
m j
r r

) , (
,
Cov
=
Covariance:
m j m j m j
r r
,
) , ( Cov =

Covariance:

=

=
n
i
m
m
j
j i m j
r r r r p r r Cov
1
) )( ( ) , (

Beta of stock j:
m
j m j
j

,
=
2
) , ( Cov
m
m j
r r

=

The capital asset pricing model (CAPM):
Expected return = Risk-free rate + Asset risk premium ). (
f m f
r r r r + =

Cost of Capital
After-tax cost of debt = pretax cost of debt (1 tax rate) = ) 1 (
c
T r
debt

WACC = ], [ ] ) 1 ( [
equity debt
r
V
E
r T
V
D
c
+ where V = D + E.

If firm has a third type of securities, e.g. preferred stocks, in its capital structure,
WACC = ], [ ] [ ] ) 1 ( [
equity preferred debt
r
V
E
r
V
P
r T
V
D
c
+ + where V = D + P + E.
); (
f m f
r r r r + =
equity
or .
0
g
P
r + =
1
equity
DIV

preferred of Price
Dividend
preferred
= r