Formula Sheets-GDBA505 must be returned after exam Note: The use of programmable calculators and PDAs is prohibited during

g the final exam

TIME VALUE OF MONEY Future value

FVn = PV0 (1 + k ) n (1 + k )n 1 FVn = PMT k FVn PV0 = (1 + k ) n

1 n 1 (1 + k ) PVn = PMT k

Future value of annuity Present value

Present value of annuity

Present value of perpetuity Annual percentage rate (APR) or quoted rate

PV0 =

PMT k
= Rate per period * Compounding Periods per year
m

Effective annual rate

QR f k = 1 + 1 m

VALUATION OF BONDS

Let:

B = current price of a bond,

k = bond required return,

I = periodic payment,

F = face value,

n = years to maturity

1 n 1 1 + kb ) ( 1 Current price of an annual coupon bond B=I +F (1 + k )n kb b Semi annual coupon Semi-annual payment = I = annual coupon rate * face / 2 Yield to Maturity = The interest rate y such that: B0 = C * PVAy ,n + F * PV y ,n Investment rate of return = total income/investment

VALUATION OF STOCKS

Let:

P0,P1 = current stock price, stock price in one period, Stock expected return =
kc

kc = stock expected return,

D0,D1 = current dividend, dividend in one period

= =

expected dividend yield + expected capital appreciation

D1 P0
P0 = D0 (1 + g ) D1 = kc g kc g

(P1 P0 )
P0

Constant growth (g) dividend discount model:

GDBA 505 Formula Sheet must be returned after exam

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INVESTMENT CRITERIA

Let:

CFt = cash flow in year t,

k = opportunity cost of capital,

CF0 = initial investment,

CF1 + CF2 + ... + CFT = CF0

n = project life

Ordinary Payback is the value of T such that:

Discounted Payback is the value of T such that: Net Present Value: NPV = CF1 + CF2 + CF3

(1 + k )

CF1

(1 + k )
CFn
n

CF2

+ ... +

(1 + k )
n t =1

CFT

= CF0

(1 + k )

(1 + k )

(1 + k )

+K +

(1 + k )

CF0 =

(1 + k )

CFt

CF0

Internal Rate of Return - Find IRR such that: CF3 CFn CF1 CF2 + + +K+ = CF0 1 2 3 n (1 + IRR ) (1 + IRR ) (1 + IRR ) (1 + IRR ) Profitability Index = PI = Equivalent annual NPV = PV (cash inflows ) PV (cash outflows ) Project NPV Annuity factor

or ,

t =1

(1 + IRR )

CFt

= CF0

Book (accounting) rate of return: Average book rate of return = (average annual net income)/(average annual book value of assets)

CAPITAL BUDGETING

Let:

OI = Operating Income = Sales Costs of goods sold, CF0 = capital cost of an asset in year 0, d = CCA rate, TC = corporate tax rate, k = discount rate, SVn = salvage value in year n (C0 )(d )(T ) (1 + 0.5k ) ( SVn )(d )(T ) 1 * * n d +k d +k (1 + k ) (1 + k )

PV of perpetual tax shield with salvage value in year n = =

NPV =

PVof After Tax PVof CCA PVof All Changes 1 SVn CF0 + + n Operating cash flows Tax Shield in NWC (1 + k )

RISK & RETURN

Let:w1, w2 = investment proportion in asset 1, asset 2, E(Rp) = portfolio expected return, p = portfolio standard deviation, 1 ,2 = standard deviation of the returns for asset 1, asset 2 Expected return for a single asset given n past historical realized returns R1 , R2 ,..., Rn : Expected return for a single asset given k possible states of the economy, conditional returns and their probabilities:

E (R ) =

1 (R1 + R2 + ... + Rn ) n

E (R ) = p1 R1 + p 2 R2 + ... + p k Rk

Variance of returns for a single asset given n past historical realized returns R1 , R2 ,..., Rn :

Variance for a single asset given k possible states of the economy, conditional returns and their probabilities:

1 = [R1 E (R )]2 + [R2 E (R )]2 + ... + [Rn E (R )]2 n

2

2 = p1 [R1 E (R )] + p 2 [R2 E (R )] + ... + p k [Rk E (R )]

2 2

Expected return of a portfolio of j assets: E ( R p ) = w1 E ( R1 ) + w2 E ( R2 ) + ... + w j E ( R j )

P =

2 2 2 2 ( w1 ) ( 1 ) + ( w2 ) ( 2 ) + 2 ( w1 )( w2 ) ( COV1,2 )

Correlation between the returns on stock 1 and stock 2: 12 =

COV12

1 2

P =B

( w1 ) ( 1 )
2

+ ( w2 ) ( 2 ) + 2 ( w1 )( w2 )( 12 )( 1 )( 2 )
2 2

Sharpe Ratio = CAPM:

ERP RF

E ( Ri ) = R f + i E ( RM ) R f

GDBA 505 Formula Sheet must be returned after exam

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COST OF CAPITAL

Dividend Growth Model: D Ke = 1 + g P0 kE D1 = = = Shareholders required return Next period's projected Constant growth rate

dividend

Note: Where appropriate, g may be estimated as a: 1) Compound rate 2) Average (Arithmetic) rate 3) Retention ratio X Return on Retained Earnings = Retention ratio * ROE retained earnings earnings = * earnings shareholders equity

SML or CAPM Approach:

Rf
Rm

= = = =

RE = R f + [ Rm - R f ] E Risk-free rate
Return on the market portfolio The systematic risk of the asset Market risk premium

Cost of Preferred Stock:

k Ps =

D P0

E
Rm - R f

D P0

= =

Fixed dividend Price per share of the preferred stock

S D K e + K D (1 T ) V V Net proceeds = issue price issue price *floatation cost% * (1- taxes) WACC =

LEVERAGE & CAPITAL STRUCTURE

Indifference EBIT = When EPS under different capital structures are equal ( EBIT - Interest ) ( 1 - t c ) Preferred Share Dividends EPS = # of common shares M&Ms Capital Structure Theory

No Tax With Tax

EBIT = S L + D = VL VU = KU
VU = EBIT (1 T ) , KU VL = VU + D (T )

K e = KU + ( KU K D ) D

SL

K e = KU + ( KU K D ) (1 T ) D

SL

GDBA 505 Formula Sheet must be returned after exam

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