AP/ADMS 3530 3.

00 Finance
Final Exam Formula Sheet

Time Value of Money

Future Value
FV = Investment  1  r 
t
PV =
1  r t
C C1
PV of a perpetuity = PV of a growing perpetuity =
r rg

1 1 
PV of an annuity = C    t 
 r r (1  r )   (1  r ) t  1
FV of an annuity = C   
1  (1  r ) t   r 
= C  (easier to calculate)
 r 

1 1 
C1   1  g t  Annuity factor =   t 
PV (Growing Annuity) =  1      r r (1  r ) 
r  g   1  r  
1  (1  r ) t 
 
C1 =  
 1  r   1  g   r 
t t
FV (Growing Annuity) =
rg
(lower version is easier to calculate)

PV (Annuity Due) = (1+r) x (PV of an annuity)

FV (Annuity Due) = (1+r) x (FV of an annuity)

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


APR = Period Rate  m 

EAR = 1  Period Rate   1
m
 where m = number of periods per year
1 
Period Rate = (1  EAR )  1m 


1
Bonds and Stocks
1 1  Face Value
Price of a bond = PV (Coupons) + PV (Face Value) = C    t 

 r r (1  r )  (1  r ) t

Annual Coupon payment

Current yield =
Bond price

Yield to maturity (YTM) = interest rate for which the present value of the bond’s
payments equals the price

Coupon income  Price change

Rate of return =
Investment
Dividend payment
Dividend yield =
Stock price

Stock Price
Price earnings (P/E) ratio =
Earnings per share

Sustainable growth rate g = ROE  Plowback ratio

DIV1 DIV2 DIVH PH

Dividend Discount Model: P0   ...  
1  r (1  r ) 2
(1  r ) H
(1  r ) H
where H is the horizon date, and PH is the expected price of the stock at date H

DIV1
Constant-Growth Dividend Discount Model: P0 
rg

DIV1 DIV1 P1  P0
Expected Rate of Return Formula: r  g or r 
P0 P0 P0

2
Net Present Value and Other Investment Criteria

Net Present Value: NPV = PV(Cash flows) – Initial Investment (C0)

Payback = time periods it takes for the cash flows generated by the project to cover the
initial investment (C0)

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

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

PV of Costs
Equivalent Annual Cost =
Annuity Factor

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

 CdTc  1  0.5r   SdTc   1 

Present value of CCA tax shield with the half-year rule =     t 
 r  d   1  r   d  r   (1  r ) 
NPV = Total PV excluding CCA tax shield + PV of CCA tax shield

3
Accounting break-even level of revenues =

Fixed costs  Depreciation

Additional profit from each additional dollar of sales

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

Percentage change in profits

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

Fixed Costs  Depreciati on

Alternatively: DOL = 1 
Pretax Profits

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

Sample variance = 2 = sum of squared deviations around the average return, divided by the
number of observations minus 1

Standard deviation =  = Variance

Suppose a portfolio consists of only two assets:

1) Portfolio rate of return = rP  x1 r1  x2 r2 ,
where x1 and x2 are fractions of the portfolio in the first and second assets, respectively, and
r1 and r2 are the realized rates of return on the first and second assets, respectively.

2) Portfolio expected rate of return  rP  x1r1  x 2 r2 ,

where x1 and x2 are fractions of the portfolio in the first and second assets, respectively, and
r1 and r2 are the expected rates of return on the first and second assets, respectively.

3) Portfolio standard deviation   P  x12 12  x 22 22  2 x1 x 2  1 2 ,

where x1 and x2 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.

4
 Cov (r j , rm )
Correlation:  j ,m 
 j m

Covariance: Cov ( r j , rm )   j ,m j  m

Covariance: the probability-weighted average of cross-products of the deviations from

the respective means
 j , m j Cov(r j , rm )
Beta of stock j: j  
m  m2
The capital asset pricing model (CAPM):
Expected return = Risk-free rate + Asset risk premium  r  r f   ( rm  r f ).

Cost of Capital
After-tax cost of debt = pretax cost of debt  (1 – tax rate) = rdebt  (1  Tc )

D E
WACC = [  (1  Tc )rdebt ]  [  requity ], where V = D + E.
V V

If firm has a third type of securities, e.g. preferred stocks, in its capital structure,
D P E
WACC = [  (1  Tc )  rdebt ]  [  rpreferred ]  [  requity ], where V = D + P + E.
V V V
DIV1
requity  r f   ( rm  r f ); or requity   g.
P0
Dividend
rpreferred 
Price of preferred

Working Capital Management and Short-Term Financial Decisions

Cash conversion cycle = (inventory period + trade receivables period)
– trade payables period

Average inventory
Inventory period =
Annual cost of sales/ 365
Average trade receivables
Trade receivables period =
Annual sales / 365
Average trade payables
Trade payables period =
Annual cost of goods sold / 365

5
For bank loans (where m is the number of periods per year):
1) Simple interest:
quoted annual interest rate m
Effective annual rate = (1  )  1.
m
2) Discount interest:
m
 
 1 
Effective annual rate =    1.
 quoted annual interest rate 
1 
 m 
3) Interest with compensating balances:
actual interest paid
Effective annual rate = (1  ) m  1.
borrowed funds available
For inventories, total costs = order costs + carrying costs

2  annual sales  cost per order

Economic order quantity (EOQ) =
carrying cost

2  annual cash outflows  cost per sale of securities

Initial cash balance =
interest rate

365
discount
For trade credit, effective annual rate = (1  ) extra days credit  1.
discounted price

The break-even probability of collection is the probability p that makes the expected
profit from granting credit, p  PV(REV  COST)  (1  p )  PV(COST), equal to zero.
When there is no possibility of repeat order, break-even probability of collection
PV(COST)
 p .
PV(REV)