Summary
of
Formulas
Effective Interest Rate per Payment Period
Discrete compounding
i
=
[(I
+
~/(cK)]'
1
Continuous compounding
i

erlK

1
Recovery Period (Year
where
i

effective interest rate per payment period
r
=
nominal interest rate or
APR
C
=
number of interest periods per paymentperiod
K
=
number of payment periods per year
r/K
=
nominal interest rate per payment period
Market Interest Rate
i

'
+
f
+
i'f
where
i
=
market interest rate
if
=
inflationfree interest rate

,f
=
general inflation rate
Present Value of Perpetuities
p
=
market related risk index
r,
=
market rate of return
Capital Recovery with ReturnCost of Debt
CR(i)
=
(I

S)(A/P, ,
N)
+
iS
Book Value
11
=
I

x
D,
where
id
=
cost of debt
11
c,

he amount of term loan
StraightLine Depreciation
c,,
=
the amount of bond financing
(I

S)
c,,
=
total debt
=
c,
t
c,,
D,?

k,
=
the beforetax interest rate on the term loan
Declining Balance Depreciation
kh
=
the beforetax interest rate on the bond
t,,,
=
the firm's marginal tax rate
D,,

aI(1

a)"'

WeightedAverage Cost of Capital
1
where
a
=
declining balance rate. and
0
<
a
5
N
Cost of Equity
where
i,
=
cost of equity
rf
=
riskfree interest ratewhere
k
=
cost of capital
c,,
=
total equity capital
V
=
Cd
+
C,