Basic Financial Formulae 1995-2005 by Timothy R. Mayes, Ph.D.

1
Selected Financial Formulae
Purpose Formula
Basic Time Value Formulae
Future Value of a Single Sum
Present Value of a Single Sum
Solve for N for a Single Sum
Solve for i for a Single Sum
Present Value of an Ordinary Annuity
Future Value of an Ordinary Annuity
Present Value of an Annuity Due
Future Value of an Annuity Due
Present Value of an Annuity Growing at a
Constant Rate (g)
Future Value of an Annuity Growing at a
Constant Rate (g)
Holding Period Return (single period)
Holding Period Return with Reinvestment
(for multiple sub-period returns)
FV PV 1 i + ( )
N
=
PV
FV
1 i + ( )
N
------------------- =
N
FV
PV
-------


ln
1 i + ( ) ln
--------------------- =
i
FV
PV
------- N 1 =
PV
A
Pmt
1 1 1 i + ( )
N

i
----------------------------------- =
FV
A
Pmt
1 i + ( )
N
1
i
---------------------------- =
PV
Ad
Pmt
1 1 1 i + ( )
N 1 ( )

i
---------------------------------------------- Pmt + =
FV
Ad
Pmt
1 i + ( )
N
1
i
---------------------------- 1 i + ( ) =
PV
GA
Pmt
1
i g
------------ 1
1 g +
1 i +
------------


N

=
FV
GA
Pmt
1
i g
------------ 1
1 g +
1 i +
------------


N

1 i + ( )
N
=
HPR
P
1
Cash Flows
+
P
0
----------------------------------------------- 1 =
HPR
Reinvest
1 HPR
t
+ ( ) 1
t 1 =
N

=
Basic Financial Formulae 1995-2005 by Timothy R. Mayes, Ph.D. 2
Basic Security Valuation Formulae
Dividend Discount Model (AKA, the Gordon
Model)
Two-stage Dividend Discount Model
Notes: This equation is too long for one line.
g
1
= Growth rate during high growth phase.
g
2
= Growth in constant growth phase after n.
n = Length of high growth phase.
Assume g
1
<> k
CS
and g
2
< k
CS

Three-stage Dividend Discount Model
Notes:
n
1
= Length of high growth phase.
n
2
= Periods until constant growth phase.
n
2
= n
1
+ length of transistion phase.

Earnings Model
Constant Growth FCF Valuation Model
V
Ops
= Value of Total Operations
V
Debt
, V
Pref
= Value of debt and preferred stock
V
Non-Ops Assets
= Value of non-operating assets
Sustainable growth rate
Note: b = retention ratio = 1 - payout ratio
r = return on equity
Value of a Share of Preferred Stock
Value of a Bond on a Payment Date
Quoted Price of a Bond on a Non-Payment
Date
V
B,0
= Value of bond at last payment date
= The fraction of the current period that has elaspsed
Selected Financial Formulae
Purpose Formula
V
CS
D
0
1 g + ( )
k
CS
g
------------------------
D
1
k
CS
g
----------------- = =
V
CS
D
0
1 g
1
+ ( )
k
CS
g
1

-------------------------- 1
1 g
1
+
1 k
CS
+
-----------------


n
=

D
0
1 g
1
+ ( )
n
1 g
2
+ ( )
k
CS
g
2

-------------------------------------------------
1 k
CS
+ ( )
n
------------------------------------------------- +
V
CS
D
0
k
CS
g
2

-------------------- 1 g
2
+ ( )
n
1
n
2
+
2
----------------- g
1
g
2
( ) + =
V
CS
EPS
1
k
CS
-------------
RE
1
ROE
k
CS
------------ 1


k
CS
g
------------------------------------- + =
V
Ops
FCF
1
k
CS
g
----------------- =
V
CS
V
Ops
V
Debt
V
Pref
V
Non OpAssets
+ =
g br =
V
P
D
k
P
----- =
V
B
Pmt
1 1 1 k
d
+ ( )
N

k
d
--------------------------------------
FV
1 k
d
+ ( )
N
---------------------- + =
V
B ,
V
B 0 ,
1 k
d
+ ( )

Pmt ( ) =
Basic Financial Formulae 1995-2005 by Timothy R. Mayes, Ph.D. 3
Basic Statistical Formulae
Arithmetic Mean (Average)
Geometric Mean (used for averaging returns,
growth rates, etc.)
Expected Value (Weighted Average)
Variance
Standard Deviation
Covariance
Correlation Coefficient
Beta (Note: M is the market portfolio, and i is
the security or portfolio)
Portfolio Formulae
Expected Return of a Portfolio
Selected Financial Formulae
Purpose Formula
X
1
N
---- X
t
t 1 =
N

=
G 1 R
t
+ ( )
t 1 =
N
N
1 =
E X ( )
t
X
t
t 1 =
N

X
2

t
X
t
X ( )
2
t 1 =
N

X

X
2
=

X Y ,

t
X
t
X ( ) Y
t
Y ( ) [ ]
t 1 =
N

=
r
X Y ,

X Y ,

Y
------------- =

i

i M ,

M
2
-----------
r
i M ,

i

M
2
----------------------- = =
E R
P
( ) w
i
R
i
i 1 =
N

=
Basic Financial Formulae 1995-2005 by Timothy R. Mayes, Ph.D. 4
Variance of a 2-security Portfolio Using the covariance:
or, using the correlation coefficient:
Variance of an N-security portfolio Using the
Covariance
Standard Deviation of a Portfolio
Portfolio Beta
95% Value at Risk (Variance/Covariance
Model)
Note: V
p
is portfolio value
Capital Market Theory Models
Capital Market Line (CML)
Capital Asset Pricing Model (CAPM)
Note: This is also the equation for the Security
Market Line (SML)
Treynors Risk-adjusted Performance
Measure
Sharpes Risk-adjusted Performance Measure
The Information Ratio
M
2
(Modigliani & Modigliani) Performance
Measure
Selected Financial Formulae
Purpose Formula

P
2
w
1
2

1
2
w
2
2

2
2
2w
1
w
2

1 2 ,
+ + =

P
2
w
1
2

1
2
w
2
2

2
2
2w
1
w
2
r
1 2 ,

1

2
+ + =

P
2
w
i
w
j

i j ,
j 1 =
N

i 1 =
N

P

P
2
=

P
w
i

i
i 1 =
N

=
VaR 1.645 V
p

p
=
E R
P
( ) R
f

P
E R
M
( ) R
f
( )

M
-------------------------------- + =
E R
i
( ) R
f

i
E R
M
( ) R
f
( ) + =
T
i
R
i
R
f

i
---------------- =
S
i
R
i
R
f

i
---------------- =
IR
P
R
P
R
B

R
P
R
B

------------------- =
M
2

m

i
-------


R
i
R
f
( ) R
f
+ =
Basic Financial Formulae 1995-2005 by Timothy R. Mayes, Ph.D. 5
Famas Risk Decomposition
Notes:
R
i
= Portfolio Return
R
M
= Market Return
R
f
= Risk-free Rate

i
= Portfolio Beta

T
= Target Beta
Brinson, Hood, and Beebower Additive
Attribution Model
Notes:
A
t
= Overall Allocation Effect
S
t
= Overall Selection Effect
I
t
= Overall Interaction Effect
w
i,t
= Weight of Sector i in portfolio t
bars over variables represent benchmark
weights or returns.
Options and Futures Valuation Models
Black-Scholes European Call Option
Valuation Model
where:
Black-Scholes European Put Option Valuation
Model (see above for d
1
and d
2
)
Put-Call Parity for European Options with No
Cash Flows
or,
Selected Financial Formulae
Purpose Formula
Risk Premium R
i
R
f
=
Risk
i
R
M
R
f
( ) =
Selectivity Risk Premium Risk =
Managers Risk
i

T
( ) R
M
R
f
( ) =
Investors Risk
T
R
M
R
f
( ) =
Diversification

i

M
-------
i

R
M
R
f
( ) =
Net Selectivity Selectivity Diversification =
A
t
w
i t ,
w
i t ,
( ) R
i t ,
R
t
( )
i 1 =
N

=
S
t
w
i t ,
R
i t ,
R
i t ,
( )
i 1 =
N

=
I
t
w
i t ,
w
i t ,
( ) R
i t ,
R
i t ,
( )
i 1 =
N

=
C SN d
1
( ) Xe
rt
N d
2
( ) =
d
1
S
X
---


ln r 0.5
2
+ ( )t +
t
-------------------------------------------------- =
d
2
d
1
t =
P Xe
rt
N d
2
( ) SN d
1
( ) =
C P S Xe
rt
+ =
P C Xe
rt
S + =
Basic Financial Formulae 1995-2005 by Timothy R. Mayes, Ph.D. 6
Single-period Binomial Option Pricing Model
for Call Options (r is the risk-free rate, u is the
up factor, and d is the down factor)
where,
Single-period Binomial Option Pricing Model
for Put Options
where,
Cost of Carry Model for Pricing Futures
Contracts (CC is the carrying costs as a % of
the spot price)
Bond Analysis Formulae
Macaulays Duration on a Payment Date (for
immunization). Note: C
t
is the cash flow in
period t, i is the yield to maturity
Modified Duration (for price volatility) on a
Payment Date
Convexity on a Payment Date
The n-period forward rate given two spot rates
(note that i > j, and n = i - j)
Bank Discount Yield for discount securities
(FV = face value, PP = purchase price, m =
periods per year)
Bond Equivalent Yield for discount securities
(see definitions for BDY)
Selected Financial Formulae
Purpose Formula
C
pC
u
1 p ( )C
d
+
1 r + ( )
---------------------------------------- =
p
r d
u d
------------ =
P
pP
u
1 p ( )P
d
+
1 r + ( )
--------------------------------------- =
p
r d
u d
------------ =
F
T 0
S
0
e
CC t ( )
=
D
C
t
t ( )
1 i + ( )
t
-----------------
t 1 =
N

Bond Price
--------------------------- =
D
Mod
D
1 i + ( )
--------------- =
C
1
1 i + ( )
2
------------------ t
2
t + ( )
Cf
t
1 i + ( )
t
-----------------
t 1 =
N

Bond Price
--------------------------------------------------------------------- =
R
t j + n
1 R
i
+ ( )
i
1 R
j
+ ( )
j
--------------------
n
=
BDY
FV PP
FV
---------------------
360
m
--------- =
BEY
FV PP
PP
---------------------
365
m
--------- BDY
FV
PP
-------
365
360
--------- = =
Basic Financial Formulae 1995-2005 by Timothy R. Mayes, Ph.D. 7
Note: The Bond Analysis Formulae do not apply only to bonds. They may be used with any stream of cash flows.
Capital Budgeting Decision Formulae
Net Present Value (NPV)
Profitability Index (PI)
Internal Rate of Return (IRR). Note: This is a
trial and error procedure to find the i that
makes the equality hold (i.e., what discount
rate makes the NPV = 0).
Modified Internal Rate of Return (MIRR).
Stock Market Index Construction Formulae
Price-weighted Average (e.g., DJIA)
Note: The divisor (Div) at period 0 is equal to
the number of stocks in the average. It will be
adjusted for stock splits or any other corporate
action that results in a non-economic change
in the stock price.
Capitalization-weighted Index (e.g., S&P
500)
Note: The divisor (Div) at period 0 is the
divisor that makes the initial level of the index
equal to the desired starting point. It will be
adjusted for any corporate action that results
in a change in market capitalization.

Selected Financial Formulae
Purpose Formula
NPV
Cf
t
1 i + ( )
t
-----------------
t 1 =
N

IO =
PI
Cf
t
1 i + ( )
t
-----------------
t 1 =
N

IO
---------------------------
NPV IO +
IO
-------------------------
NPV
IO
------------ 1 + = = =
0
Cf
t
1 i + ( )
t
-----------------
t 1 =
N

IO =
MIRR
Cf
t
1 i + ( )
N t ( )
t 1 =
N

IO
----------------------------------------------
N
1 =
PWA
t
P
j
j 1 =
N

Div
t
-------------- =
CWI
t
P
j
Q
j
j 1 =
N

Div
t
-------------------- =
Basic Financial Formulae 1995-2005 by Timothy R. Mayes, Ph.D. 8
Equally-weighted Arithmetic Index (e.g.,
VLA)
Note: At period 0 the index is set to some
starting value (e.g., 100). To calculate the
index for any day, multiply the average %
change by the previous index level.
Equally-weighted Geometric Index (e.g.,
VLG)
Note: See note above
Corporate Financial Formulae
Net Operating Profit After Taxes (NOPAT)
Net Operating Working Capital (NOWC)
Operating Capital (Op. Cap.)
Free Cash Flow (FCF)
Economic Value Added (EVA)
Miscelaneous Formulae
Margin Call Trigger Price
Note: IM% is the initial margin supplied,
MM% is the maintenance margin
requirement, P
0
is the initial value of the
portfolio
Percentage gain to recover (% GTR) from a
loss (%L)
Selected Financial Formulae
Purpose Formula
EWAI
t
EWAI
t 1
P
j t ,
P
j t 1 ,
---------------


N
j 1 =
N

=
EWGI
t
EWGI
t 1
P
j t ,
P
j t 1 ,
---------------
j 1 =
N
N
=
NOPAT EBIT 1 t ( ) =
NOWC Op. C.A. Op. C.L. =
Op. Cap. NOWC NFA + =
FCF NOPAT Net Investment in Op. Cap. =
EVA NOPAT Op. Cap. Cost of Cap. ( ) =
P
M
IM% 1
MM% 1
------------------------- P
0
=
%GTR
1
1 %L
------------------ 1 =