=
Invest if: IRR > r Do not invest if: IRR< r
3. Average Accounting Rate of Return (AAR)=
book value Average
income net Average
4. Profitability Index PI=
Invesment Initial
NPV
1
Invesments Initial
flows cash future of PV
+ =
Invest if: PI > 1.0 Do not invest if: PI< 1.0
5. Cost of Capital
e e p p d d
r w r w t) (1 r w (WACC) + + =
where w
d
= target debt proportion in total capital
r
d
= the beforetax marginal tax rate t = the companys marginal tax rate
w
p
= target preferred stock proportion in total capital
r
p
= the marginal cost of preferred stock re = the marginal cost of equity
w
e
= target common stock proportion in total capital
6. Capital Asses Pricing Model Approach ( )  
F M i F i
R R E R ) E(R + =
where
I
= the return correlation of stock i to changes in the market return
E(R
M
) = the expected return on the market E(R
M
)R
F =
the expected market risk premium
7. Dividend Discount Model Approach V0 =
( ) ( )
......
r 1
D
r 1
D
e
2
e
1
+
+
+
+
where
V0 = the intrinsic value of a share Dt = the shares dividend at the end of period t
re = the cost of equity
8.
g r
D
P
e
=
1
0
9. g
P
D
r
e
+ =
0
1
10.
(
(
(
(

.

\

+
=
E
D
t) (1 1
1
equity asset
11. Country equity premium= Sovereign yield spread
(
(
(
(
(
(
(
\

=
22. Money Market yield =


.

\



.

\

maturity to days of Number
360
price Purchase
price Purchase  value Face
23. Bond Market yield =


.

\



.

\

maturity to days of Number
365
price Purchase
price Purchase  value Face
24. Discount basis yield =


.

\


.

\

maturity to days of Number
360
value Face
price Purchase  value Face
25. Cost of trade credit = 1
1
1
period discount beyond
days of Number
365

.

\

+
(
(
(
(
Discount
Discount
26. Return on equity =
equity rs' shareholde Average
assets total Average
assets total Average
Revenues
Revenues
income Net
equity rs' shareholde Average
income Net
=
27. Standard Deviation =
=
n
1 i
i
2
i i
2
P )] E(R [R
28. rij=
j i
ij
Cov
o o
where rij= the correlation coefficient of returns
i
o = the standard deviation of Rit
j
o = the standard deviation of Rjt
29.
2 1 2 , 1 2 1
2
2
2
2
2
1
2
1
2 o o o o o r w w w w
port
+ + =
Derivatives and Alternative Investments
1. FRA payoff formula (from the perspective of the party going )
Notional Principal =
( )
(
(
(
(

.

\

+

.

\

360
rate underlying in Days
xpriation ate rate Underlying 1
360
rate underlying in Days
rate contract Forward expiration at rate g Underliyin
2. Minimum and Maximum Values of Options
Option Minimum value Maximum Value
European call
0
0
> c
0 0
S c s
American call
0
0
> C
0 0
S C s
European put
0
0
> p
T
r X p ) 1 /(
0
+ s
American put
0
0
> P X P s
0
3. Putcall parity = c
0
+ X/ (1+r)
T
=p
0
+s
0
4. Appraisal price =
rate cap Market
NOI
Equity and Fixed income
1. Dividend Discount Model (DDM)
( )
( ) ( ) ( )
+
+ +
+
+
+
+
+
=
k
D
k
D
k
D
k
D
1
......
1 1
1
Vj
3
3
2
2 1
( )
=
+
=
n
t
t
t
k
D
1
1
2. Present value of Free Cash Flows to Equity
( )
=
+
=
n
t
t
j
j
k
FCFE
V
1
1
2. Justified/ Fundamental (P/E)
g k
E D
E
P
i
=
1 1
1
/
4. (Shareholders equity) (Total value of equity claims that are senior to common stock) = Common
shareholders equity
5. (Common shareholders equity)/ (Number of common stock shares outstanding) = Book value per
share
6. Coupon rate = Yield required by market Price = Par value
Coupon rate < Yield required by market Price < Par value (discount)
Coupon rate > Yield required by market Price > Par value (premium)
7. Price of callable bond = Price of optionfree bond Price of embedded call option
8. Price of putable bond = Price of option free bond + Price of embedded put option
9. Taxableequivalent yield =
rate tax Marginal  1
ld exempt yie Tax
10. Present value of an annuity =
( )
(
(
(
(
i
i 1
1
1
payment Annuity
periods of no.
11. Valuing a Zero Coupon Bond
2
1
+
rs no. of yea
i
alue Maturity v
Where i is the semiannual discount rate
12. Current yield =
Price
interest coupan dollar Annual
13. Yield on an annualpay basis
(
(

.

\

+ = 1
2
basis equivalent  bond a on Yield
1
2
14. Spread for life =
( )

.

\

Price
100
margin Quoted
Maturity
Price 100 100
15. Zspread = OAS + Option cost
16.
( )
( )
1
1
1
1
+
+
=
+
+
t
m
m
t m
t m
m t
z
z
f
17. Effective duration =
( )( ) decimal in yield in Change price Initial 2
rise yields if Price  decline yields if Price
18. Macaulay duration =
( )
(
+ + +
+ Price k
PVCF n ..... PVCF 2 PVCF 1
Yield/k 1
1
n 2 1
19. Modified duration=
( ) Yield/k 1
duration Macaulay
+
20. Portfolio Duration =
k k
D w D w D w D w + + + + .....
3 3 2 2 1 1
Financial Reporting and Analysis
1. Assets = Liabilities + Owners equity Revenue Expenses = Net income (loss)
2. Basic EPS
g outstandin shares of number average Weighted
dividends Preferred  income Net
=
3. Diluted EPS =
ersion ed at conv been issu could have
at shares th New common ding outs
res ber of sha verage num Weighted a
vidends eferred di e debt convertibl
rest on After tax Net income
+


.

\

+
tan
Pr
int
4. Diluted EPS =
( )
excersice upon received cash with
purchased been have could that Shares
excersice option at issued been have could
that shares New g outstandin
shares of number average Weighted
dividends Preferred Netincome
=
=
N
i
i X
X
N
1
1
=
=
n
i
i
X
n
X
1
1
=
=
n
i
i i weighted
X w X
1
n
n
X X X X G ...
3 2 1
=
=
=
n
i
i
X X
n
MAD
1
1
( )
=
=
N
i
i
X
N
1
2 2
1
o
( )
( )
=
n
i
i
X X
n
s
1
2
2
1
1
8. Covariance describes the comovement between 2 random numbers, given as :
Cov(X
1
, X
2
) =
12
9. Correlation coefficient is a unitless number, which gives a measure of linear dependence between
two random variables. (X
1
, X
2
) = Cov(X
1
, X
2
) /
1
2
10. Portfolio Expected Return:
E(r
p
) = w
A
r
A
+ (1w
A
)r
B
Portfolio Variance:
OR
11. Coefficient of variation
12. Sharpe measure
13. Addition Rule
Used to Get Compound Probabilities for Union of Events: P(A OR B) = P(A U B) = P(A) + P(B)  P(A B)
For Mutually Exclusive Events: P(A OR B) = P(A U B) = P(A) + P(B)
14. Sum Rule & Bayes Theorem
Out of a group of 100 patients being treated for chronic back trouble, 25% are chosen at random to
receive a new, experimental treatment as opposed to the more usual muscle relaxantbased therapy
which the remaining patients receive. Preliminary studies suggest that the probability of a cure with the
standard treatment is 0.3, while the probability of a cure from the new treatment is 0.6.
15. Discrete Probability Distributions
Probability distribution for a Binomial random variable is given by:
16. Normal Distribution Random Variable
General Normal random variable X ~ N (,
2
)
X can be standardized to a Standard Normal random variable.
Resulting variable has mean zero and variance equal to 1.
Y X
Y X
XY E Y X Cov
Y X E Y X Cov
=
=
) ( ) , (
)] )( [( ) , (
( ) ( ) ( )
B A A A B A A A r
r r Cov w w w w
p
, 1 2 1
2 2 2 2 2
+ + = o o o
( ) ( )
B A AB A A B A A A r
w w w w
p
o o o o o + + = 1 2 1
2 2 2 2 2
X
s
CV =
p
f p
r r
SM
o
) (
=
) ( ) / ( ) ( ) / ( ) ( ) ( ) (
c c c
A P A B P A P A B P B A P B A P B P + = + =
) ( ) / ( ) ( ) / (
) ( ) / (
) / (
c c
A P A B P A P A B P
A P A B P
B A P
+
=
x n x
x
n
p p C x X P
= = ) 1 ( ) (
o
=
X
Z
17. Confidence Intervals
The standard error of the mean (s
x
) is given by:
18. Errors in Estimation
Type I and Type II Errors
Type I error occurs if the null hypothesis is rejected when it is true
Type II error occurs if the null hypothesis is not rejected when it is false
Significance Level
o> Significance level
The upperbound probability of a Type I error
1  o >confidence level
The complement of significance level
19. The sample variance for a pooled estimater is given as
20. Hypothesis Tests for Variances
n
s
s
x
=
2
) 1 ( ) 1 (
2 1
2
2 2
2
1 1 2
+
+
=
n n
s n s n
s