FinQuiz Formula Sheet Level II 2017

fgg
Reading 9: Correlation & Regression •   H1: b1 ≠ 0 (linear relationship does bcd (
h
)  
10. F-Statistic or F-Test = =   ggi
exist) bce ( )
-
! jkhk/

*./ )* +) ,* +, b1 − b1 (df numerator = k = 1)

1.   Sample  Cov   X, Y =
0+1 •   Test statistic = t = (df denominator = n – k – 1 = n – 2)
s b1
34567
2.   Correlation Coefficient = r), = or b1 ± t c s b1 11. Prediction Intervals = Y ± t 3 sm
(96 )(97 ) •   Confidence Interval =
345(),,) 1 ()+))?
r= 𝑤ℎ𝑒𝑟𝑒  sm> = s > 1 + + and
5;<()) 5;<(,) 0 0+1 9?
6
9. ANOVA (Analysis of variance) =
3.   t-test (for normally distributed variables) = ANOVA SS MSS F s f = s 2f
< 0+> 𝑆𝑆𝑅
t=  t  distribution  with   n −
1+<? [ 𝑆𝑆𝑅
Regression 𝑆𝑆𝑅 𝑘
2 deg. of  freedom = 𝑦Z 𝑆𝑆𝐸 Reading 10: Multiple Regression & Issues in
df = k 𝑘
Z\1 𝑛−𝑘−1 Regression Analysis
>
−𝑦
4. Linear Regression = Yi = b0 + b1Xi + εi,
𝑆𝑆𝐸
1.   Yi = b0 + b1X1i + b2X2i + … + bkXki + εi,i =
Intercept (b0) = b0 = y − b1 x =
[
•   Error 𝑆𝑆𝐸
= 𝑦Z 1, 2, … n  
df = n-k-1 𝑛−𝑘−1
•   Slope or regression coefficient =  b1 = Z\1
>
−𝑦
345(O,P) O+O P+P 2.   Prediction equation = 𝑌Z = 𝑏u + 𝑏1 𝑋1Z +
or =
5;<(O) O+O ? 𝑆𝑆𝑇
[ 𝑏> 𝑋>Z +. . . +𝑏w 𝑋wZ + εy , 𝑖  
Total
= 𝑦Z
5. Standard Error of Estimate SEE = SR = df = n-1
Z\1 [+1
- (P +P)? −𝑦 > 3.   Adjusted R2 = 𝑅 > = 1 − 1 − 𝑅>
SSR *./ * [+w+1
=
0+T+1 0+T+1
4.   Breusch–Pagan test
Source of Sum of Mean Sum
6. Coefficient of Determination (R2) = DoF •   H0 = No conditional
Variability Squares of Squares
SSU+SSR VSS
= = where, 0 ≤ R2≤ 1 Heteroskedasticity exists
SSU SSU
(for single independent variable R2 = r2) Regression MSR = •   HA = Conditional Heteroskedasticity
1 RSS
(Explained) RSS/1 exists
7. SST = SSE + SSR(or RSS) •   Test statistic = n × R2residuals
Error MSE =
n-2 SSE
(Unexplained) SSE/n-2
8. Hypothesis Testing: 5.   Durbin-Waston Test = 𝐷𝑊 =
SST= • ?
~.? }~ +}~k/
•   Null and Alternative hypotheses • } ?
Total n-1 RSS + ~./ ~
•   H0: b1 = 0 (no linear relationship) SSE
•   For Large Sample size DW Statistic
(d) = d ≈ 2 (1 – r)
 FinQuiz Formula Sheet Level II 2017

•   Random walk with a drift = xt = b0 + x Reading 13: Currency Exchange Rates

t-1 + εt where, b0 ≠ 0 and b1 = 1
•   By taking first difference yt = xt - x t-1 1.   Bid-offer Spread = Offer price – Bid price
= b0 + εt 2.   Fwd  rate   = Spot  Exchange  rate   +
Reading 11: Time Series Analysis †4<‡;<ˆ  ‰4y0Š9
 
7.   Using Dickey-Fuller Test = xt - x t-1 = b0 + 1u,uuu

(b1 -1) x t-1 + εt 3.   Forward  premium/discount  (in  %)   =

1.   Linear Trend Models = yt = b0 + b1t+ εt 9‰4Š  •O3Ž;0••  <;Š•+(m4<‡;<ˆ  ‰4y0Š9/1u,uuu)
−1
•   Predicted/fitted value of yt in period 9‰4Š  •O3Ž;0••  <;Š•
8.   Smoothing Past Values with n-Period
(T + 1) = yˆ t +1 = bˆ0 + bˆ1 (T + 1) Moving Average = 4.   To convert spot rate into forward quote:
2.   Log-Linear Trend Models = yt = e b0 +b1t xt + xt −1 + xt −2 + ..... + xt −( n −1) •   Spot exchange rate × (1 + % premium)
•   Spot exchange rate × (1 - % discount)
n
3.   Autoregressive Time-Series Models: 9.   Correcting Seasonality in Time Series
•   First order autoregressive AR (1) = xt Models: 5.   Covered interest rate parity:
1
= b0 + b1 x t-1 + εt •   1 + iˆ = S ∫ 1 + i∫
†∫ /‘
•   pth-order autoregressive AR (p) = xt ˆ
•   For quarterly data = xt = b0 + b1x t-1 + 1’y∫
= b0 + b1 x t-1 + b2 x t-2 + …..+ bp x t-p b2x t-4 + εt •   F∫ /ˆ = S∫
1’y‘
ˆ
+εt •   For monthly data = xt = b0 + b1x t-1 +
•   Using day count convention:
b0 b2x t-12 + εt
' ! Actual $*
4.   Mean reverting level of xt = 10. ARCH model =
1 − b1 )1+ id # ,=
εˆ 2 t = α 0 + α1εˆ 2 t −1 + µ t where µt is ( " 360 &%+

5.   Chain Rule of Forecasting: an error term ' ! Actual $*' 1 *

S f /d )1+ i f # ,) ,
•   One-period ahead forecast = •   Predicting variance of errors in period ( " 360 &%+)( Ff /d ,+
x̂t+1 = b̂0 + b̂1 xt t+1 = σˆ t2+1 = α̂ 0 + α1εˆt2
•   Two-period ahead forecast= ⎛ ⎡ Actual ⎤ ⎞
Reading 12: Excerpt from ‘Probabilistic ⎜ 1 + i f ⎢ ⎟
x̂t+2 = b̂0 + b̂1 xt+1 •   ⎜ ⎣ 360 ⎥⎦ ⎟
Approaches , Scenario Analysis, Decision Tree Ff / d = S f /d
⎜ ⎡ Actual ⎤ ⎟
6.   Random Walks and Unit Roots: & Simulations’ ⎜ 1 + id ⎢ ⎟
•   Random Walk without drift = xt = x t- ⎝ ⎣ 360 ⎥⎦ ⎠
1 + εt where, b0 = 0 and b1 = 1.
•   Correcting Random Walk = yt = xt - x 6.   Uncovered Interest Rate Parity :
t-1 i f − %ΔS e f / d = id
•  
 FinQuiz Formula Sheet Level II 2017

%ΔS e f / d = i f − id ⎛ S f / d Pd 𝑟– − 𝑟— − 𝜑– − 𝜑—
⎟ = S f / d ⎜ Pd
⎞ ⎛ ⎞
•   ⎜ ⎟
•   Forward premium or discount: ⎜ P ⎟ ⎜ P ⎟
qf/d = ⎝ f ⎠ ⎝ f ⎠ 16.   Interest Rate Differentials, Carry Trades
•   For one year horizon = and Exchange Rates
Ff /d − S f /d = ⎛ CPI d ⎞
q f / d = S f / d ⎜ ⎟
"i −i % or
⎜ CPI
⎝ f
⎟
⎠
qL/H = qL/H +(iH −i L )−(π Hε − π Lε )−(φH − φL )  
S f /d $ f d ' ≅ S f /d (i f − id )
# 1+ id & 12.   Fisher effect:
•   id = rd + πεd 17.   Policy Rate under Taylor rule:
•   Using day count convention:
( " Actual % +
•   if = rf + πεf •   i = rn + π + α (π − π *) + β (y − y*)
* $ - •   if – id = (rf – rd) + (πεf- πεd)
# 360 '& -
Ff /d − S f /d = S f /d * (i f − id ) •   (rf – rd) = (if – id) - (πεf- πεd) •   Neutral real policy rate + Current inf
* 1+ i " Actual % -
* d$ -
) # 360 '& , rate + α (Inf gap) + β (Output gap)
13.   When both uncovered interest rate parity
and ex-ante PPP hold: 18.   Exchange rates using the Taylor Rule =
7.   Forward discount or premium as % of spot
•   (rf – rd) = %∆ Sεf/d - %∆ Sεf/d = 0 q šS›/RšV = q šS›/RšV + r0Rš − r0šS +
rate:
•   International Fisher Effect: if – id = πεf-
Ff / d − S f / d π εd α πRš – π ∗Rš − πšS − π ∗šS +
≅ (i f − id )
S f /d β yRš − y ∗Rš − yšS − y ∗šS −
14.   When all the key international parity ∅Rš − ∅šS
If uncovered interest rate parity holds
conditions are held at all times:
•   Ff /d − S f /d BOP = Current A/C + Capital A/C +
= = %ΔS ef /d ≅ (i f − id ) Reading 14: Economic Growth & The
S f /d Official Reserve A/C = 0 Investment Decision

8.   Purchasing Power parity (PPP) 15.   Real exchange rate = 𝑞” = 𝑞” + 1.   Economic growth = Annual % ∆ in real
• •
•   Pf = S f/d × Pd GDP or in real per capita GDP
•   S f/d = Pf / Pd
R ¤
2.   P = GDP
£›¤ R
9.   Relative version of PPP = %∆S f/d = πf – πd
3.   Expressing in terms of logarithmic rates:
10.   Ex ante version of PPP = %∆Sef/d = πef –
•   (1/T) % ∆P = (1/T) % ∆GDP + (1/T)
π ed
%∆ (E / GDP) + (1/T) % ∆(P / E)

11.   Real Exchange Rate •   % ∆ in stock MV = % ∆ in GDP + %

∆ in share of earnings (profit) in GDP
 FinQuiz Formula Sheet Level II 2017

+ % ∆ in the price-to-earnings •   Growth rates of output per capita = ∆y

multiple 11.   Labor productivity growth accounting /y=
©
+  𝛼𝑠  
ª
−  𝛹 =
1+  ¨ «
equation ©
4.   A two-factor aggregate production •   Growth rate in potential GDP = LT g   + 𝛼𝑠 (y/k – Ψ)
1+¨
function: Y = AF (K, L) rate of labor force + LT g rate in labor •   Capital-to-labor ratio = ∆k / k =
productivity © ª ©
+  𝑠   −  𝛹 =   +s
5.   Cobb-Douglas Production Function = F 1+  ¨ « 1+¨

(K, L) = Kα L1 - α 12.   Balanced or Steady State Rate of Growth (y/k – Ψ)

in Neoclassical Growth Theory:
6.   Under the Cobb-Douglas production •   Growth in physical capital stock = ∆K 15.   Proportional impact of the saving rate
function: change on the capital-to-labor ratio and per
= sY – δK
•   Marginal product of capital = MPK = capita income over time:
1
α AK α-1 L 1-α = α Y/K 13.   In the steady state: ' ! Y $ *α −1
•   α Y/K = r èα = r (K) / Y = Capital •   Growth rate of capital per worker = ∆k )# & ,
income / Output or GDP / k = ∆y / y = ∆A / A + α ∆k / k = knew " K %new ,
¥¦§  
=)
è Steady state growth rate of •   kold )!Y $ ,
)( #" K &%old ,+
1+  ¨
7. Output per worker or Average labor
labor productivity
productivity (Y/L or y):
•   Growth rate of Total output = ∆Y / Y α
•   GDP/Labor input = TFP × capital-to-
= Growth rate of TFP scaled by labor y new ⎡ k new ⎤
labor ratio × share of capital in GDP = ⎢ ⎥
force share + Growth rate in the labor
•   Or y = Y/L = Akα © •  
y old ⎣ k old ⎦
force = +n
1+  ¨
8.   Contribution of Capital Deepening = Labor •   Steady state Output-to-capital ratio = 16.   Production function in the endogenous
ª 1 ©
productivity growth rate – TFP = +  𝛿 + 𝑛 =  𝛹 growth model = ye = f (ke) = cke
« ¬ 1+  ¨
•   Gross investment per worker = •   Growth rate of output per capita =
9.   Contribution of Improvement in © ∆ye/ye = ∆ke/ke = sc – δ – n
technology = Labor productivity growth +  𝛿 + 𝑛 𝑘
1+  ¨
rate – Capital Deepening •   Slope of straight line = [δ + n + θ / (1 Reading 15: Economics of Regulation
– α)]
10.   Growth Accounting based on Solow 14. During the transition to the steady state
Approach = ∆Y /Y = ∆A / A + α ∆K/K + growth path:
(1 – α) ∆L/ L
 FinQuiz Formula Sheet Level II 2017

Reading 16: Interoperate Investments

1.   Summary of Accounting Treatment of Investments

Income Statement (I.S) Balance Sheet (B.S) Statement
ofSH’sEq
uity
Held-to- §   i income = Market rate at purchase × Initial fair value (FV) of a §   Initially, at FV (IFRS) or initial price paid (US N/A
maturity debt security GAAP)
Ori income = i pmt – Amort §   Subsequently, reported at amort cost at the
  i pmt = (Coupon rate × Par value) subsequent reporting date on B.S.
  Amort = i pmt – i income
§   If debt security is sold: Realized g/l reported on I.S = SP – CV or
Amort cost
Held §   i income = Market rate × Initial FV §   Initially, at FV.
for §   Unrealized g/l = FV at the end of Yr t – Amort Cost at end of Yr t §   Subsequently, at FV at subsequent reporting date
trading If debt security is sold: on B.S.
security §   Realized g/l reported on I.S= SP – Recorded FV
Designated §   i income = Market rate at purchase × Initial FV §   Reported at FV at the end of Yr t
at §   Unrealized g/l = FV at the end of Yr t – Amortized Cost at end of §   Subsequently, at FV at the subsequent reporting
fair value Yr t date on B.S
If debt security is sold:
§   Realized g/l reported on I.S= SP – Recorded FV
Available §   i income = Market rate at purchase × Initial Fv §   Reported at FV at the end of Yr t Unrealized g/l (net
-for-sale If debt security is sold: §   Subsequently, at FV at the subsequent reporting of tax) = FV at end
§   Cumulative unrealized g/l is removed from OCI and entire g/l date on the B.S. of Yr t – Amort Cost
recognized in P&l statement. at end of Yr t
Where, Realized g/l in I.S = (SP – Recorded FV) + Unrealized g/l •   Unrealized g/l
(net of tax) is
reported as OCI
 FinQuiz Formula Sheet Level II 2017

2.   Goodwill = Cost of acquisition – investor’s share of the FV of the net Add: Unamortized excess PP (Excess PP – Amount attributable xxx
identifiable assets to PP&E)
PP Xxx = Investment in Investee xxx
Less: (% of Ownership Interest × BV of Investee’s Net (xxx)
Assets) Transactions with Associates:
= Excess Purchase Price Xxx 4.   Upstream Transactions:
Less: Attributable to Net Assets: Investor’s share of Associate’s reported NI (% of Ownership xxx
-Plant & Equipment (% of Ownership Interest × difference (xxx) Interest × Reported net income)
b/wBV & FV) Less: Amort. of excess purchase price (xxx)
-Land (% of Ownership Interest × difference b/wBV & FV) (xxx)
Less: Unrealized profit (% of Ownership Interest × Profit from (xxx)
= Residual Amount (Treated as Goodwill) Xxx
upstream sale in Associate’s NI)
3.   Amort. of Excess PP: = Equity Income to be reported as a line item on Investor’s I.S* xxx
Investment in associate:
PP Xxx Balance in the investment in Associate to be reported at the end of
•  
Add: Investor’s share of Investee’s NI (% of Ownership Xxx year:
Interest × Investee’s NI) PP xxx
Less: Div. received (% of Ownership Interest × Div. paid) (xxx) Add: Equity income (as calculated above)* xxx
Less: Amort. of excess PP attributable to plant & equipment (xxx)
Less: Div. received (% of Ownership Interest × Div paid) (xxx)
(Amount attributable to PP&E* ÷ Remaining life of PP&E)
= Balance in investment in Investee Xxx
= Value of Investment in Associate’s company at the end of year xxx
Where, *Amount attributable to Plant & Equipment = % of Ownership
Interest of investor × (FV of P&E – BV of P&E)

Beg net assets Xxx •   Composition of Investment account:

Add: NI Xxx Investor’s proportionate share of Associate’s net equity = [% of xxx
Less: Div. paid (xxx) Ownership Interest × (beg BV of net assets) + (Reported NI of
= Ending net assets Xxx associate – Profit from upstream sale in Associate’s NI) – Div. paid
Investor’s proportionate share of Investee’s recorded net assets Xxx by the associate)]
(% of Ownership Interest × Ending net assets) Add: Unamortized excess PP (Excess PP – Amort. of excess PP) xxx
 FinQuiz Formula Sheet Level II 2017

5.   Downstream Transactions Goodwill under acquisition method = BV for A&L

Investor’s share of Associate’s xxx
reported NI (% of Ownership Interest
× Reported NI)
Less: Amort of excess PP (xxx)
Less: Unrealized profit (% of (xxx)
Ownership Interest × Profit from the
downstream sale in Associate’s NI)
= Equity Income to be reported as a xxx
line item on Investor’s I.S
Unrealized profit = % of goods unsold × Profit
on the sale to investee
Investor’s share of the unrealized profit =
Unrealized profit × % of goods unsold
Investor’s share of associate’s xxx
reported NI (% of Ownership Interest
× Reported NI)
Less: Amort of excess PP (xxx)
Add: Realized profit (% of goods xxx
unsold × Unrealized profit)
= Equity Income to be reported as a xxx
line item on Investor’s I.S
Business Combinations
6.   Merger = Company X + Company Y
= Company X
7.   Acquisition = Company X + Company Y =
(Company X + Company Y)
8.   Consolidation = Company X + Company
Y = Company Z
9.   Full Goodwill = Total FV of the
Subsidiary – FV of subsidiary’s
identifiable net assets
10.   Partial Goodwill Method:
•   Goodwill = FV of acquisition –
Acquirer’s share of FV of all
identifiable tangible and intangible
assets, liabilities and contingent
liabilities acquired
Or
•   Goodwill = Purchase price – parent’s
(acquirer’s) proportionate share of the
FV of subsidiary’s identifiable net
assets.
11.   Under Acquisition method, the allocation
of PP:
FV of the stock issued xxx
Add: BV of Investee’s net assets xxx
= Excess PP xxx
FV of the stock issued xxx
Less: FV allocated to identifiable net (xxx)
assets
= Goodwill xxx
12.   Allocation of excess PP: Excess PPP =
Sum of diff b/w FV and BV of identifiable
assets + Goodwill
13.   Combined Assets & Liabilities (A&L)
reported on Consolidated B.S under
acquisition method: Consolidated B.S
of Investor + FV for A&L acquired from
Acquiree
14.   Combined Paid-in Capital (PIC) = (FV of
the stock issued to effect the transaction –
Par value of the stock issued) + Additional
PIC of investor
15.   Minority Interest = % of subsidiary not
owned by the Parent × Subsidiary’s Equity
16.   Value of non-controlling interest under full
goodwill method = Non-controlling
interest’s proportionate interest in
subsidiary × FV of subsidiary on
acquisition date
17.   Value of non-controlling interest under
partial goodwill method = Non-controlling
interest’s proportionate interest in
subsidiary × FVof the subsidiary’s
identifiable net assets on acquisition date
Goodwill Impairment:
18. Goodwill Impairment Test under IFRS:
•   Impaired when CA of the Cash-generating
Unit > RA of the Cash-generating Unit
•   Impairment loss = CA of Cash-generating
Unit - RA of Cash-generating Unit where,
RA = Higher of Net SP and its VIU
Net SP = FV – costs to sell
VIU = PV of expected future CF of
cash-generating unit
 FinQuiz
19. Goodwill Impairment Test under U.S.
GAAP (Two Step Approach)
•   Step 1: Goodwill Impairment Test
•   Impaired when CV of Reporting Unit
(including Goodwill) > FV of
Reporting Unit (including Goodwill).
•   Step 2: Measurement of Impairment
loss = CV of Reporting unit’s
Goodwill - Implied FV of Reporting
unit’s Goodwill
•   Where Implied FV of Reporting unit’s
Goodwill = FV of Reporting Unit –
FV of Reporting unit’s net assets
Reading 17: Employee Compensation: Post
Employment & Share-Based
1.   Under DC Plans: Pension exp = Co.’s
annual contribution to plans adjusted for ∆
in yr-end accruals
2.   Funded Status = PV of DB obligations –
FV of plan assets
3.   Period pension cost of a Co.’s DB pension
plan = ∆ in Net pension liability or asset
 exp
 recognized
  =
 040+
adjusted for employer’s contributions
 34´‰•09;Šy40
 •O‰
 5•9Šy0•
 ‰•<y4ˆ
4.   Net i exp = Discount rate × Net Pension
liability
where Discount Rate = rate used to
calculate PV of future pension benefits
Formula Sheet
5.   Net i income = Discount rate × Net
Pension asset
6.   Net return on plan assets = Actual return
on plan assets – (Plan assets × i rate)
7.   Actuarial g/l = Actual return – (Plan assets
× Expected return)
8.   Total Periodic Pension Costs =Sum of
components of periodic pension costs
•   Total periodic pension cost in a given
period = ∆in Net pension liability or
asset adjusted for employer
contributions
•   Total Net periodic pension cost (End
Funded Status* – Beg Funded Status*)
– Employer Contribution
where *Pension liability is treated as a
negative
9.   Adjusted Total P&L pension exp (income)
•   = Current service costs + i costs + (-)
actuarial losses (actuarial gains) + past
service costs (or plan amendments) –
(+) Actual return (loss) on plan assets
Or
•   = Reported Total P&L pension exp
(income) + Expected return on plan
assets – Actual return on plan assets
Level II 2017
10.   Adjusted Pre-tax Income:
•   = Reported Pre-tax income + (Actual
return on plan assets – Expected return
on plan assets)
Or
•   = Reported Pre-tax income + Total
reported pension and other post-
retirement benefits - Current service
costs - i exp component of pension
cost + Actual return on plan assets
11.   Adjusted Net Operating Exp=Reported Net
operating exp – Total reported pension and
other post-retirement benefits + Current
service costs
12.   Adjusted i Exp. = Reported i exp. + i exp.
component of pension cost
13.   Adjusted i and investment Income
=Reported i and investment income +
Actual return on plan assets
14.   Compensation exp. = FV of stock on the
Grant Date
16. Compensation
š0<•34•0y³•ˆ
5•9Š•ˆ
V•´;y0y0•
 FinQuiz Formula Sheet Level II 2017

Reading 18: Multinational Operations Foreign Subsidiary’s Functional Currency

FC Parent’s Presentation
Currency
1.   Cumulative Translation Adjustment = CTA = Assets – Liabilities –
inventories measured at
Common Stock – Retained Earnings market value under the lower
of cost or market rule.
ii) Measured at historical Current rate Historical rate
2.   Balance Sheet Exposure: costs e.g. PP&E
Foreign Currency (FC) LIABILITIES
B.S Exposure Strengthens Weakens Monetary liabilities: a/c Current rate Current rate
When assets translated at +ve -ve payable, LT debt, accrued
Net Asset B.S
current X rate > liabilities translation translation exp., and deferred income
exposure
translated at current X rate adj adj taxes.
When liabilities translated at -ve +ve Nonmonetary liabilities:
Net Liability B.S i) measured at current value Current rate Current rate
current X rate > assets translation translation
exposure ii) not measured at current
translated at current X rate adj Adj
(X = exchange) value i.e. deferred revenue Current rate Historical rate

3.   Re-measurement Gain = NI − NI before re-measurement gain

4.   Re-measurement Loss = NI − NI before Re-measurement loss EQUITY

Other than R.E i.e. Common Historical rates Historical rates
5.   Rules For Translation Of A Foreign Subsidiary’s FC Financial Stock
Beg R.E + Beg R.E + translated NI –
Statements (F.Ss) Into Parent’s Presentation Currency Under IFRS & Retained Earnings (R.E) translated NI – div. div. translated at historical
U.S. GAAP translated at rate
historical rate
Foreign Subsidiary’s Functional Currency
Revenues Average rate Average rate
FC Parent’s Presentation
Currency
Translation Method: Current Rate Temporal Method EXPENSES
method Most Expenses Average rate Average rate
Expenses related to assets
X rate at which F.Ss are translated at historical X rate Average rate Historical rate
translated from foreign e.g. COGS, Dep.,
subsidiary’s bookkeeping & Amort. etc.
currency to parent’s
NI Average rate Mixed (a mix of average
presentation currency.
rate & historical rate)
ASSETS
Monetary assets: Cash, a/c Current rate Current rate Exposure Net Assets or Net Net monetary assets or Net
receivables Liabilities monetary liabilities
Treatment of translation adj. Accumulated as a Included as g/l in NI
Nonmonetary Assets: Current rate Current rate in parent’s consolidated F.Ss separate component
i) Measured at current value of equity
i.e. marketable securities &
 FinQuiz Formula Sheet Level II 2017

TEMPORAL METHOD: CURRENT ·¸<<•0Š  P<¹ 9  ‰<y3•  y0ˆ•O

RATE 7.   Restatement Factor =
ºy9Š4<y3;»    ‰<y3•  y0ˆ•O
Net Monetary Net Monetary METHOD
Liability Exposure Asset Exposure
FC §   Rev ↑ §   Rev ↑ §   Rev ↑
8.   Restated Capital Stock = Capital stock original value ×
strengthens §   Assets ↑ §   Assets ↑ §   Assets ↑ ·¸<<•0Š  P<¹ 9  ‰<y3•  y0ˆ•O  4<  ˆ;Š•  4m  340Š<y¼¸Šy40,‡Žy3Ž•5•<  y9  »;Š•<
relative to §   Liabilities ↑ §   Liabilities ↑ §   Liabilities ↑ ºy9Š4<y3;»  ‰<y3•  y0ˆ•O
parent’s
presentation §   NI ↓ §   NI ↑ §   NI ↑
·¸<<•0Š  P<¹ 9  ‰<y3•  y0ˆ•O
currency §   SH’ equity ↓ §   SH’ equity ↑ §   SH’ equity 9.   Restated Revenue = Revenue original value ×
§   Translation §   Translation ↑ ½5•.‰<y3•  y0ˆ•O
loss gain §   +ve
Translation
adj.
10.   Loss from holding beg balance in cash = -Beg balance in cash ×
FC weakens §   Rev ↓ §   Rev ↓ §   Rev ↓ ·¸<<•0Š  P<¹ 9  ‰<y3•  y0ˆ•O  –ºy9Š4<y3;»  ‰<y3•  y0ˆ•O
relative to §   Assets ↓ §   Assets ↓ §   Assets ↓ ºy9Š4<y3;»  ‰<y3•  y0ˆ•O
parent’s §   Liabilities ↓ §   Liabilities ↓ §   Liabilities ↓
presentation
currency §   NI ↑ §   NI ↓   §   Net Income 11.   Loss from increase in cash during the yr = -Increase in cash ×
§   SH’ equity ↑ §   SH’ equity ↓ ↓ ·¸<<•0Š  P<¹ 9  ‰<y3•  y0ˆ•O+½5•  ‰<y3•  y0ˆ•O
§   Translation §   Translation §   SH’ equity ↓ ½5•  ‰<y3•  y0ˆ•O
gain loss §   -ve
Translation
adj. 12.   Gain from holding note payable = Notes payable ×
·¸<<•0Š  P<¹ 9  ‰<y3•  y0ˆ•O+ºy9Š4<y3;»  ‰<y3•  y0ˆ•O
ºy9Š4<y3;»  ‰<y3•  y0ˆ•O

6. Impact of Changing Exchange Rates on Exposure

U;O  RO‰
Foreign Currency 13.   Avg. effective tax rate =
 ¤<•Š;O  ½334¸0Šy0•  ¤<4myŠ9
Strengthens Weakens
CURRENT RATE METHOD:
Net Assets Gain Loss 14.   Organic sales growth = Net sales growth + Foreign X impact +
Net Liabilities Loss Gain
TEMPORAL METHOD:
Acquisition/Divestiture impact.
Net Monetary Assets Gain Loss
Net Monetary Liabilities Loss Gain

Hyperinflationary Economy
 FinQuiz Formula Sheet Level II 2017

¿•Š  À·   V.R   (Cash t + ST invstmnt. t)} – {Total liab

Reading 19: Evaluating Quality of Financial 11.   Z-score = 1.2  ×   + 1.4  ×   +
U½ U½
Reports RÃÄU   Ç.È  4m  RɸyŠP t – (Total LT debt t + Debt in current
3.3  ×   + 0.6  ×   + liab.)}]
U½ Ã.È  4m  »y;¼y»yŠy•9
S;»•9   B. S  based  Accruals  Ratio =
1.   DSR (days sales receivable index) = 1.0  ×   •  
U.½ ¿ß½~ +¿ß½~k/
(Receivablest/Salest) / (Receivablest– ¿ß½~ ’¿ß½~k/
>
1/Salest–1) Reading 20: Integration of Financial Statement
Analysis 3.   CF based aggregate accruals:
2.   GMI (gross margin index) = Gross
margint–1 / Gross margint •   Aggregate Accruals = NI t – (CFO t +
1.   DuPont Analysis: CFI t)
•   ROE = Tax Burden × Interest •   CF  based  Accruals  Ratio =
3.   AQI (asset quality index) = [1 – (PP&Et+
Burden × EBIT margin × TATO × ¿ÄÚ +(·†ßÚ ’·†ÄÚ )
CAt)/TAt ] / [1 – (PP&Et–1+ CAt-1)/TAt-1] (¿ß½Ú ’¿ß½Úk/ )
Financial Leverage >
•   ROE = NI/EBT × EBT/EBIT × •   Op. CF before interest and taxes = Op.
4.   SGI (sales growth index) = Salest/Salest–1
EBIT/Sales × Sales/Assets × CF + cash i paid + cash taxes paid
Assets/Equity •   Op income adjusted for accounting ∆
5.   DEPI (depreciation index) = Dep ratet–
•   ROE = Net profit margin × asset = Profit before i& taxes + amort. of
1/Dep ratet
where, Dep rate = Dep/(Dep + PP&E) turnover × leverage goodwill
•   Adjusted Asset base = Adjusted Total
Assets = Total Assets of the company ߉.·†
6.   SGAI (sales, general, and admin exp 4.   Cash  Return  on  Assets =
½5•  U.½
index) = (SGAt/Salest) / (SGAt–1/Salest–1) – Investments in Associates
•   Adjusted NI = NI of Co – NI from
5.   Cash Flow to Reinvestment =
7.   Accruals = (Income before extraordinary Associates ߉.·†
items – Cash from operations)/TA •   Adjusted  Tax  Burden = 3;‰yŠ;»  •O‰•0ˆyŠ¸<•9
¿Ä+RɸyŠP  y034´•  
RÃU
8.   LEVI (leverage index) = Leveraget / 6.   Cash Flow to Total Debt =
•   Adjusted  TATO = ߉.·†  ¼•m4<•  y0Š•<•9Š  &  áâãä¬
Leveraget–1 where, Leverage = Debt / ÏÐÑ
U.›
ÒÐÓ  ÔÕkÒÐÓ  Ö×.Ø-ÑÙÚÛ-Ú.ÜÖ-‘  ÔÕkÖ-‘  Ö×.Ø-ÑÙÚÛ-Ú
Assets >
7.   Capacity to pay debt (in years)
9.   Earnings t+1 = α + (β1 × Earnings t) + ε Accruals and Earnings Quality U.›
=
߉.·†+·;‰yŠ;»  RO‰•0ˆyŠ¸<•9
2.   B.S based aggregate accruals
10.   Account receivable turnover = (365/DSO) •   Aggregate Accrualst = NOAt – NOAt-1 ߉.·†  ¼•m4<•  Z&  áâãä¬
where, NOAt = Net operating Assets t 8.   CF Interest Coverage =
Z  ¤;yˆ  
= Op Assets t – Op Liab t = [{TA t –
 FinQuiz Formula Sheet Level II 2017

Decomposition and Analysis of the Co’s Reading 21: Capital Budgeting 9.   Profitability index = PI = 1 + (NPV/Initial
Valuation: investment)
9.   Parent Co. pro-rata share of 1.   Depreciable Basis = Purchase price + any when PI > 1, invest and when PI < 1, do
subsidiary/affiliates = (Subsidiary’s share Shipping or handling or installation costs not invest.
price in FC× Shares held by Parent Co. ×
X- rate)/Parent Co. total market Expansion Project 10.   CAPM = ri = R F + βi [E (R M) – R F]
capitalization 2.   Initial Outlay = FCInv + NWCInv
NWCInv = ∆non-cash current assets – Economic and Accounting Income
10.   Implied Value of Parent Co. (excl. ∆non-debt current liabilities= ∆NWC 11.   Accounting income = Rev – Exp
subsidiary/affiliates) = Parent Co.’s Mkt
Cap - Value of subsidiary/affiliate holdings 3.   Annual after-tax operating cash flow = CF 12.   Economic Income = AT CF from
= (S – C – D) (1 – T) + D or CF = (S – C) investment + ∆ in MV = AT CF from
¤;<•0Š  ·4.’9  ´TŠ  ·;‰ investment + (End MV – Beg MV)
11.   P/E ratio of Parent Co = (1 – T) + TD
¿Ä  4m    ¤;<•0Š  ·4.
OR
4.   Terminal year after-tax non-operating cash = AT CF from invstmnt. – (Beg MV – End
12.   Implied P/E ratio of Parent Co. =
flow = TNOCF = Sal T + NWCInv – T (Sal MV)= AT CF from invstmnt. – Eco. Dep
Implied  Value  of  Parent  Co.
(excluding  subsidiary/affiliates)   T – B T)
NI  of    Parent  Co. −Equity  Income  from   13.   Economic Profit (EP) = NOPAT– $WACC
subsidiary/affiliates Replacement Project where,
5.   Initial Outlay = FCInv + NWCInv – Sal 0 + NOPAT = net operating profit after tax
13.   Discount to Benchmark = T (Sal 0 – B0) i.e. EBIT (1 – Tax rate)
ê
Õ03Ž´;<T¹ 9 +  ¤;<•0Š  ·4.¤/R EBIT = earnings before interest and taxes
Ö
Õ03Ž´;<T¹ 9  ¤/R 6.   Annual after-tax operating cash flow $WACC= dollar cost of capital = WACC
(incremental) × capital
Off-Balance Sheet Leverage from Operating •   CF = (∆S – ∆C – ∆D) (1 – T) + ∆D or Capital (after Year 1) = investment =
Leases •   CF = (∆S – ∆C) (1 – T) + T∆D Initial Investment – depreciation
U.½  ’  ¤È  4m  »•;9•  ‰;P´•0Š9
14.   Adj. Fin Lev =
U.R   ì R¤Ú
7.   Terminal year after-tax non-operating cash 14.   MVA  or  NPV = Š\1 (1’À½··)Ú
U.›’¤È  4m  »•;9•  ‰;P´•0Š9 flow = TNOCF = ∆Sal T + NWCInv – T 15.   Total value of Co. = original investment +
15.   Adj. D-to-E ratio =
U.R (∆Sal T – ∆B T) NPV
16.   Adj. i-coverage Ratio = 8.   (1 + Nominal rate) = (1 + Real rate) (1 +
RÃÄU+›•‰  •O‰’V•0Š  RO‰ 16.   Residual income (RI) = NI – Equity
Z  •O‰’½99¸´•ˆ  Z  •O‰  40  »•;9•9 Inf rate) Charge
•   RI t = NI t – (re × B t-1)
 FinQuiz Formula Sheet Level II 2017

where, •   V=D+E= Reading 23: Dividends & Share Repurchases

ì VÄÚ Ä0Š•<•9Š  ‰;P´•0Š9  40  ˆ•¼Š  
•   MVA = Š\1 1’< Ú + Analysis
Ð ·49Š  4m  ˆ•¼Š
•   Total value of Co. = NPV (PV of RI) (RÃÄU  –  y0Š•<•9Š  ‰;P´•0Š9  40  ˆ•¼Š)
  Share is sold just before it goes ex-dividend:
·49Š  4m  •É¸yŠP
+ Original Equity investment +
Original Debt investment 1.   Cash flow from Sale = Sale price – capital
›  R gains tax owned on the sale = Pw – (Pw –
8.   Systematic Risk = βa = βd + βe  
È  È  
Claims Valuation Pb)(TCG)
•   βe = βa + (βa – βd) (D/E)
17.   Total value of Co. = value of liabilities + where, Pw = price with the right to receive
value of equity dividend
9.   AT cost of debt = BT cost of debt × (1 –
Pb = purchase price where b is for buy
Marginal tax rate)
TCG = marginal tax rate on capital gains
Reading 22: Capital Structure
10.   MM Proposition I with Taxes: Co.’s value
Share is sold (after share goes ex-div.)
1.   WACC = rÀ½·· =
›
×rˆ × 1 − t + is maximized at 100% Debt
È 2.   CF from Sale = Sale price – cap gains tax
•   V L = V U + (t ×D)
R
×r• (owed on sale) + AT amount of div. = Px–
È •   Value  of  Unlevered all  equity Co. =
(Px– Pb) (TCG) + D (1 – TD)
RÃÄU   1  –  Š
  VU =
2.   Total value of Co. = V = D + E <ðÕññ
Ä0Š•<•9Š  ‰;P´•0Š9  40  ˆ•¼Š 3.   When Px = Pw then Pw – (Pw – Pb) (TCG) =
•   V=D+E= +
·49Š  4m  ˆ•¼Š Px– (Px– Pb) (TCG) + D (1 – TD)
3.   WACC without taxes = rÀ½·· = (RÃÄU  –  y0Š•<•9Š  ‰;P´•0Š9  40  ˆ•¼Š)(1  –  Š) 1+Uò 1+Uò
› R ·49Š  4m  •É¸yŠP P‡ − PO = D or ∆P = D
×rˆ + ×r• 1+Uñó 1+Uñó
È È
where, ∆P = ∆ in price when the stock
11.   MM Proposition II with Taxes: WACC is goes from with div to ex-div
›
4.   Cost  of  Equity = r• = ru + (ru − rˆ ) minimized at 100% Debt
R
›
•   re = r0 + (r0 –rd)(1 – t) 4.   Double Taxation Method: ETR= Corp. tax
Ä0Š•<•9Š  ‰;P´•0Š9  40  ˆ•¼Š     R
5.   V = D + E = + (r0 –rd)(1-t) = Slope coefficient * rate + {(1 – Corp. tax rate) (Indiv. tax
·49Š  4m  ˆ•¼Š
(RÃÄU  –  y0Š•<•9Š  ‰;P´•0Š9  40  ˆ•¼Š) *(r0- r d)(1 – t) < (r 0 - r d) rate)}
   ›
·49Š  4m  •É¸yŠP
•   WACC with taxes: rWACC = ×rd× (1 –
  È 5.   Dividend imputation tax system: ETR =
R
6.   According to MM proposition I: V L = V U
t)+ ×re SH’s Marginal Tax Rate
È
and E = V – D  
  12.   Static trade-off theory of capital structure 6.   Split tax system: ETR = Corp. tax rate on
7.   According to MM proposition II: VL = V U + tD – PV(Costs of financial div + {(1 – Corp. tax rate on div.)
•   Cost  of  Equity = r• = ru + (ru − distress) (personal tax rate)}
›
rˆ )
R
 FinQuiz Formula Sheet Level II 2017

Payout Policies: Reading 26: Mergers & Acquisitions •   Unlevered NI = EBIT × (1- tax rate)
7.   Stable Div. Policy •   NOPLAT = Unlevered NI + ∆ in
•   Expected ↑ in Div. = ↑ in Earnings × 1.   Statutory Merger = Co. X + Co. Y= Co. X deferred taxes
Target payout ratio × Adj. factor 2.   Subsidiary Merger = Co. X +Co. Y=(Co.
•   Adj. factor = 1/no. of yrs. over which X + Co. Y) 11.   FCF = NOPLAT + NCC – ∆ in Net WC –
adj. in div. will take place Capex
•   Expected Div = Last div. + (Expected 3.   Consolidation = Co. X + Co. Y = Co. Z
↑ in earnings × Target payout ratio × 12.   FCF = NI + net interest after-tax + ∆ in
Adj. factor) 4.   New shares issued by Acquirer = deferred taxes + net noncash charges – ∆ in
ÇTŠ  3;‰  4m  U;<••Š NWC – Capex
9Š43T  ‰<y3•  4m  ½3ɸy<•<
8.   Residual Div. Policy
•   Div. = Earnings – (Capital budget × Terminal Value:
5.   Post-merger no. of shares outstanding =
Equity % in capital structure) or Acquirer’s pre-merger total shares
13.   Using constant growth formula
•   Div. = Zero, whichever is greater. outstanding + new shares issued by †·†Ô (1’•)
Terminal  ValueU =
9.   Div. Payout Ratio =
›y5. Acquirer (À½··ü‘ýþÙÚБ +•)
¿Ä

¿Ä  
6.   Post-Merger EPS = 14.   Using Market Multiple
10.   Div. Coverage Ratio = ½3ɸy<•<¹ 9  ‰<•  ´•<••<  R;<0y0•9’U;<••Š¹ 9  ‰<•  ´•<••<  R;<0y0•9   ¤
›y5. Terminal  ValueU = FCFU ×
¤49Š  ´•<••<  0¸´¼•<  4m  9Ž;<•9  4¸Š9Š;0ˆy0• †·†

11.   FCFE Coverage Ratio =

†·†R   7.   Post merger P/E (if market is efficient) 15.   EV =MV of debt + MV of equity – cash &
[›y5.’SŽ;<•  V•‰¸<3Ž;9•9] ¤<•  ´•<••<  9Š43T  ‰<y3•  4m  ½3ɸy<•< cash equivalents
=
¤49Š  ´•<••<  R¤S  

FCFE = CFO – FCInv + Net Borrowings 16.   Takeover Premium = takeover (deal price)
8.   No. of acquirer shares received by each per share (of target Co.) – current stock
shareholder (in target Co.) = No. of target ›¤  +  S¤
Reading 24: Corporate Performance, price of target Co. =
shares he/she owns × X ratio c§
Governance & Business Ethics

[ câöä¬
 ÷ø
 ÷ùáúùá
 ÷—
 ¦Zøû
 Z 17.   Estimated takeover price of Target =
9.   HHI = Z ¥÷áâö
 câöä¬
 ÷ø
 ÷ùáúùá
 ÷—
 ûâøwäá
 
 ×
Estimated stock price of Target based on
2 Comparables + Estimated takeover
Reading 25: Corporate Governance 100
premium
1.   Share Overhang = 10.   Unlevered NI = NI + Net Interest after-tax
¿4.4m
 9Ž;<•9
 <•‰<•9•0Š•ˆ
 ¼P
 ŠŽ•
 ß‰Šy409
•   Net interest after-tax = (i exp – i •   When takeover premium is given in
U4Š;»
 04.4m
 9Ž;<•9
 4¸Š9Š;0ˆy0• %, Estimated takeover price of Target
income) × (1 – Tax rate) Or
 FinQuiz
= (Estimated stock price of Target
based on Comparables) × (1 +
Takeover premium in %)
18.   Target Shareholders’ gain = Premium = P T
–VT
where,
P T = price paid for target company
V T = pre-merger value of target
company
19.   Acquirer’s gain = Synergies – Premium =
S – (P T – V T)
20.   Post-merger value of the combined
company = V A* = V A + V T + S – C
where,
V A = pre-merger value of the acquirer
C = cash paid to target SH i.e. cash paid =
cash price paid per share of target co. × no.
of shares outstanding of target co.
21.   In Stock offer = P T = (N × P AT)
where,
P T = price paid for target co.
N = No. of new shares target receives
P AT = price per share of combined firm
after merger announcement
Reading 27: Equity Valuation: Applications &
Processes
1.   Mispricing = VE – P = (V- P) + (VE –
V)
•   VE–P: Mispricing
Formula Sheet
•   V–P: True Mispricing
•   VE–V: Valuation Error
where,VE = estimated value
P = market price
V = intrinsic value
2.   Residual Income Model = NI – (cost of
equity × Beg value Equity)
Reading 28: Return Concepts
1.   Dividend yield or investment income =
(DH/P0)
2.   Price appreciation R = (PH-P0)/P0
3.   HPR = r = {(DH + PH) / P0} – 1 OR r =
{(P1 – P0+CF1) / P0
4.   Expected Alpha = Exp. R – Req. R
5.   Realized Alpha (Ex-post alpha) = (Actual
HPR) – (Contemporaneous Req. R)
6.   Expected HPR:
•   When an asset’s intrinsic value ≠
market price, the investor expects to
earn = RR + return from the
convergence of price to value
•   When an asset’s intrinsic value =
price, the investor expects to earn RR
only.
•   E (RT) ≈ rT + {(V0 – P0) / P0}
where,rT = periodic required RoR,
Level II 2017
•   {(V0 – P0)/P0} = estimate of return
from convergence over period
7.   IRR:
•   Intrinsic value= D1 / (k-g)
•   If asset (fairly priced), market price =
intrinsic value: k = (D1 / P0) + g
8.   Req ROE = Rf + ERP
9.   GGM Intrinsic value = D1/ (k-g)
Macroeconomic Model Estimates (Supply side
models):
10.   ERP = [{(1+EINFL) (1+EGREPS)
(1+EGPE)-1} +EINC]-Expected Rf R
•   where EINFL= expected inf.(
forecasted as) {(1+YTM of 20-yr T-
bonds) / (1+YTM of 20-yr TIPS)} –
1.
•   EGREPS = expected growth rate in
real EPS.
•   Real GDP growth rate = labor
productivity growth + labor supply
growth rate
Labor supply growth rate = population
growth rate + increase in labor force
participation rate
•   EGPE = expected growth rate in P/E
ratio. (For efficient markets 1+EGPE
= 1+0 = 1.
 FinQuiz
•   EINC = expected income component
(includes dividend yield &
reinvestment R)
11.   CAPM: Required Return on share i =
Current expected Rf R + Bi (ERP)
•   where ERP = Expected R on mkt
portfolio – RF R
•   Beta = Cov of returns with mkt R /mkt
portfolio var.
12.   Adjusted Beta = (2/3) (Unadjusted beta) +
(1/3) (1.0)
13.   Beta Estimation for Thinly Traded Stocks
and Nonpublic Companies
•   Bu ≈ [1/ {1+ (D/E)}] ×Be
•   Be’ ≈ [1+ (D’/E’)] ×Bu
14.   Multifactor Models = r = Rf+ (RP)1 +
(RP)2 + … + (RP)k
•   RPi = (Factor sensitivity)i × (Factor
RP)i.
15.   The Fama-French Model (FFM): ri =Rf +
Bimarket × RMRF + Bisize× SMB + Bivalue ×
HML
•   RMRF = RM –Rf
•   SMB(small minus big) = Avg. R on 3
small-cap portfolios – avg. R on 3
large-cap portfolios.
Formula Sheet
•   HML (high minus low) = Avg. R on 2
high Book-to-market portfolios – avg.
R on 2 low book-to-market portfolios.
16.   Pastor-Stambaugh Model (PSM): ri = Rf +
Bimarket×RMRF + Bisize× SMB + Bivalue ×
HML+ BiLiq× LIQ
17.   5-factor BIRR Model: ri = T-bill rate +
(sensitivity to confidence risk × confidence
RP)–(sensitivity to time horizon × time
horizon RP) – (sensitivity to inf. risk × inf.
RP) + (sensitivity to business cycle risk ×
business cycle RP) + (sensitivity to mkt.
timing risk × mkt. timing RP)
18.   Build-Up Approaches for Private Business
Valuation: ri = rf + ERP + Size premi
+Specific Co. premi
19.   Bond yield Plus RP (BYPRP) cost of
equity = YTM on the co.’s LT debt + RP
Country Spread Model
20.   ERP estimate = ERP for a developed mkt
+ Country prem.
•   Country Prem. = yield on emerging
mkt bonds (denominated in currency
of developed market) – yield on
developed mkt. govt. bonds
21.   Cost of Capital = WACC = {D/(D+E)}rd
(1-Tax rate) + {E / (D+E)}rE
Level II 2017
Reading 29: Industry & Company Analysis
1.   % of sales (specific geographic region) =
Sales of a particular region / Total sales of
a co.
2.   Co.’s projected Rev. growth = Projected
mkt. share × Projected sales of a given
product mkt.
3.   Forecasted variable costs = % of rev. Or =
Unit volume × Unit variable costs
4.   COGS =Raw materials + Direct labor +
Overhead (in producing the goods)
5.   Finance costs = (Fixed i rate on debt ×
Gross debt at beg. of period) – (i income
rate × cash position at beg of period)
6.   Gross debt = LT financial debt + ST
financial debt + Accrued interest
7.   Net debt = Gross debt – Cash and cash
equivalents
8.   Effective i rate = i exp / Avg gross debt
9.   i rate on avg cash position =i income / Avg
cash position
10.   i rate on avg. net debt = Net i exp / Avg.
net debt
 FinQuiz Formula Sheet Level II 2017

11.   Deferred tax asset/liability = Profit and 18.   Post cannibalization revenue =Pre- 22.   Forecasted CF Statement
loss (reported) tax amount – Cash tax cannibalization revenue – Estimated CF from operating activities:
amount impact on rev. from cannibalization NI (profit after taxes)
Adj. to determine CF:
12.   Projected A/C receivable = Forecasted 19.   Overall organic rev. growth = [(1 + Add:
annual sales (assuming all credit sales) × volume growth) (1 + % of price/mix dep.
(Assumed DSO/ 365) contribution to rev. growth)] -1 ↓  in a/c receivable
↓ in inventory
13.   Projected inventory = Assumed COGS / 20.   Construction of Pro Forma I.S: ↑ in a/c payable
Assumed Inventory TO ratio Sales Total adjustments
Less: COGS Net CF from operating activities
14.   ROIC= NOPLAT / Invested Capital = EBI = Gross profit CF from investing activities:
/ (Operating assets – Operating liab.) Less: Admin. exp. 𝐴𝑑𝑑: ↓ in plant and equipment
Less: Distrib. Exp. Net CF from investing activities
15.   ROCE = Op. profit / Capital employed (i.e. Add: Other income from operation CF from financing activities:
debt and equity capital) = EBIT ↑ in notes payable
Add (Less): Other operating income ↑ in LTD
16.   Rev. loss for co. due to cannibalization of (exp.) Less: Dividends paid
demand = Projected no. of units of product Less: Finance costs & other financial Net CF from financing activities
cannibalized by the new substitute product exp. Forecasted ↑ in cash
× Estimated ASP = Profit before tax
Where, Less: Income Tax 23.   Forecasted B.S
•   Average selling price (ASP) = Add: Income from associates PP&E
·4´‰;0P¹ 9  •9Šy´;Š•ˆ  ;5•.    <•5. = Profit from continuing Add: Investment in associates
·4´‰;0P¹ 9  •9Šy´;Š•ˆ  9Žy‰´•0Š9  4m  ‰<4ˆ¸3Š   operations Add: Other financial assets
•   No of units of a product cannibalized Add (Less): Profit (loss) from Add: Deferred tax assets
by the new substitute product = discontinued operations = Total non-current assets
Expected no. of product shipments × = Net profit for the year Inventories
% representation of each category Less: Non-controlling interests Add: Trade and other receivables
(e.g. consumer & non-consumer) × = Owners of the co. Add: Cash & cash equivalents
Cannibalization factor for the category
Add: Other current assets
21.   EBITDA = EBIT + Dep. & amort. exp. =Total current assets
17.   Post cannibalization shipments =Pre-
Total assets = Total non-current +
cannibalization shipments – Expected
Total current assets
cannibalization Share capital
 FinQuiz Formula Sheet Level II 2017

Add: Share premium Reading 30: Discounted Dividend Valuation 6.   GGM for Preferred stock (fixed rate
Less: Treasury shares ›
perpetual preferred stock) = Vu =
<
Add: Consolidated reserves+Net profit 1.   Asset’s value is PV of its expected future
to co. owners 0 ·†Ú
CFs i.e. Vu = Š\1 1’< Ú 7.   GGM ERP = 1-yr. forecasted div. yield on
Plus: Translation reserve
market index + consensus LT earnings
+/-: Profit or loss recorded in equity
2.   RI = NI – (cost of equity × Beg. BV of growth rate – LT govt. bond yield
= Equity attributable to
shareholders common equity)
8.   Actual value of a company’s share = Vu =
Plus: Non-controlling interest R/
= Equity 3.   In RI Model: Value of stock = BVPS at t = + PVGO
<
LT financial debt 0 + PV of expected future residual where,
Add: Provision for employee benefits earnings •   PVGO =Sum of PV of expected
Add: LT provisions for liabilities and •   where, BVPS = common SHs’ equity / profitable opportunities of reinvesting
charges no. of common shares outstanding the earnings.
Add: Deferred tax liabilities •   RI model (assumes Clean Surplus E1/r = no-growth value per share
Accounting holds) i.e. BV t = BVt-1 + R/
= Total non-current liabilities •   When P0 = V0 then. PVGO = Pu −
<
ST financial debt and accrued interest NIt – Divt È# ¤# ¤
•   Can be restated as  or    or   =
Add: Trade and other payables R/ R/ R
4.   DDM 1 ¤È£ß
Add: Income tax payable +
< R/
Add: ST provisions for liabilities and •   With Single HP = Value of Stock =
where, 1/r = value of P/E for no-
charges PV of expected Div. + PV of expected
growth company.
Add: derivative financial instruments Selling Price at the end of year one =
›/ ¤/ PVGO/E1 = component of P/E value
Add: Liabilities held for sale Vu = +
(1’<)/ (1’<)/ that represents growth opportunities.
= Current liabilities
•   Value of stock for 2 years HP = Vu =
›/ ›? ¤? ›/
24.   FCFF: + + ¤ ¤# R/ 1+¼
(1’<)/ (1’<)? (1’<)? 9.   Leading ratio = = =
R R/ <+• <+•
Normalized operating profit 0 ›Ú ¤-
•   For n-HPs = Vu = Š\1 1’< Ú +
1’< -
Less: Taxes ›# (1’•)
•   When HP is extended into indefinite ¤# R#
= Normalized operating 10.   Trailing  P/E  ratio =   = =
ì ›Ú R# (<+•)
profit after tax future: Vu = Š\1 (1’<)Ú (1+¼)(1’•)
Add: Dep. & amort. (<+•)
∆ in WC 5.   Gordon Growth Model (GGM) = Vu =
Less: Capital expenditures ›# × 1’• ›/ 11.   GGM can be used to derive required RoR
or =
= FCFF <+• <+• ›# (1’•) ›/
=r= +g= +g
¤# ¤#
 FinQuiz Formula Sheet Level II 2017

¿Ä ¿Ä FCInv = End gross PPE – Beg. gross

15.   ROE   = = ×
SŽ;<•Ž4»ˆ•<9¹ •É¸yŠP U4Š;»  ½99•Š9
12.   Two-Stage Div Discount Model = Vu = U4Š;»  ½99•Š9
PPE
0 ›Ú È- b)  When LT assets are sold during the yr:
Š\1 (1’<)Ú + SŽ;<•Ž4»ˆ•<¹ 9  •É¸yŠP
(1’<)-
=
¿Ä
×
S;»•9
× FCInv = Capital expenditures –
where, S;»•9 U4Š;»  ½99•Š9
proceeds from sale of LT assets or
›# × 1’•& - 1’•' U4Š;»  ½99•Š9
•   V0 = = FCInv = (End. gross PPE – Beg. gross
<+•' SŽ;<•Ž4»ˆ•<9¹ •É¸yŠP

0 ›# (1’•& )Ú = Net profit margin × Asset PPE) - Proceeds from sale of LT

•   Vu = Š\1 +
(1’<)Ú Turnover × Leverage assets
›# ×(1’•& )- ×(1’•' )
WCInv = ∆ in Current assets excl. cash
1’< - (<+•' )
Reading 31: Free Cash Flow Valuation & cash equivalents – ∆ in Current liab.
excl. ST debt
13.   H-Model
•   Vu =
›# × 1’•' › ×º× •& +•'
+ # or 1.   PV of FCFF = Firm  Value =
<+•' <+•' ì †·††Ú 7.   CF from operating activities = CFO = NI +
›# × 1’•' ’ ›# ׺×(•& +•' )
  Š\1 (1’À½··)Ú  
•   Vu = NCC – WCInv.
(<+•' )
where, ÇÈ  4m  ›
2.   WACC   =   × rˆ  × 1 − 8.   Computing FCFE from FCFF
gL= normal LT div. growth rate after ÇÈ  4m  ›’ÇÈ  4m  R
ÇÈ4m  R •   FCFE = FCFF – Int ×(1 – Tax rate) –
year 2H Tax  rate +   × r•
ÇÈ4m  ›’ÇÈ4m  R preferred stock dividends + Net
gS= initial ST div. growth rate
Borrowing + issuance of preferred
H = half-life in years of the high- ì †·†RÚ
3.   PV of FCFE = Equity  value = Š\1 (1’<)Ú   stocks – redemption of preferred stock
growth period i.e. high growth period
•   FCFE = NI + NCC – FCInv – WCInv
= 2H years
4.   Constant-Growth FCFF valuation Model = + Net Borrowing + issuance of
†·††/ †·††# ×(1’•) preferred stocks – redemption of
14.   Estimating Sustainable Growth Rate = g = Firm  Value = Vu = =
À½··+• À½··+• preferred stock
b × ROE
¿Ä+›y5yˆ•0ˆ9 ¿Ä S;»•9 •   FCFE = CFO – FCInv + Net
•   g= × × × 5.   Constant-Growth FCFE valuation Model =
¿Ä S;»•9 U4Š;»  ½99•Š9 Borrowing + issuance of preferred
U4Š;»  ½99•Š9 †·†R/ †·†R# ×(1’•)
Equity  Value = Vu = = stocks – redemption of preferred stock
SŽ;<•Ž4»ˆ•<9¹ RɸyŠP <+• <+•
•   Total value of Equity (common) =
•   g = PRAT i.e..
6.   Computing FCFF from NI = FCFF = NI + Total Firm value – Market value of
•   g = profit margin (P) × retention rate
NCC + Int × (1 – Tax rate) + Preferred Debt – Preferred stock
(R) × asset turnover (A) × financial
leverage (T) stock div. – FCInv – WCInv
9.   Finding FCFF and FCFE from EBIT or
a)   When no LT assets are sold during the EBITDA
yr: •   FCFF = EBIT (1 – Tax rate) + Dep –
FCInv – WCInv
 FinQuiz Formula Sheet Level II 2017

•   FCFF = EBITDA (1 – Tax rate) + Dep Required rate of return (real) [in %] Reading 32: Market based Valuation: Price &
(Tax rate) – FCInv – WCInv Enterprise Value Multiples
•   FCFE = FCFF – Int (1 – Tax rate) + 15.   Single-Stage FCFF and FCFE Model for
Net borrowing + issuance of preferred International Valuation: 1.   Trailing P/E or Current P/E =
stocks – redemption of preferred stock FCFFu ×(1 + g <•;» ) ·¸<<•0Š  ÇTŠ  ¤<y3•  ‰•<  9Ž;<•
Value  of  firm = Vu = ´49Š  <•3•0Š  )  *¸;<Š•<9¹ R¤S
10.   Forecasted FCFF = Forecasted [EBIT ×(1 WACC<•;» − g <•;»
– Tax rate) – FCInv – WCInv] FCFF1
= 2.   Forward P/E or Leading P/E or Prospective
WACC<•;» − g <•;»
·¸<<•0Š  Ç;<T•Š  ¤<y3•  ‰•<  9Ž;<•
11.   Incremental fixed capital expenditures as a P/E =
¿•OŠ  ,•;<¹ 9  RO‰•3Š•ˆ  R;<0y0•9  
proportion of sales increases = Value  of  Stock = Vu
·;‰yŠ;»  •O‰+›•‰  •O‰ FCFEu ×(1 + g <•;» )
Ä03<•;9•  y0  9;»•9 = 3.   Basic EPS =
r<•;» − g <•;» U4Š;»  R;<0y0•9
 
FCFE1 À•ŽŠˆ  ½5•  04.4m  9Ž;<•9  ;3Š¸;»»P  4/9  ˆ¸<y0•  ŠŽ•  ‰•<y4ˆ
12.   Incremental working capital expenditures =
r<•;» − g <•;»
as a proportion of sales increases = 4.   Diluted EPS =
Ä03<•;9•  y0  À·
U4Š;»  R;<0y0•9
Ä03<•;9•  y0  9;»•9 16.   Two-stage FCFF valuation model equation   ¿4.4m  9Ž;<•9  4/9  ‡Ž•0  Ž4»ˆ•<9  4m  
is: •O3•<3y9•ˆ  ŠŽ•y<    4‰Šy409  Š4  4¼Š;y0  34´´40  9Š43T
13.   FCFE = NI – (FCInv – Dep) – WCInv + 0 †·††Ú
•   Firm  Value = Š\1 (1’À½··)Ú +
ò/
Net borrowing †·††-Ü/ 1 Ö/ 1+¼
where, × 5.   Justified Forward P/E = P0/E1 = =
(À½··+•) (1’À½··)- <+• <+•
Net borrowing = DR×(FCInv – Dep) +
DR×(WCInv) Or ›# (1’•)/R#
•   Two-stage FCFE valuation model 6.   Justified Trailing P/E = P0/E0 =
<+•
FCFE = NI – (FCInv – Dep) – WCInv equation = Equity  Value = 1+¼ ×(1’•)
+ (DR) ×(FCInv – Dep) + (DR) 0 †·†RÚ †·†R-Ü/ 1 = where
+ × <+•
Š\1 (1’<)Ú (<+•) (1’<)-
×(WCInv) Or P = price; E = earnings; D = dividends; r =
FCFE = NI - (1-DR) ×(FCInv – Dep) required rate of return; and g = dividend
– (1 – DR) ×(WCInv) 17.   Excess Cash = Total  Cash  Available − growth rate
Total  Assets  of  Firm×
14.   Modified Build-Up method to estimate real Ç•ˆy;0  »•5•»  4  m  Ä0ˆ¸9Š<P  3;9Ž SŠ43T¹ 9  ¤/R
7.   PEG ratio =
discount rate: Ç•ˆy;0  »•5•»  4m  Ä0ˆ¸9Š<P  U4Š;»  ½99•Š RO‰•3Š•ˆ  R;<0y0•9  £<4‡ŠŽ  V;Š•  y0  %

Country return (Real) [in %]

+/ - Industry Adjustment [in %] 8.   Yardeni Model CEY = CBY – (b × LTEG)
+/ - Size Adjustment [in %] + Residual
+/ - Leverage Adjustment [in %]
where,
 FinQuiz Formula Sheet Level II 2017

CEY = current earnings yield on the mkt. * It includes preferred stock and div.
index i.e. E/P. in arrears on preferred stock. › ›y5  ‰•<  9Ž;<•
19.   Dividend Yield = =
¤ ¤<y3•  ‰•<  9Ž;<•
CBY = current Moody’s Investors Service •   BVPS for whole company =
•   Trailing Div Yield =
A-rated corporate bond yield. Š4Š;»  ;99•Š9  –  Š4Š;»  »y;¼y»yŠy•9  
›y5yˆ•0ˆ  V;Š•
LTEG = consensus 5-year earnings growth 0¸´¼•<  4m    9Ž;<•9  4¸Š9Š;0ˆy0•
·¸<<•0Š  ´TŠ  ¤<y3•  ‰•<  9Ž;<•
rate forecast for the mkt index. •   Leading Div Yield =
VßR+•
b = coefficient (measures weight, the mkt 13.   Justified P/B = P0/B0 = †4<•3;9Š•ˆ  ›y5  ‰•<  9Ž;<•  45•<  ŠŽ•  0•OŠ  P<
<+•
gives to 5-year earnings projections). ·¸<<•0Š  ´TŠ.    ¤<y3•  ‰•<  9Ž;<•
¤ 1
•   By taking inverse: = 14.   Justified P/B based on RI model = P0/B0 =
R ·Ã,+¼  ×  +UR£ 20.   Div Yield (by using GGM) = Justified Div
¤È  4m  •O‰•3Š•ˆ  m¸Š¸<•  <•9yˆ¸;»  •;<0y0•9
9.   Own Historical P/E: Justified price = 1+ ›u <+•
Ãu Yield = =
Benchmark value of own historical P/Es × ¤u 1’•

Most recent EPS ¤<y3•  ‰•<  9Ž;<•

15.   P/S = 21.   EV = MV of Common equity + MV of
½00¸;»  0•Š  9;»•9  ‰•<  9Ž;<•

10.   Terminal Value (T.V) based on where Net Sales = Total Sales – preferred stock* + MV of debt – Cash &
Fundamentals: returns– customer discounts Short-term Investments
•   T.V in yr n = (justified trailing P/E) ×
(forecasted earnings in year n) 16.   P/S ( in terms of Gordon Growth Model = •  MV of Common equity = No. of
Ö#
•   T.V in year n = (justified leading P/E) ¤# &#
1+¼ (1’•) shares o/s × Price per share
Justified P/S = =
S# (<+•) •  Cash & Investments = cash, cash
× (forecasted earnings in year n+1)
where, E0/S0 = Business’s profit equivalents, short term investments
11.   Terminal Value based on Comparables: margin etc.
•   T.V in yr n = (Benchmark trailing *If minority interest exists and it is not
P/E) × (forecasted earnings in year n) 17.   g = Retention rate (b) × ROE included elsewhere, then it should be
S;»•9
•   T.V in yr n = (Benchmark leading g = b × PM0 × × added back.
U4Š;»  ½99•Š9
P/E) × (forecasted earnings in year U4Š;»  ½99•Š9
SŽ;<•Ž4»ˆ•<9¹ RɸyŠP ߉•<;Šy0•  ‰<4myŠ  ;mŠ•<  Š;O
n+1) 22.   ROIC =
where, PM0 = Profit Margin at t = 0 U4Š;»  y05•9Š•ˆ  ·;‰yŠ;»

¤<y3•  ‰•<  SŽ;<•

12.   P/B = where 18.   Price To Cash Flow 23.   Total Invested Capital = TIC = MV of
 Ã44T  È;»¸•  ‰•<  SŽ;<•
•   BVPS for equity shareholders = ¤<y3•  ‰•<  9Ž;<• Common equity + MV of preferred stock +
•   = Or
R;<0y0•9  ‰»¸9  0403;9Ž  3Ž;<••9 MV of debt
U½  –  U+  –  ¤.S  
= ¤<y3•  ‰•<  9Ž;<•
04.4m  34´´40  9Š43T  9Ž;<•9  4/9 •   = Or
·;9Ž  m»4‡  m<4´  ß‰•<;Šy409
Sº¹ 9¹ •É¸yŠP  –  Š4Š;»  •É¸yŠP  5;»¸•  3»;y´9   24.   Earnings surprise UEt = EPS t – E (EPS t)
¤<y3•  ‰•<  9Ž;<•
ŠŽ;Š  ;<•  9•0y4<  Š4  34´´40  9Š43T∗ •   = Or
#  4m  ·.S  9Ž;<•9  4/9 †·†R where,
¤<y3•  ‰•<  9Ž;<•
•   = UEt= unexpected earnings for quarter t
RÃÄU›½
 FinQuiz Formula Sheet Level II 2017

EPSt= reported/actual EPS for quarter VÄÚ

•   =NOPAT – Total Capital Charge = •   Vu = Bu + ì
Š\1 1’< Ú = Bu +
t NOPAT – Debt Charge – Equity RÚ +<ÃÚk/
ì
E(EPSt) = expected EPS for the Charge = NOPAT – (AT cost of debt Š\1 (1’<)Ú

quarter × Debt Capital) – (cost of equity × •   Vu = Bu +

VÄ/
+
VÄ?
+
VÄ/
+
(1’<)/ (1’<)? (1’<)/
•   Percent Earning Surprise = Equity Capital)
R;<0y0•9  S¸<‰<y9•
•   RI (with preferred stock) = NI – ⋯
RO‰•3Š•ˆ  R¤S
Equity Charge – Preferred Stock Div
•   Scaled Earnings Surprise =
R;<0y0•9  S¸<‰<y9•
•   RI = (ROIC – Effective Capital 6.   RI Model (general) = Vu = Bu +
S.›  4m  ;0;»P9Š9-  •;<0y0•9  m4<•3;9Š Charge) × Beg. Capital ì VßRÚ +< ×ÃÚk/
Š\1 1’< Ú
25.   Standardized Unexpected Earnings = SUE
R¤SÚ  +R  (R¤SÚ ) 3.   EVA = NOPAT – (C% × TC)
t = ¤ ¤# VßR+• VßR+<
.  [R¤SÚ  +R  (R¤SÚ )]
Or = [EBIT (1 – t)] – (WACC × invested 7.   Justified = =   =  1 +
à Ã# <+• <+•
where,
capital) where, Justified Price is the stock’s
EPSt= reported/actual EPS for time t
where, Intrinsic value i.e. P0 = V0
E (EPSt) = expected EPS for the time t
C% = cost of capital BV of equity = B0 = Total assets –
σ [EPSŠ   − E  (EPSŠ )] = S.D of [EPSŠ   −
TC = Total capital total liab.
E  (EPSŠ )] over some historical time period. WACC × invested capital = dollar cost of
capital 8. Tobin’s q =
ÇÈ  4m  ›•¼Š  ;0ˆ  RɸyŠP
26.   Relative strength indicator Invested capital = net WC + net fixed V•‰»;3•´•0Š  349Š  4m  U4Š;»  ½99•Š9
SŠ43T¹ 9  ‰•<m4<´;03•
= assets = BV of LT debt + BV of equity
¤•<m4<´;03•  4m  ;0  RɸyŠP  Ä0ˆ•O
9.   Single-Stage RI Valuation = Vu = Bu +
VßR+<
0 4.   MVA = MV of Co. – Accounting BV of ×Bu
27.   Harmonic Mean = XH= - (/)
<+•
*./ 6
*
total capital = MV of Co – (BV of Debt + •   Implied Growth rate in RI = g = r −
BV of Equity) Ã# VßR+<
È# +Ã#
Reading 33: Residual Income Valuation
5.   RI model
•   RIt = E t – (r × B t-1) = (ROE – r) × B t-1 10.   Multi-Stage RI Valuation = V0 = B0 + (PV
1.   End. BV of equity = Beg. BV of equity +
•   Two components of intrinsic value of of interim high-growth RI) + (PV of
Earnings – Div.
stock/equity continuing RI)
B t = B t-1 + E t – Dt &
D t = E t - (B t - B t-1) = E t + B t-1 - B t i.   Current BV of Equity that is B0. •   PV of continuing RI in year T–1
VÄ/ VÄÔ
ii.   PV of expected future RI + = where, ω=
(1’<)/ 1’<+2 1’< Ôk/
2.   Residual Income (RI) VÄ? VÄ/ persistence factor, 0 ≤ ω ≤ 1
+ +⋯
•   = NI – Equity Charge = NI – (Equity (1’<)? (1’<)/ •   Assumptions about Continuing RI:
Capital × Cost of Equity Capital)
 FinQuiz Formula Sheet Level II 2017

o   RI is at +ve level currently and †·††/ r (T) = {[ 1 + r (1)] [1 + f (1,1)] [1 + f

•   To value Equity directly = V =
<+•
will persist at this level in the (2,1)] [1 + f (3,1)] … [1 + f (T – 1,1)]} (1/T)
future indefinitely: -1
2.   Excess Earnings or RI = Normalized
PV of continuing RI in year T-1
VÄÔ VÄÔ VÄÔ earnings – [(RR on WC × value of WC) +
= = = Forward rate model can be expressed as:
1’<+2 1’<+1 < (RR on fixed assets × value of fixed •∗
o   RI will become 0 from the assets)] 1 + 𝑟 𝑇∗ + 𝑇 •
1 + 𝑟 𝑇∗ + 𝑇
terminal yr forward. 1 + 𝑟 𝑇∗
PV of continuing RI in year T-1 3.   MVIC = MV of Debt + MV of Equity = 1 + 𝑓 𝑇 ∗, 𝑇
VÄÔ
= =  
1’<+2 1’< Ôk/
VÄÔ VÄÔ 4.   Calculation of Lack of Control Discount = 5.   Yield Curve Movement and the Forward
= 1
1’<+u 1’< Ôk/ 1’< Ôk/ DLOC = 1 − Curve  
1’·40Š<4»  ¤<•´y¸´
o   RI declines to 0 as ROE
•  F (T*, T) = § §¥∗  ¥∗’¥
approaches r over time (& RI will
5.   Lack of Marketability Discount =
become 0 eventually). i.e. 0 ≤ ω
È;»¸•  4m  ";Š–ŠŽ•–´40•P"  ‰¸Š  4‰Šy40
•  P* (T) = § §á  ’á ¥
≤1 DLOM =
PV of continuing RI in year T-1=
5;»¸•  4m  9Š43T  ¼•m4<•  ;0P  ›+ßÇ
•  F*(t, T*, T) = §∗  §∗  ¥∗  ¥∗  ’+¥+á
á
VÄÔ 6  (~Ü•∗  Ü•k~)
6.   Total Discount = [1 – (1 – DLOC in %) × 6  (~) §∗  (¥∗  ’¥)
1’<+2 1’< Ôk/ •  F*(t, T*, T) = 6  (~Ü•∗  k~) =   =
(1 – DLOM in %)] §  (¥∗)
o   RI declines to long-run mean 6  (~)

level of mature industry. F (T*, T)

Reading 35: The Term Structure & Interest
Where premium over book value is assumed at Rate Dynamics Active Bond Portfolio Management
  1’ø ¥’1 •Ü/
the end of time horizon T (PT – Bt), current 6.   1-yr. HPR = =   1 + 𝑟(1)
1 1’— 1,¥ •
value (V0) = 1.   Discount Factor = P (T) = =
1’¬ú÷áøâáä • (when the spot curve one year from today
B0 + ∑
(ROEt − r )Bt −1 + PT − BT
T
1
  is today’s forward curve)
1’ø  (¥) •
t =1 (1 + r )T (1 + r )T  
Where PT =BT × (forecasted 7.   Return of the 2-year zero-coupon bond
2.   Forward pricing model: P (T* + T) = P
P/B ratio) over 1-yr HP =
(T*) × F (T*,T)   ¤<y3•  4m  ;  >+P<  ³•<4+34¸‰40  ¼40ˆ  1  P<  m<4´  Š4ˆ;P
  −
¤¸<3Ž;9•  ‰<y3•  4m  ¼40ˆ
Reading 34: Private Company Valuation 3.   Forward rate model = [1 + r (T* + T)] (T* + T) 1
= [1 + r (T*)] T* × [1 + f (T*, T)] T
†·††/
1.   Capitalized CF to the firm = Vm = 4.   Spot rate for a security, having maturity of
À½··+•3
T > 1  
•   Value of Equity = Vf – MV of Debt
 FinQuiz Formula Sheet Level II 2017

•   Price of a 2-yr zero-coupon bond 1 yr   9.   Effective Convexity =

§Fk ’ §FÜ + >× §F#
 
∆Gùø7ä ? × §F#
from today = 15.   Interest rate volatility for a security with
§âø7âöùä÷—8÷[– C
∆D  (~.•)
(1’¦9–øâáä—÷ø1:ø8÷[–1:ø—ø÷ûá÷–â:) maturity T at time t = σ (t, T) =
D  (~,•)
  10.   Value of capped floater = Value of straight
Ƈ
•   Price of a 3-yr zero-coupon bond 1 yr bond – Value of embedded cap
from today =
Reading 36: The Arbitrage Free Valuation
§âø7âöùä÷—8÷[–
= 11.   Value of floored floater = Value of straight
(1’¦9–øâáä—÷øá9÷:ø8÷[–1:äâø—ø÷ûá÷–â:) Framework
bond + Value of embedded floor
§âø7âöùä÷—8÷[–
  Analysis of a Convertible Bond
1’— 1,>

8.   Swap Spread = Fixed-rate of an interest Reading 37: Valuation & Analysis: Bonds with 12.   Conversion Ratio (CR) = No. of shares of
rate swap – Interest rate on “on-the-run” Embedded Options C.stock from exercising call option  
Govt. security  
¥ ¬  (¥)
+  
1 1.   Value of callable bond = Value of straight 13.   Conversion Price (or stated conversion
á\1 1’ø á Ú 1’ø ¥ • =1
bond – Value of issuer call option price) = Par value of convertible bond ÷
•   ↓
↓ 𝑓𝑙𝑜𝑎𝑡𝑖𝑛𝑔𝑟𝑎𝑡𝑒𝑙𝑒𝑔 CR  
𝑓𝑖𝑥𝑒𝑑𝑟𝑎𝑡𝑒𝑙𝑒𝑔 2.   Value of issuer call option = Value of  
straight bond – Value of callable bond 14.   Conversion Value (or Parity) = Market
9.   TED spread = LIBOR - T-bill rate of price of C.stock × CR  
matching maturity   3.   Value of putable bond = Value of straight  
  bond + Value of investor put option 15.   Straight Value or Investment Value =
10.   Libor–OIS spread = Libor - Overnight Market value of a security without
indexed swap (OIS) rate   4.   Value of investor put option = Value of conversion option  
  putable bond – Value of straight bond  
1
11.   Local expectations theory = = 16.   Min. Value of a Convertible Security is
§  (á,¥)
5.   The rate in the up state = Ru = Rd × e2σ 𝑡 (greater of conversion value or straight
1 + 𝑟 1 1 + 𝑓 1,1 1 + 𝑓 2,1 1+
where, Rd = Rate in the down state value)  
𝑓 3,1 … [1 + 𝑓 𝑇 − 1,1 ]  
σ = Interest rate volatility  
t = Time in years between “time slices” 17.   Market Conversion Price or Conversion
12.   Cox–Ingersoll–Ross (CIR) Model = dr = a
Parity Price =
(b – r) dt + σ 𝑟𝑑𝑧   Èk +ÈÜ
6.   Duration =   Ç;<T•Š  ¤<y3•  4m  ·405•<Šy¼»•  S•3¸<yŠP
  >×È# × ∆, ·V
13.   Vasicek Model = dr = a(b – r)dt + σdz  
ÈÜ ’Èk + >×È#
  7.   Convexity =   18.   Market Conversion Premium per share =
>×  È# × ∆, ?
14.   Ho-Lee model = drt = θtdt + σdzt   ¤Èk + ¤ÈÜ
Market Conversion Price – Current Market
8.   Effective Duration =   Price
>× ∆·¸<5• × ¤ÈE
 FinQuiz Formula Sheet Level II 2017

19.   Premium Payback Period = 2.   Credit spread = Yield to maturity of a risky ⎛ A ⎞ 1

Ç;<T•Š  ·405•<9y40  ‰<•´y¸´  ‰•<  9Ž;<• bond – Yield to maturity of a Govt. bond   ln⎜⎜ t ⎟⎟ + u (T − t ) + σ 2 (T − t )
†;54<;¼»•  Ä034´•  ›ymm•<•0Šy;»  ‰•<  9Ž;<• K 2
  •   e1 = ⎝ ⎠
3.   Put option’s price = Value of risky debt – σ T −t
20.   Favorable Income Differential per share =
·4¸‰40  y0Š•<•9Š+ ·V  ×·.9Š43T  ›y5.‰•<  9Ž;<•
Value of riskless debt  
·V   •   e2 = e1 - σ T − 1
4.   Black-Scholes Option pricing Formula = 7.   Co.’s asset R in CAPM (a static one-period
21.   Premium over straight value = model):
Ç;<T•Š  ¤<y3•  4m  ·405•<Šy¼»•  Ã40ˆ
St = At N(d1 ) − ke−r(T −1) N(d2 )  
–1 Co.’s asset R = Rf + β of co.’s asset
SŠ<;y•ŽŠ  È;»¸• Where,
(Expected R per year on Mkt. portfolio –
⎛ A ⎞ 1 R f)
22.   Non-callable/Non-putable Convertible ln⎜⎜ t ⎟⎟ + r (T − t ) + σ 2 (T − t )
K 2 = Rf+ (β of co.’s asset × Mkt.’s ERP)
security value = Straight value + Value of
d1 = ⎝ ⎠
Call option on stock σ T −1
8.   Price of debt𝐷 𝑡, 𝑇 =
«
23.   Callable Convertible bond value = Straight d2 = d1 – σ T − 1  𝐸  
1’ø/ ∆ 1’ø/Ü∆ … 1’ø•Ü∆
value + Value of call option on stock –
 
Value of call option on bond 5.   Value of debt = D (t, T) = PV of payoff on 9.   Credit risk measures in reduced form
co.’s debt if default occurs + PV of payoff model:  
24.   Callable & Putable Convertible bond value on co.’s debt if default does not occur = •   Default probability over [0,T] = Prob
= Straight value + Value of call option on
stock – Value of call option on bond +
At N (−d1 ) + Ke − r (T −1) N (d 2 ) 𝑡 ≤𝑇 =1−
á IJ «
Value of Put option on bond •   where, N (d2) = Risk neutral 𝐸    
1’K I# ∆ ’ 1’K I∆ … 1’K I•k∆ ∆
probability of the co.’s debt not •   Expected loss =
25.   Value of Call Option – Value of Put defaulting
á IJ «
Option = PV (Forward price of bond on ¥+∆
𝐸á\u 𝑋Z ∆  
1’K I# ∆ ’ 1’K I∆ … 𝜆
exercise date – Exercise price) 6.   Credit Risk Measures   1’K IJ ∆
•   Probability of the debt defaulting = •   Present value of the expected loss = K
Reading 38: Credit Analysis Models Prob. (AT< K) = 1 – Prob. (AT ≥ K) = P (t,T) – D (t,T)
  1 – N(e2)
1.   Expected loss = Full amount owed – Where, 10.   Historical Estimation  
Expected recovery or = Loss given default •   Probability of default over [t, t+∆] =
× Probability of default 1
Prob (t) = N
−α − ∑ bi X i t
1+ e i =1
 FinQuiz Formula Sheet Level II 2017

•   Parameters estimation:
  Reading 39: Credit Default Swaps
⎛ dt ⎞ N spread – PV of fixed coupon Or =
i
ln⎜ ⎟ = α + ∑ bi X t Where
⎝ 1 − dt ⎠ i =1
dt = {1 if default, 0 if no default}
•   To estimate the loss given default:
N
t(Xt) = c 0 + ∑ ci X i t
i =1
Where {ci for i = 1, …, N} are
constants.
11.   Price of the coupon bond (assuming no
arbitrage and frictionless markets)
T −1
BG (t) = ∑ CP(t , i) + (C + F ) P(t, T )
i =1
12.   Credit spread (t) = Avg. yields on risky
zero-coupon bond – Avg. yields on riskless
zero-coupon bond
Or
= [Average yields on the risky zero-coupon
bond – Average yields on riskless zero-
coupon bond] + Liquidity premium
or
= Expected % loss per year on the risky
zero-coupon bond + Liquidity Premium
13.   PV of expected loss = PV of CF of riskless
debt – PV of CF of risky debt = [P (t,T) –
D (t,T)] XT
Where, XT = Promised CF at T of a risky
Co.
•   Upfront premium = PV of credit
1.   Upfront premium = Credit spread –
Standard rate
2.   Expected Credit Loss (%) = Payout ratio =
1 – Recovery rate (%)
3.   Expected Credit Loss Amount or Payout
amount = Payout ratio × Notional amount
4.   Loss Given Default:
•   Expected loss = Full amount owed –
Expected recovery
•   Expected loss = Loss given default ×
Probability of default
•   Prob. of default (at some point during
T years) = 1 – Prob. of no default
during T years
5.   Value of protection leg = Expected payoff
of bond/loan with credit risk - Expected
payoff of bond/loan with no credit risks
6.   Value of premium leg = PV of pmts. made
by the protection buyer to the protection
seller
7.   Upfront pmt = PV of protection leg – PV
of premium leg
8.   Credit spread ≈ Prob. of default × Loss
given default (%)
(Credit spread – Fixed coupon) × D of
the CDS
•   PV of credit spread = Upfront prem. +
PV of fixed coupon
•   Credit spread ≈ (Upfront prem./D) +
Fixed coupon
•   Upfront premium in % = 100 – Price
of CDS in currency per 100 par
•   Price of CDS in currency per 100 par
= 100 – Upfront premium %
10.   Profit for the buyer of protection ≈ ∆ in
spread in bps × D × NP
11.   % change in CDS price = ∆ in spread in
bps × D
12.   Basis = CDS spread (prem.) – Bond’s
credit spread*
*Bond’s Credit spread = Yield on bond -
Investor’s cost of funding
Bond yield = Rf rate + Funding spread +
Credit spread
where, Rf + Funding spread = LIBOR
13.   Synthetic CDO = Portfolio of default-free
securities + CDS holdings

9.   Credit spread Pricing Conventions

 FinQuiz Formula Sheet Level II 2017

Reading 40: Pricing & Valuation of Forward QF0(T) =

Commitments [1/CF(T)]{FV0,T[B0(T+Y)+AI0]−AIT−FVCI0,T}
13.   Interest Paid = TA – NA = NA[L0(m)tm]
Pricing & Valuing of Forwards & Futures
1.   Forward contract value (Long) VT(T) = ST Currency Forward & Fututre Contracts:
FRAs
– F0(T).
22.   F0(£/€,T) =FV£,T(1)/[FV€,T(1)S0(€/£)]=
14.   Settlement amount at h for receive- S0(£/€)FV£,T(1)/FV€,T(1)
2.   Forward contract value (short)VT(T) =
floating:
F0(T) – ST.
NA{[Lh(m)−FRA(0,h,m)]tm}/[1+Dh(m)t 23.   Vt (T)=PV£,t,T[Ft(£/€,T)−F0(£/€,T)]
rcT m]
3.   FV(S0) = S0e . (compounded
continuously) Pricing & Valuing Swap Contracts:
15.   Settlement amount at h for receive-fixed: Interest Rate Swap Contracts:
NA{[FRA(0,h,m)−Lh(m)]tm}/[1+Dh(m)t
4.   FV(S0) = S0(1 + r)T (compounded
m] Floating Leg Cash Flow:
annually)
OPQRS•,J  
24.   Si=CFFLT,i=APFLT,irFLT,i=( )rFLT,i
16.   FRA(0,h,m)={[1+L0(h+m)th+m]/[1+L0(h) ¿U›RS•,J
5.   Vt(T) = PVt,T[Ft(T) – F0(T)]
th]−1}/tm
6.   Forward Price (carry arbitrage): F0(T) = 25.   FS=CFFIX,i=APFIX,irFIX,i=(
OPQRTU,J  
)rFIX
17.   FRA Value at time g =
Soe(rc−γ)T ¿U›RTU,J
FRA(0,h,m)={[1+L0(h+m)th+m]/[1+L0(h)
th]−1}/tm Value of Floating Rate Bond:
7.   F0(T) = FV0,T(S0)

Fixed Income Forward & Future Contracts: [

8.   Future Value (adj. for carry cash flows) = 26.   FB=C Z\1 𝑃𝑉u,áZ (1)+PV0,tn(1)
F0(T) =FV0,T(S0+θ0−γ0) 18.   Accrued interest = Accrual period × 1+¤Èu,Š0(1)
Periodic coupon amount 27.   Swap Pricing = j §F
J./ #,~J (1)’
9.   PVt,T[Ft(T)−F0(T)] Or AI = (NAD/NTD) × (C/n)
28.   Value of fixed rate swap at time t =
10.   F0(T) = FV0,T(S0 + θ0 – γ0) Fixed Income Forward/Future Price including V=NA(FS0−FSt) [Z\1 PVt, ti
conversion factor:
11.   F0(T)=𝑆u  𝑒 (<3’©-­‐‑N)U (carry arbitrage: 19.   F0(T)=QF0(T)CF(T) 29.   Value of fixed rate bond in currency k:
continuous compounding) FBk=Ck [Z\1 𝑃𝑉u,áZ,w (1) + 𝑃𝑉u,Š0,T (Park)
20.  FV0,T[S0−PVCI0,T]=B0(T+Y)+AI0−PVCI0,T]
Interest Rate Forward & Future Contract:
12.   Terminal Amount = TA = NA[1 + 21.   Conversion factor adj. FV adj. for carry =
L0(m)tm]
 FinQuiz Formula Sheet Level II 2017

30.   Equilibrium Fixed Swap rate = where probability of an up move 23.   E(c2) = π2c++ + 2π(1 – π)c+– + (1 – π)2c
1+§Fu,á[,8(1) π = [FV(1) – d]/(u – d)
rFIX,b=
§F#,~J,X (1)
24.   E(p2) = π2p++ + 2π(1 – π)p+– + (1 – π)2p– –
Expected terminal option payoffs
31.   Va=NAa,0(rFIX,a,0 [-
Z\1 𝑃𝑉á,áZ,â + 11.   E(c1) = πc+ + (1 – π)c BSM Model
𝑃𝑉á,á[¹,â )−StNAb,0(rFIX,b,0 [-
Z\1 𝑃𝑉á,áZ,8 + 𝑏 ) 25.   c = SN(d1) – e–rTXN(d2)
12.   E(p1) = πp+ + (1 – π)p–
32.   Vt = FBt(C0) – (St/St–)NAE – PV(Par – 26.   p = e–rTXN(–d2) – SN(–d1)
NAE) 13.   Put Call Parity = S + p = PV(X) + c
where
Reading 41: Valuation of Contingent Claims Two Period Binomial Model: •   d1 =
ö[(c/I)’(ø’C>/>)¥
C ¥
•   d2=d1−  𝜎 𝑇
1.   Call Value = cT = Max(0,ST – X) For calls:
14.   c++ = Max(0,S++ – X) = Max(0,u2S – X)
27.   Replicating strategy cost = nSS + nBB
2.   Put Value pT = Max(0,X – ST)
15.   c+– = Max(0,S+– – X) = Max(0,udS – X)
28.   nS = N(d1) > 0 for calls
One Period Binomial Model:
c’ –– –– 2
3.   Up factor = u= 16.   c = Max(0,S – X) = Max(0,d S – X)
¬ 29.   nS = –N(–d1) < 0 for puts

c+ For puts:
4.   Down factor = d= 30.   nB = –N(d2) < 0 for calls
¬ 17.   p++ = Max(0,X – S++) = Max(0,X – u2S)

Y Ü +Y k 31.   nB = N(–d2) > 0 for puts

5.   Call Hedge ratio h= ≥0 18.   p+– = Max(0,X – S+–) = Max(0,X – udS)
c Ü +c k

Carry Benefit-Adjusted BSM Model

úÜ +úk
19.   p– – = Max(0,X – S– –) = Max(0,X – d2S)
6.   Put Hedge ratio = ≥0 32.   c = Se–γTN(d1) – e–rTXN(d2)
c Ü +c k
20.   Two period Binomial Hedge Ratio h+=
7.   single-period call = c = hS + PV(–hS + c ) – –
Y ÜÜ +Y Ük 33.   p = e–rTXN(–d2) – Se–γTN(–d1)
c ÜÜ +c Ük

8.   single-period put= p = hS + PV(–hS– + p–) carry benefit-adjusted put–call parity:

21.   c = PV[π2c++ + 2π(1 – π)c+– + (1 – π)2c– –]
9.   c = PV[πc+ + (1 – π)c–]
22.   p = PV[π2p++ + 2π(1 – π)p+– + (1 – π)2p– –]
10.   p = PV[πp+ + (1 – π)p–]
Expected terminal option payoffs:
34.   p + Se–γT = c + e–rTX
35.   E(cT) = Se(r–γ)TN(d1) – XN(d2)
36.   E(pT) = XN(–d2) – Se(r–γ)TN(–d1).
 FinQuiz Formula Sheet Level II 2017

44.   RECSWN = (AP)PVA[RXN(–d2) – RFIXN(–

European Options on Futures d1)] Delta-plus- Gemma Approximation:

37.   c = e–rT[F0(T)N(d1) – XN(d2)] Payer Swaption Model Value: 54.   𝑐−c ≈ Deltac (  𝑆 − 𝑆  ) +  
bâûûâc
(  𝑆-­‐‑𝑆  )>
>
45.   PAYSWN = PV[E(PAYSWN,T)]
for calls
38.   p = e–rT[XN(–d2) – F0(T)N(–d1)]
Receiver swaption Model Value: bâûûâd
39.   Futures option put–call parity: c = e– 46.   RECSWN = PV[E(RECSWN,T)], 55.   𝑝−p ≈ Deltap (  𝑆 − 𝑆  ) +   (  𝑆-­‐‑𝑆  )>
>
rT
[F0(T) – X] + p for puts
where
Price of Interest Rate call & Put options: •   E(PAYSWN,T) = erTPAYSWN Reading 42: Derivative Strategies
•   E(RECSWN,T) = erTRECSWN.
40.   C= 𝐴𝑃 𝑒 +ø á\+1’áû
[FRA(0,tj−1,tm)N(d1)−RXN(d2)] Option Greeks & Implied Volatility Reading 43: Private Real Estate Investments

41.   p= (𝐴𝑃)𝑒 -­‐‑ø(á\-­‐‑1’áû) 47.   Call Deltac = e–δTN(d1) 1.   Rent of Net Lease = Gross rent – Op. exp.
[RXN(−d2)−FRA(0,tj−1,tm)N(−d1)]
48.   Put Deltap = –e–δTN(–d1) 2.   Lease Rent = Min. rent + % of sales rev
where, above a certain level
ö[[¦dP(u,á\-­‐‑1,áû)/dI]’(C>/>)á\-­‐‑1 49.   Optimal # of Hedging Units = NH
•   d1= •   In case of natural break-point, Lease
§÷øá—÷öZ÷–äöáâ
C á\-­‐‑1 =− Rent = % of sales rev. above a certain
Qäöáâ^
level × Tenant’s sales
•   d2=d1−σ 𝑡𝑗-­‐‑1
Change in option Price based on Delta
Approximation: 3.   Implied land value = Value after
Swaptions construction – Cost to construct a building
50.   𝑐−c ≅ Deltac(𝑆−S)
for calls
PV of annuity matching Forward Swap 4.   Appraised value of a property
¿ßÄ
payment: 51.   𝑝−p ≅ Deltap(𝑆−S)
for puts =
·;‰yŠ;»y³;Šy40  <;Š•
42.   PVA= [\\1 𝑃𝑉u,á\ (1)
where,
52.   𝑐=c+Deltac(𝑆−S)
 •   NOI = Net operating income for the
Payer Swaption:
subject property
43.   PAYSWN = (AP)PVA[RFIXN(d1) – RXN(d2)]
Gamma: •   Gross potential income = Rental
ä kaÔ income at full occupancy + Other
Receiver swaption: 53.   Gammac = Gammap = n(d1)
SC ¥
income
 FinQuiz Formula Sheet Level II 2017

•   Effective gross income =Gross (Discount raVVVVVVVate – growth

potential income – Vacancy and rate) 17.   Under Layer Method Value of a property =
collection loss •   Loss in income due to renovation = PV of current contract rent in perpetuity +
•   NOI = Effective gross income – Op. Post-renovation NOI of a property - PV of expected incremental rent after the
exp. OR NOI of a property during renovation rent review
•   NOI = Gross potential income – time-period
Estimated vacancy losses – Estimated •   PV of the lost income è Loss in 18.   When effective age of property < its
collection losses – Insurance – value = Loss in income due to economic life, Physical deterioration = %
Property Taxes – Utilities - Repairs renovation / (1 + discount rate) worn out = Effective age / Economic life
and maintenance exp. •   Value of a property = Post-renovation
Value - Loss in value OR 19.   Incurable depreciation deduction =
†y<9Š+P•;<  ¿ßÄ
•   Value of a property = {NOI of a (Replacement cost + Developer’s profit –
5.   Capitalization rate =
¤<4‰•<ŠP  5;»¸• curable depreciation costs) × Physical
property during renovation time-
period + [Post-renovation NOI of a deterioration
6.   Discount rate = Cap rate + Growth rate
property (1 + growth rate)] / (Discount
rate – growth rate)]} / (1 + discount 20.   Amount of functional obsolescence =
7.   Value of property = NOI / (discount rate – Income loss due to the functional
rate)
Growth rate) obsolescence / cap rate
13.   Avg. no. of months vacant until the lease is
renewed = Lease Non-renewal probability 21.   Amount of locational obsolescence
8.   Capitalization rate = associated with building only = Total Loss
¿ßÄ × No. of months vacant if not renewed
S;»•  ‰<y3•  4m  34´‰;<;¼»•  ‰<4‰•<ŠP
in the value - Loss in land value
¤<y3• 14.   Vacancy rate = Avg. no. of months vacant
9.   Reciprocal of the cap rate =
·¸<<•0Š  ¿ßÄ 22.   Cost Approach Calculations
until the lease is renewed / (Lease term +
10.   All Risks Yield = ARY = •   Total depreciation = Physical
V•0Š Avg. no. of months vacant until the lease is
V•3•0Š  9;»•9  ‰<y3•9  4m  34´‰;<;¼»•9 renewed) deterioration + functional
obsolescence + Locational
V•0Š 15.   Gross income multiplier = GIM = obsolescence + Economic
11.   Mkt. value   =
½V, S;»•9  ¤<y3• obsolescence
RO‰•3Š•ˆ  £.Ä  4m  ‰<4•‰<ŠP  y0  19Š  P<  ;mŠ•<  9;»•
•   Depreciated building value =
12.   Stabilized NOI i.e. (NOI of a non-
(Replacement cost + Developer’s
renovated property or post-renovated NOI 16.   Total capital value = PV of income until profit) – Total depreciation
of a property) the rent review + PV of what the property
•   Final Appraisal value èEstimated
•   Post-renovation Value = Post- could be sold for at rent review (PV of
value of the property = Depreciated
renovation NOI of a property / estimated rental value or ERV)
building value + Land value
 FinQuiz Formula Sheet Level II 2017

•   Principal payments=Part of the loan Reading 44: Publicly Traded Real Estate
23.   Valuation in an international context when payment that amortizes the loan over Securities
land and building are valued separately:
  the loan term.
 
•   Income to the building = NOI – •   Max.debt service based on DSCR = 1.   Rent paid by Tenants = Net rent +
assumed land lease payment NOI/DSCR
  Proportionate share of the common area
•   PV for building = Income to the •   When the loan is interest-only, costs of the mall (based on space leased)
building / Cap rate or discount rate Max.loan amount based on DSCR=
•   Total value = PV for Building + Value Max. debt service based on DSCR / 2.   NAVPS = (MV of R.E Co.’s assets – MV
of the land (from sales comparison Debt interest rate
  of R.E Co.’s liab.) / # of shares outstanding
approach)
 
26.   Equity dividend rate or Equity yield rate = 3.   Appraised value = NOI / Cap rate
24.   The NCREIF Property Index (NPI):
  Cash flow / Equity
•   Total
 Return
 of
 individual
 Property
  = where, Cash flow = NOI – Debt 4.   Estimating NAVPS:
¿ßÄ+·;‰•O’(R0ˆy0•
 ÇÈ+Õ•.ÇÈ) Service •   Pro forma cash NOI = NOI – Non

 
Õ•.ÇÈ
 
Equity = Price – Mortgage cash rents* + Adj. for full impact of
•   Income return = Cap rate = NOI /
acquisitions
beginning value 27.   Calculating Leveraged IRR: •   *Non-cash rent = Avg. contractual
•   Amount of cash flows available each CF received by the equity investor from rent over the leases’ terms – Cash rent
quarter = NOI – Capex the sale = Sale price – Mortgage balance actually paid.
•   Capital
 return
  = PV = – Initial investment
R0ˆy0•
 ´ ;<T•Š
 5;»¸•+Õ•y00y0•
 ´ ;<T•Š
 5;»¸• +·;‰•O
•   Estimated future expected cash NOI =

  PMT = Cash flow
Õ•y00y0•
 ´ ;<T•Š
 5;»¸•
  Pro forma cash NOI + Expected
•   Total Index Return = Value-Weighted n = Holding period growth in NOI
average return for individual FV = Cash flow received from sale •   Estimated value of operating real
properties CPTà I/Y è Leveraged IRR. estate =Estimated future expected cash
25.   Private market real estate debt
 
  NOI / Cap rate
•   Loan-to-value = Loan / value of the 28.   Calculating Unleveraged IRR: •   Estimated gross asset value =
property
  Cash flow received by the equity investor Estimated value of operating real
•   Max. loan amount based on LTV ratio from the sale = Sale price + NOI in the 1st estate + BV of Cash & equivalents +
= LTV ratio (in %) × Appraisal value year BV of Land held for future
of property (in $)
  PV = – Initial investment development + BV of a/c receivables
•   Debt serve coverage ratio = NOI/Debt PMT = NOI in the 1st year + BV of Prepaid/other assets
service
  n = Holding period •   Net asset value = Estimated gross
•   Debt service=Interest + Principal FV = Sale price asset value – Total debt – Other liab.
payments on the mortgage.
  CPT à I/Y èUnleveraged IRR. (but not deferred taxes)

 
 FinQuiz
•   NAVPS = Net asset value / # of shares
outstanding
5.   P/FFO = Current stock prices / Yr-ahead
estimated FFO
  2.   DPI = Sum of distb. / CC called down (or
•   FFO = Net earnings + Dep. Exp. on
 
R.E + Deferred tax charges – g/l from
sales of property and debt
restructuring + Losses on sales of
 
property and debt restructuring OR
 
•   FFO = EBITDA – Interest Expense
 
 
6.   P/AFFO = Current stock prices / Yr-ahead
 
estimated AFFO
 
•   AFFO = FFO – Non cash rent* –
Recurring Maintenance type Capital
expenditures – Leasing costs (i.e.
 
leasing agent’s commissions –
 Carried
 interest
 =
 %
 ×
 ΔNAV
Tenants’ improvement allowances)
 distb.
•   *Non-cash rent = Straight-line rent -
Cash rent paid during the period
7.   Estimated Value of a REIT Co. in yr N
= (P/FFO of overall REIT group for
yr N) × REIT co.’s expected FFO in yr
N or
= (P/AFFO of overall REIT group for
yr N) × REIT co.’s expected AFFO in
yr N
Reading 45: Private Equity Valuation
 
1.   PIC:
Formula Sheet Level II 2017
•   PIC = Cumulative capital (CC) called 11.   General Case: NPV Method
down Step 1: POST = V / (1 + r) t
•   PIC Multiple = PIC / CC Step 2: PRE = POST – I
Step 3: F = I / POST
Step 4: y = x [F / (1 – F)]
PIC)
Step 5: p1 = I / y
3.   RVPI = NAV after distb. / CC called down 12.   Alternative Method using IRR:
(or PIC)
Step 1: W = I (1 + r) t
Step 2: F = W / V
4.   TVPI = DPI + RVPI
Step 3: y = x [F / (1 – F)]
Step 4: p1 = I / y
5.   Mgmt. fees = % fee × PIC
Step 5: POST = I / F or p1 × (x + y)
Step 6: PRE = POST – I or PRE = p1
6.   Carried interest= % × (NAV before distb. ×x
–CC) in year when NAV before distb. Is 13.   NPV Method with multiple (two) rounds
first > CC
of financing:
Thereafter,
Step 1: Compound interest between dates:
before
•   T1 and T2 = (1 + R1)
•   T2 and T3= = (1 + R2).
7.   NAV before distb.t = NAV after distbt-1 +
Step 2: POST2 = V / (1 + R2)
called down capitalt– mgmt feest+
Step 3: PRE2 = POST2–I2
operating resultst
Step 4: POST1 = PRE2 / (1 + R1)
8.   NAV after distbt = NAV before distb.t–
Step 5: PRE1 = POST1 –I1
carried interestt – distb.t
Step 6: F2 = I2 / POST 2
Step 7: F1 = I1 / POST 1
9.   CF for Gross IRRt= – Capital called down
Step 8: y1 = x1[F1/ (1 – F1)]
at the beg of periodt+1 + Op. resultt-1
Step 9: p1 = I1/ y1
Step 10: x2 = x1 + y1
10.   CF for Net IRRt = – Capital called down at
Step 11: y2 = x2[F2/ (1 – F2)]
the beg of periodt+1 + Op. resultt-1– mgmt..
Step 12: p2 = I2/ y2
feest– carried interestt
14.   Accounting for Risk in Venture Capital
Venture Capital Method:
 FinQuiz Formula Sheet Level II 2017

[
•   By adjusting Discount Rate = r = 3.   Carhart Four Factor Model = E (Rp) = RF+ 13.   Active specific risk = Z\1 𝑤Zâ > 𝜎}>J
1’ø
– 1   βp1RMRF + + βp2SMB + + βp3HML ++
1+e
βp4WML…..+ ℰ P Where
15.   By adjusting terminal value using Scenario
𝑤Zâ = ith asset’s active weight
analysis  =  Adj. TV = (% prob. scenario 1 ×
RMRF = Portfolio’s sensitivity to Mkt. 𝜎}>J is ith asset’s residual risk
expected E × expected P/E multiple) + (% Index
prob. scenario 2 × expected E × expected SMB = small minus big
P/E multiple) + … + (% prob. scenario n × Reading 49: Measuring & Managing Market
HML = high minus low
expected E × expected P/E multiple)   Risk
WML = winners minus losers
 
d+n
Reading 46: Commodities & Commodity 4.   Macroeconomic Factor Model = Ri =ai + b 1.   Std. Normal Dist. (z-dist.)=
C
Derivatives: An Introduction i1 F1 + bi2 F2+ …..+ biKFK+ εi 2.   To obtain a 5% VaR = 𝐸 d§ −
1.65𝜎§ (−1) Portfolio Value
1.   Theory of Storage states: Future Prices = Fâöùä  ÷—  w  —÷ø  â¬¬äá  Z +P7äøägä  7âöùä  ÷—  w
5.   biK = 3.   Equity Exposure Measure = E(Ri) = RF +
C  (—÷ø  7âöùä¬  ÷—  w )
Spot Price of the physical commodity + βi[E(RM) – RF]
Direct Storage costs – Convenience Yiled 4.   Fixed Income Exposure Measure using
6.   Actual Inf. = Predicted Inf. + Surprise Inf.
2.   Price Return = (Current Price – Previous ∆h ∆:
Duration = = −𝐷
Price)/Previous Price h 1’:
7.   Active R = 𝑅ú − 𝑅h 5.   Fixed Income Exposure Measure using
3.   Total Return = Price Return + Roll Return
∆h ∆:
+ Collateral Return Duration & Convexity = = −𝐷 +
h 1’:
8.   Active R (decomposition)=
1 1 ∆: ?
w 𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜  𝑠𝑒𝑛𝑠𝑡𝑖𝑣𝑖𝑡𝑦 − 𝐶
Reading 47: The Portfolio Management > 1’: ?

Process & the Investment Policy Statement 𝑏𝑒𝑛𝑐ℎ𝑚𝑎𝑟𝑘  𝑠𝑒𝑛𝑠𝑡𝑖𝑣𝑖𝑡𝑦 w × ∆  Z[  ÷úáZ÷[  7âöùä
6.   Delta =
𝐹𝑎𝑐𝑡𝑜𝑟  𝑅 w + 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑦  𝑠𝑒𝑙𝑒𝑐𝑡𝑖𝑜𝑛 ∆  Z[  7âöùä  ÷—  ù[–äøö:Z[g
∆  Z[  Qäöáâ
7.   Gemma =
∆  Z[  7âöùä  ÷—  ù[–äøö:Z[g
9.   Tracking Error TE = s(RP-RB) ∆  Z[  ÷úáZ÷[  7âöùä
Reading 48: An Introduction to Multifactor 8.   Vega =
∆  Z[  7÷öâáZöZá:  ÷—  ù[–äøö:Z[g
Models Vm +VÒ
10.   Information Ratio = =
9 Vm +VÒ Reading 50: Economics & Investment Markets
1.   Multifactor Model = Ri = ai + b i1I1 + bi2I2+
…..+ biK IK+ εi 11.   Active risk squared = s2(RP-RB) 1.   Present Value Model =
2.   Arbitrage Pricing Theory = E (R p) = RF + RÚ ·†qÚÜÙ
¿
λ1β p,1 + λ2β p,2 + …..+ λk βp,k 12.   Active risk squared = Active factor risk + 9\1
1’»Ú,Ù ’rÚ,Ù ’s*Ú,Ù
Ù

Active specific risk

 FinQuiz Formula Sheet Level II 2017

2.   Price of default-free bond certain to pay d6 +dR 14.   Fundamental Law: E(RA) =
4.   Sharpe Ratio SR =
c.Q   d6
off one unit of real consumption at time s = (TC)(IC) 𝐵𝑅𝜎P
PŠ,9 = EŠ 1mŠ,9 = EŠ mŠ,9 d6 +du dv
5.   Information Ratio IR = = xd ∗
c.Q   d6 c.Q   d6
15.   𝜎P = 𝑇𝐶 𝜎h
1+¤Ú,/ cdu
3.   One  period  Rf  interest  rate  lŠ,1 = =
¤Ú,/
6.   𝑆𝑅§> = 𝑆𝑅h> + 𝐼𝑅 >
 
1
−1 16.   𝑆𝑅§> = 𝑆𝑅h> + 𝑇𝐶 >
𝐼𝑅 ∗ >
RÚ ´Ú,/
xd
7.   S.D(RA) = ×𝑆. 𝐷 𝑅h
cdu Ex Ante Measurement of Skill
Risk premium on risky assets:
17.   𝜎P = 𝜎xG 𝑁𝜎db
8.   Active Security R as residual R in
4.   Relation b/w expected value and Cov. = xG
𝐸á 𝑥𝑦 =   𝐸á 𝑥 𝐸á 𝑦 + 𝐶𝑜𝑣 𝑥, 𝑦 18.   𝐸(𝑅P ) =   𝜎
•   Single factor statistical model =𝑅PZ = CT} P

𝑅Z − 𝑅h
5.   Alternate way to view the pricing relation O
•   Multi factor statistical model = 𝑅PZ = 19.   Breadth BR =
1’(O+1)~
e~ §~Ü/,tk/
= 𝑃á,¬ =
1’ö~,/
+ 𝑐𝑜𝑣á 𝑃á’1,¬+1 , 𝑚á,1 𝑅Z − w\\1 𝛽\,Z , 𝑅\
Reading 52: Algorithmic Trading & High
6.   Expected Holding period return = 𝑟á,¬ = 9.   Mean-var optimal security wghts for Frequency Trading
e~ §~Ü/,tk/ +§~,t uncorrelated active R subject to limit on
§~,t active portfolio risk =
𝜇Z 𝜎P
∆𝑤Z∗ = >
7.   Pricing for real default free i rate =𝑃áZ = 𝜎Z O nJ
?

J Z\1 C ?
O G¦~Üt J
¬\1 t
1’ö~,t
10.   Grinold Rule = 𝜇Z = 𝐼𝐶𝜎Z 𝑆Z
Reading 51: Analysis of Active Portfolio
nJ Cv
Management 11.   ∆𝑤Z∗ =
CJ? xG hd

O
1.   Benchmark Portfolio = 𝑅h = Z\1 𝑤h,Z 𝑅Z 12.   Anticipated value added for Active
portfolio = E(RA) = IC 𝐵𝑅𝜎P
O
2.   Portfolio Return = 𝑅§ = Z\1 𝑤§,Z 𝑅Z
13.   Transfer Coefficient TC=
3.   Value added return = RP-RB Cor(𝜇Z 𝜎Z , ∆𝑤Z 𝜎Z )