Formulae Sheet – FIN3121 Principles of Finance

Future value:
FV = PV × (1 + r)n

Present Value:
PV = FV × 1 ÷ (1 + r)n

r = [FV ÷ PV]1÷n − 1 → solving for unknown rate

n = [ln(FV ÷ PV) ÷ ln(1 + r)] → solving for # of periods
Future Value of an Annuity

(1 + r )n - 1
FV = PMT ´
r
Present Value of an Annuity

é æ 1 öù
ê1 - ç ÷ú
ê ç (1 + r ) n ÷ú
è øû
PV = PMT ´ ë
r

Perpetuity:
PMT
PV =
r
Effective annual rate
( m)
æ APR ö
EAR = ç1 + ÷ -1
è m ø

Monthly payment and monthly compounding

C ÷ Y = 12
P ÷ Y = 12

Annuity Due
PV annuity due = PV ordinary annuity × (1 + r)
FV annuity due = FV ordinary annuity × (1 + r)
PV annuity due > PV ordinary annuity
FV annuity due > FV ordinary annuity

Financial calculator
Mode → BGN for annuity due
Mode → END for an ordinary annuity

Bond Price = PMT × +

365 * Bank discount yield

BEY =
360 - ( days to maturity * discount yield )
Price of T-bill = Face value × [1 − (discount yield × days until maturity ÷ 360)]
Stock Valuation

The Constant Dividend Model with an Infinite Horizon

Price = Dividend ÷ Required rate of return

The Constant Growth Dividend Model with an Infinite Horizon

Div 0 ´ (1 + g )
Price 0 =
(r - g )
The Constant Growth Dividend Model with a Finite Horizon
Div 0 ´(1+ g ) æç æç 1+ g ö÷
nö
÷ Price n
Price0 = ´ ç1- ÷+
(r-g ) ç
è
ç ÷
è 1+ r ø ÷
ø (1+ r )n
Dollar profit or loss = Ending value + Distributions − Original cost

Dollar profit or loss

Rate of return =
Original cost

Profit
HPR =
Cost
Ending price + Distributions - Beginning price
HPR =
Beginning price
Ending price + Distributions
HPR = -1
Beginning price

Simple annual return or APR = HPR ÷ n

EAR = (1 + HPR)1 ÷ n – 1
( X i - average )
2

Variance ( X ) = å =s2 8.6

n -1
Standard deviation = variance = s 2 = s 8.7
Expected payoff = Σ payoffi × probabilityi
σ2 = Σ (payoffi − expected payoff)2 × probabilityi

Portfolio Beta

n
b p = å wi ´ bi 8.10
i =1

CAPM

E(ri) = rf + [E(rm) − rf] × βi

SLOPE of SML

DY
Slope of line =
DX
Net Present Value:

CF1 CF2 CF3 CFn

NPV = -CF0 + + + +!+ 9.1
(1 + r ) (1 + r ) (1 + r ) (1 + r )
1 2 3 n

accept if NPV > 0 reject if NPV < 0

Internal Rate of Return:

CF1 CF2 CF3 CFn
$0 = CF0 + + + +! + !"#
(1 + r ) (1 + r ) (1 + r ) (1 + r )
1 2 3 n

Modified Internal Rate of Return:

1/ n
æ FV ö
MIRR = ç ÷ -1
è PV ø
Balance Sheet:

assets ≡ liabilities + owners’ equity

Cash Flow from Assets:

Three components:
– Operating cash flow (OCF)
– Net capital spending (NCS)
– Change in net working capital (∆NWC)

Cash flow from assets = OCF − NCS − ∆NWC

OCF = EBIT + depreciation − taxes or
OCF = net income + depreciation + interest expense
NCS = ending net fixed assets − beginning net fixed assets + depreciation
∆NWC = ending NWC − beginning NWC

Net Income:
net income = revenues − expenses
EBIT = revenues − operating expenses