Formula Sheet (All Modules)

1) FV = PV(1 + r)t [compound interest]

• FV = future value
• PV = present value
• r = period interest rate, expressed as a decimal
• t = number of periods
FV = PV + (PV)(r)(t) [simple interest]

N C
2) PV = (1+r) N

PV = Present Value, or Cash at date 0 (C0)

CN = Cash at time period N, or Future Value at time period N (FVN)

r = interest rate per period

N = the number of periods over which the cash is invested

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DF = (1+r)N ; Discount Factor

3) Present value of a series of cash flows

C
PV = ∑Tt=1 (1+r)
t
t ; you can denote number of periods with N or T

4) Excel formulae
– FV(rate,nper,pmt,pv)
– PV(rate,nper,pmt,fv)
– RATE(nper,pmt,pv,fv)
– NPER(rate,pmt,pv,fv)

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5) Ordinary Annuities [zero growth]

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1− PV = Present Value
(1 + 𝑟)𝑇
𝑃𝑉 = 𝐶 [ ]
𝑟 C = Cash flow (constant)
r = interest rate per period
T = the number of periods over which the cash is invested
(1 + 𝑟)𝑇 − 1
𝐹𝑉 = 𝐶 [ ] g = growth rate of cash flow
𝑟

C1 1+g T
6) Growing ordinary annuity: PV = [1 − (1+r ) ]
r−g

7) Perpetuity: PV = C / r

8) PV Annuity Due = PV Ordinary Annuity x (1+r)

C1
9) Growing perpetuity: PV =
r−g

10) Compounding within periods

APR m×N
FV = C0 × (1 + )
m

m = the number of times per period (i.e. year) the investment is compounded
N = the number of periods (i.e. years) over which the cash is invested
APR= Annual Percentage Rate

11) Effective annual rate (EAR)

𝐴𝑃𝑅 𝑚𝑁 𝐴𝑃𝑅 𝑚
𝑁
(1 + 𝐸𝐴𝑅) = ൬1 + ൰ 𝐸𝐴𝑅 = ൬1 + ൰ −1
𝑚 𝑚
in a single
year (N=1)

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 APR = Annual percentage/nominal interest rate
m = the number of times per period (i.e. year) the investment is compounded

12) Continuous Compounding: FVN = C0×erN

C0 is cash flow at date 0,
r is the stated annual interest rate,
N is the number of periods over which the cash is invested, and
e is a mathematical constant approximately equal to 2.718. ex is the exponential function and also
a key on your calculator.

13) Zero Coupon Bonds:

F
PZCB = (1+r)n
F = Face Value (or “Par” Value) to be received at time “n” (i.e. “T”, or year) in the future

14) Bonds with coupons:

1 1 F F
B=C×[ − n] + = C × Anr +
r r(1+r) (1+r)n (1+r)n

C = coupon amount, Annuity Factor

15) Bond yield:

C 1 F
B = × [1 − ]+ ; r is the expected rate of return or yield to maturity
r (1+r)n (1+r)n

YTM is that discount rate that causes the sum of the present value of promised cash flows to equal
the current bond price.

16) Fisher Effect:

(1 + R) = (1 + r)(1 + h), or R = r + h [approximation]
• R = nominal rate
• r = real rate

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 • h = expected inflation rate

17) rd  r* + IP + DRP + LP + MRP

where rd = Market interest rate

r* = Real risk-free rate

IP = Inflation premium
DRP = Default risk premium
LP = Liquidity premium
MRP = Maturity risk premium

18) Dividend discount model:

Div1
Zero growth: 𝑃0 =
𝑟

1+g Dt+1
Constant growth: Pt = Dt or Pt =
r−g r−g

Differential growth:
Divn DivN+1 1
𝑃 = ∑𝑁
𝑛=1 +( )( )
(1+𝑟)𝑛 𝑟−𝑔 (1+𝑟)𝑁

PV (future dividends before PV (dividends with constant

constant growth) growth)

Differential growth (case with two constant growth):

𝑫𝒊𝒗𝟏 (𝟏+𝒈𝟏 )𝑵 Div 𝟏
𝑷∗𝟎 = (𝟏 − 𝐍+𝟏
) + ( 𝒓−𝒈 ) ((𝟏+𝒓)𝑵 )
𝒓−𝒈𝟏 (𝟏+𝒓)𝑵 𝟐

Where: N is the number of payments in the growing annuity (g1 growth rate)

N+1 is time at which the first “steady state” dividend is paid (g2 growth rate)

Div represents dividend

r represents discount rate of rate of return on the stock
p represents stock price

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 CF
19) NPV(project) = ∑T
t
t=1 (1+r)t − C0

• NPV > 0 → Accept project

• NPV < 0 → Reject project
C0: Initial investment for the project
CFt: Periodic cash flows of the project

20) IRR: rate of return for which NPV = 0.

Total PV of Future Cash Flows

21) Profitability Index PI =
Initial Investment

Minimum Acceptance Criteria: Accept if PI > 1

22) Operating Cash flow

1. Bottom-Up Approach:
• 𝑂𝐶𝐹 = 𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥𝑒𝑠 (𝑁𝑂𝑃𝐴𝑇) + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
2. Top-Down Approach:
• 𝑂𝐶𝐹 = 𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑜𝑠𝑡𝑠 − 𝑇𝑎𝑥𝑒𝑠
3. Tax Shield Approach:
• 𝑂𝐶𝐹 = (𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑜𝑠𝑡𝑠) ∗ (1 − T) + [Depreciation ∗ T]

23) Present value of CCA Tax shield

C0 dT 1+0.5𝑘 𝑆𝑑𝑇 1
PV tax shield on CCA = × − ×
d+k 1+𝑘 𝑑+𝑘 (1+𝑘)𝑛

• C0 = Total Capital Investment

• d = CCA tax rate
• T = Corporate Tax Rate
• k = discount rate

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 • S = Salvage value in year n
• n = number of periods in the project

24) The complete NPV formula:

NPV = – CF0 + PV (after-tax operating income) + PV (CCA tax shields) + PV (ending cash flows)

25) Costs:
Total variable costs = cost per unit * quantity = v*Q
Total costs = fixed + variable = FC + v*Q

26) Break-even analysis

Accounting Break-even
– Where NI = 0
– Q = (FC + D)/(P – v)
Cash Break-even (ignoring taxes)
– Where OCF = 0
– Q = (FC + OCF)/(P – v) = FC/(P – v)
Financial Break-even
– Q = (FC + OCF*)/(P – v)
– Where OCF* leads to NPV = 0

27) Operating Leverage

DOL = 1+ FC/OCF

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28) Expression to compute stock returns: P1 and P0 represents stock prices in period 1 and 0,
respectively. Income1 represents the dividend given in period 1.

Capital gain yield Dividend yield

P1 − P0 + Income1 P1 − P0 Income1
r1 = = +
P0 P0 P0
29) Expressions to compute arithmetic mean return (Ṝ), standard deviation (σ), and geometric
mean given the stock returns from period 1 to T (R1, R2, …RT).

(𝑅1 +⋯+𝑅𝑇 ) ∑𝑇
𝑡=1 (𝑅𝑡 − ̄ )2
𝑅
𝑅=
𝑇
; 𝜎2 =
𝑇−1

(𝑅1 − 𝑅)2 + (𝑅2 − 𝑅)2 + ⋯ + (𝑅𝑇 − 𝑅)2

=> 𝜎 = √𝜎 2 = √
𝑇−1

Geometric mean:
1⁄
[(1 + R1 ) × (1 + R 2 ) ×. . .× (1 + R T )] 𝑇 −1

30) Expression to compute expected return and risk given the different possible states (p1, p2, ..,
pn) of the world, where returns for different states are r1, r2,…, rn and n is the number of possible
states of the world :

𝐸(𝑟) = ∑ ri Pi
i=1

n 0.5

σ = [∑(ri − 𝐸(𝑟))2 Pi ]
i=1

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31) Portfolio Return for a portfolio consisting of n different assets, where wi, E(ri), and Hi
represents weight assigned to asset i, expected return for asset i, and investment amount in asset i

𝑁 𝐻𝑖
𝑊𝑖 =
𝐸(𝑟𝑃 ) = ∑ 𝑊𝑖 × 𝐸(𝑟𝑖 ) ∑𝑁𝑖=1 𝐻𝑖
𝑖=1

32) Portfolio standard deviation for a two-asset portfolio, where WA, WB, σA, σB, and 𝜌AB
represents the weights of assets A and B, standard deviations of assets A and B, and the correlation
between assets A and B, respectively.

1⁄
σP = (WA2 σ2A + WB2 σ2B + 2WA WB σA σB 𝜌AB ) 2

Covariance between two assets given their periodic returns:

∑𝑁𝑡=1(𝑟𝑎,𝑡 − 𝑟̄ 𝑎 ) (𝑟𝑏,𝑡 − 𝑟̄ 𝑏 )
cov𝑎,𝑏 =
𝑁−1
where N is the number of observations, ra,t and rb,t represents the returns for assets a and b,
respectively for any period t.

Covariance between two assets given their returns for different possible states of the world:

cov𝑎,𝑏 = ∑(𝑟𝑎,𝑖 − 𝐸(𝑟𝑎 ))(𝑟𝑏,𝑖 − 𝐸(𝑟𝑏 ))𝑃𝑖

𝑖=1

where N represents the number of possible states of the world and Pi represents the probability of
any state i.

The relation between correlation and covariance

𝑐𝑜𝑣𝑎,𝑏
𝑐𝑜𝑟𝑟𝑎,𝑏 = 𝜌𝑎,𝑏 =
𝜎𝑎 𝜎𝑏
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33) Beta: 𝐶𝑜𝑣𝑗,𝑀 Covj,M = the covariance between the return on asset “j”
𝛽𝑗 = 2 and the return on the market portfolio
𝜎𝑀
𝜎2𝑀 = the variance of the market

34) Portfolio Beta, for an n-asset portfolio with weight W and beta βi for any asset i:

𝛽𝑝 = ∑ 𝑊𝑗 𝛽𝑗
𝑗=1

35) Capital asset pricing model (CAPM):

𝐸(𝑟𝑗 ) = 𝑟𝑓 + 𝛽𝑗 (𝐸(𝑟𝑚 ) − 𝑟𝑓 )

rf is the risk-free rate

rm is the return on the market portfolio
βj is the beta of the asset j

36) Weighted average cost of the capital:

WE = Weight of Equity

wD = Weight of Debt

rE = Cost of equity

𝑟𝑊𝐴𝐶𝐶 = 𝑤𝐸 𝑟𝐸 + 𝑤𝐷 𝑟𝐷 (1 − 𝑇𝐶 ) rD = Cost of debt

Tc = Corporate tax rate

wP = Weight of Preferred Shares

rP = Cost of Preferred Shares

𝑟𝑊𝐴𝐶𝐶 = 𝑤𝐸 𝑟𝐸 + 𝑤𝐷 (1 − 𝑇𝐶 )𝑟𝐷 + 𝑤𝑃 𝑟𝑃
rP = D / P [dividend/price]

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 𝐷1
37) 𝑅𝐸 = + 𝑔,
𝑃0

where RE is the return on equity (cost of equity), D1 is the dividend in period 1, P0 is the
current price (period 0), and g is the growth rate

An approach to compute the growth rate

Growth Rate (g) = Retention Ratio x Return on Equity (ROE)
= (1 - payback ratio) x ROE

38) Free cash flow

𝑭𝑪𝑭 = 𝑬𝑩𝑰𝑻 × (𝟏 − 𝑻) + 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 − 𝑪𝒂𝒑𝑬𝒙 − ∆𝑵𝑾𝑪
Where FCF is the free cash flow
EBIT is the earning before interest and taxes
T is the tax rate
CapEx is the capital expenditure
NWC is the net working capital

39) Firm Valuation

𝐹𝐶𝐹𝑡 𝑉𝑡
∑𝑇𝑡=1 +(
(1+𝑊𝐴𝐶𝐶 )𝑇 1+𝑊𝐴𝐶𝐶 )𝑇

𝐹𝐶𝐹 𝑇+1
VT = [Terminal Value]
𝑊𝐴𝐶𝐶−𝑔

40) Flotation costs:

𝑓𝐴 = 𝑤𝑠 𝑓𝐸 + 𝑤𝐷 𝑓𝐷
Where ws and wd represents weights assigned to stock (equity) and debt, respectively; and
fE and fD represents flotation costs of stock (equity) and debt, respectively

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Good Luck

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