Quant Formulas:

^ = predicted value i= actual value bar= average value

Covariance=¿ ¿

Covariane xy
Sample Correlation ( r ) = -> 1 variable -> R^2 = correlation
Sx∗Sy

Test whether correlation between population & 2 variables is 0:

r ( √ ( n−2 ) ) Covxy
r= Slope=
√ ( 1−r ) 2 Variance x (std . dev . squared)

RSS=∑ of ¿ ¿

R2=
SST −SSE RSS ExplainedVar
SST
=
SST
=
TotalVar
SSE=√ ( MSE )= (√ MSE
n−2 )

Test significance of individual coefficients

b^j−b j
t=
S b^
j

b^ j= estimated regression coefficient bj = hypothesized value Sbj = Coefficient S.E of bj

n-k-1 degrees of freedom

Confidence Intervals:

b^ j +- (tc*Sb^ j ¿

bj= estimated regression coefficient tc= critical t-value Sbj = coefficient S.E.

n-k-1 degrees of freedom

F-Statistic (Always one-tail test)

RSS
MSR K
F= = MSR/E= Mean sum regression/estimate
MSE SSE
n−k −1

RSS = Regression sum of squares (d.f. = k (variables) )

SSE = Sum squared error (d.f. = n(observations)-k(variables)-1)

Sum Squared Total = SSE + RSS

ANOVA for R^2, F-Stat and Standard Error of Estimate (SEE)

RSS Total variation−unexplained variation SST −SSE RSS

R2= = = =
SST Total Variation SST SST

SEE=√ ( MSE ) Multiple R=√( R 2 )

 Economics
Vt =( FPt−FP )∗¿ ¿

Vt =Value of forward at time t ( for party buying base currency )

R=Interest rate of price currency

FPt=Bid/Sell price on market right now for same contract

FP=Fwd . price∈contrac t

F=
( ( 360 ) )
Days
1+ RA
∗Spot Rate ( )
A

( 360 ) )
B
1+ RB (
Days

Days = days left in forward contract

RA = Interest rate currency A RB = Interest rate currency B

Stock market growth∧relation ¿ factors → Δ P=ΔGDP + Δ ( Earnings

GDP )
P
+ Δ( )
E

Y =T K α L( 1−α ) Y =Output , L=Labor , k=Capital , T =Technology

rK
α= rK= payment for capitalY =total output α=amount ∨% ¿ capital
y

Total working
labor force participation=
Working age population

Sustainable growth (g*) of output per capita:

θ
g∗¿ θ=growth∈technology 1−a=labor share of GDP
1−α

Sustainable growth rate of output (G*):

θ
G¿ = + Δ L Δ L=Growth of labor
1−α

growth accounting equation:

growth rate∈ potential GDP=long−term growth rate of labor force +long−term growthrate∈labor productivity
 FRA Formulas
Full Goodwill=FV Equity of whole – FV net identifiable assets of ¿

∂ good will=Purchase price – ¿

¿ % owned∗full good will

PENSION:

Funding status=Plan assets−PBO

Periodic Cost ∈P∧L=Current Service cost +interest cost −expected return on assets

PBO=Beginning of year benefit PBO+Current service costs+interest costs+ past service costs+ actuarialloss ( ga

Plan assets=Beginning Plan assets+ Employer contributions +actual return−benefits paid

Total Periodic Pension Cost ( TPPC ) =Employer contribution−change∈funding status=Service Cost + Interest Co

PPC P∧L[no amortization]=Current service costs+interest cost−expected return plan assets( expected rate of re

Periodic pensioncost ∈P∧L :Current service costs+ past service cost (total ) +net interest cost ( discount rate∗begin

Periodic pensioncost ∈OCI =TPPC −PPC ∈P∧L

Adjusted Operation Profit after Pension=Operating Profit+ Interest Cost −Expected Return

Financial Institutions Analysis

High Liquid Assets

Liquidity coverage ratio ( LCR−for stress situations )= Standard=minimum 100 %
Expected cash flows

Available stable funding

Net Stable Funding Ratio ( NSFR−for funding stability ) = Standard=minimum 100 %
Required Stable Funding

Insurance Company Analysis: (LOWEST ratio -> better, more profitable)

Claims Paid+ ∆ Loss Reserves

Underwriting Loss Ratio= ¿ 100 % → underwriting loss
Net Premium Earned

Underwriting expenses including commissions

Expense Ratio=
Net premium written

Loss expense+ Loss adjustment expense

Loss∧Loss adjustment expense ratio=
Net Premiums Earned
 - Lower the better

Dividends ¿ policyholders ( shareholder )=Dividends ¿ policy holders ¿

Net premiums earned

Combined Ratio after dividends ( CRAD )=Combined Ratio−¿ .¿ policyholder ratio

Combined Ratio=Loss∧Loss adjustment ratio+underwriting expense ratio

Total investment income

Total investment return ratio=
Invested Assets

( Total Benefits Paid ) Commissions∧expenses

Cost Ratios : ,
Net Premiums Written∧Deposits Net premiunms written∧deposits

Quality of Earnings

A.R.
Days Sales Outstanding( AR turnover ratio) ( DSO )= ∗365
TotalCredit Sales ( ¿ sales )

Sales
Accts. Rec . T . O.=
AR

DuPont ROE=Tax Burden∗Interest Burden∗EBIT %∗TATO∗Financial Leverage

¿ ∗EBT
EBT
∗EBIT
EBIT
∗revenue
Revenue
∗average assets
average assets
ROE=
average equity

Cash
Defensive Interval Ratio=
Daily Expenditures

Accruals ( Using BS ) : Net Operating Assets ( end )−NOA ( beg . )

NOA=Operating Assets−Operating Liabilities

Op . Assets=TA−Cash∧Cash Equivalents−Marketable Securities

Operating liabilities=TL−Total Debt ( Short+ Long)

NOA end−NOA beg

Accruals Ratio ( using BS−SCALED ) :
( NOA end + NOA beg)/2

Accruals ( Using cash flow )=¿−CFO−CFI

 ¿−CFO−CFI
Accruals Ratio ( Using CF )=
(NOA end + NOA beg) /2

Cash Generated ¿ Operations ( CGO )=EBIT + NonCashCharges−Inc .∈WC

Corporate Finance
Expansion:

Outlay =FCInv [ components+ shipping∧install ] + NWCInv [ net working cap . ]

NWCInv=∆ NonCash CA−∆ Nondebt CL=∆ NWC >0 → Need funding

Replacement:

Outlay =FCInv+ NWCInv−Sale ( old ) +tax∗[Sale ( old ) −BookValue ( old ) ]

'
Incremental op .CF =∆CF=( ∆ Sales−∆ Costs )( 1−t ) +∆ De p n∗t

Terminal year non . op . CF=TNOCF =( Sale ( new )−Sale ( old ) ) + NWCInv−T ( Sale ( new ) −BV ( new ) ) −(Sale ( old )−

Economic Income=Cash Flow+ ( Ending MV −Beg . MV ) , MV =Market value of asset

where Cash Flow=( S−C−D )( 1∗t ) + D [TAX SHIELD ALREADY]

Accounting Profit=¿ ¿ Inc . Stmt .

Economic Profit=NOPAT [EBIT∗( 1−t ) ]−Dollar ( $ ) WACC [WACC∗capital ]

Residual Income=Net income−equity change

Residual Income=¿−required rate of return∗BVequity [¿ net worth ( A−L ) ]

Market value added =PV (Economic Profits)

MM THEORIES

MM 1:V ( Levered )=V (Unlevered ) – Capital structure irrelevance proposition

MM 2: ℜ=r 0+ ( DE ) ( r 0−rd ), re= cost of equity, rd= cost of debt, r0= unlevered cost of capital
MM WITH TAXES:

MM1 (With Tax): Firm Value Max @ 100% debt: VLevered Firm=Vunlevered + ( t∗d )

D
MM2 (With Tax): WACC Minimized at 100% debt: ℜ=r 0+( )(r 0−rd)(1−t)
E

When stock goes ex ÷.→ ∆ P= ( D1−Tcg

(1−Td )
) ,Td=tax dividend , Tcg=tax capital gains
Effective Tax Rate =Corporate Tax + ( 1−Corporate Tax )∗( Individual Tax )

Target Payout : Expected Increase∈Dividends

¿ [ ( Expected Earnings∗target payout ratio )− previous dividend ) ¿∗Adj . factor

 1
Adjustment factor=
¿ of years÷. adjustment

Net Income FCFE

Dividend Coverage Ratio= FCFE Coverage=
Dividends Dividends+ Repurch.

Mergers & Acquisition

Herfindahl−Hirschman Index=∑ of ( MSi∗100 ) ∗n ,

2

MSi=market share of firmi , n=¿ of firms∈industry

FreeCash Flow :∋+ Interest ( 1−t ) +∆ Deferred Tax + Non CashCharges−∆ WC−CAPEX ,
∆ WC =CA ( exclude cash∧equivalents )−CL (exclude short −term debt)

FCFF ( equity ) =¿+ NCC + (∫ ¿ ( 1−t ) )−FCInv−WCInv

NCC = Non-cash charges, FCInv = Fixed Capital Investment (CAPEX) WCInv = WC Inv

FCF (1+ g )
Terminal Value= WACC Adjusted=WACC after merger
WACC adjusted−g

FCFterminal∗P
Terminal Vale= → assumes firmtrade at end projected ratio
FCF

( Deal price per share )−( Target Co. Stock Price)

Takeover Premium %=
Target Co . Stock Price

V ( Acq+Target)=Va+Vt + S−C , Va= pre merger valueof acquirer ,Vt =Target , S=Synergies created ,C=cash pa

Gain ¿ target Shareholders=TP=Pt −Vt , TP=Takeover premium Pt=Price paid ,Vt = premerger price

Gains ¿ Acquirer=S−TP=S−(Pt −Vt )

Pt for stock offering is expected stock price AFTER merger of acquirer, applied as Pt

Equity
 P 1−P 0+CF 1
Holding Period Return=r=
P0

1+YTM 20 Year t−Bond

Expected Inflation=
1+YTM of 20 Year TIPS

Expected real EPS growth=real GDP growth

Expected real EPS growth=labor productivity growth+labor supply growthrate

Fama French Model : Return for Stock j : Rf + BMrk , j ( R mrkt −R free ) + BSMB , j ( R small−R big ) + B HML (R HBM −R LBM )
, where Bhml = High Minus Low

Pastor Stambaugh Model : Rf + B Mrk , j ( Rmrkt −R free ) + B SMB , j ( R small−Rbig ) + BHML ( R HBM −R LBM )+
BLiquidity ¿

Burmeister , Roll , Ross → Uses UNEXPCTED changes ¿ each variable :

Rf +B∗Confidence Risk+ B∗Time Horizon Risk + B∗Inflation Risk + B∗Business Cycle Risk +B∗Market Timing R

Build−Up Method : Rf + Equity Risk Premium+ ¿ remium+ SpecificCo . Premium

2 1
Adjusted Beta=( ∗Regression Beta )+( )
3 3

1
( DE )]
Unlever Beta=BETAxyz∗( )
(1+ ( )
D
E
)
Lever Beta=Unlever Beta∗[1+

Income Tax Expense=CashTax + ∆ DTL−∆ DTA

New Product sales that replace existing product sales

Cannibalization Rate=
Total new product sales

E1 E1
V 0= + PVGO , E 1=earnings at t=1, =value of perpetual cash flows
r r

b= retention rate g= dividend growth rate P0=Fundamental value

Dp
Value Perpetual Preferred Shares= , Dp=Preferred dividend ( not growing )
r

D1
SGR( g)=RoE∗Retention Rate r= +g
P0

[ D 0∗( 1+ gL ) ] ( D 0∗H∗( gs−gL ) ) t

HModel : + , H= , t=high growth period , gs=short term growthrate , gL=long
r−gL r −gL 2
 ¿ ∗Sales
Sales
∗TA
TA
DuPont RoE=
SE

¿−¿ ∗¿
¿ ∗Sales
Sales
∗TA
TA
g= =P ( rofit )∗R ( eturn )∗A ( sset Turnover )∗Financial Leverage (T )
SE

Firm Value=Market Value Equity [FCFE @ Required RoE ]+ Market Value Debt

FREE CASH FLOW FORMULAS

FCFE → Required RoE FCFF → WACC

FCFF=¿+ NonCashCharges+ (∫ ¿ ( 1−t ) )−FCinv−WCinv

FCinv=CAPEX−Proceeds ¿ sales of < Assets

'
¿ End Net PP∧E−Beginning+ De p n−Gain on Sale+ Loss on Sale

FCFF=EBIT (1−t)+ Dep ’n−CAPEX−∆ WCinv

FCFF=( ¿+ NCC−WCInv )+∫ (1−tax rate )−FCInv + Preferred÷.

FCFF=CFO+ [∫ ¿ (1−t ) ]−FCInv , CFO=¿+ NCC−WCinv

FCFF=EBITDA (1−t )+ ( Dep∗t ) −FCinv−WCinv

FCFE=FCFF−∫ (1−tax rate)+ net borrowing

MVFirm=MVdebt + MVequity + MVpreferred Shares

 P
Terminal Value ∈ year n=Trailing ∗Earnings∈ year n
E

¿ leading P/ E∗forecasted earnings∈ year n+ 1

Market-Based Valuation

market price per share market price per share

Trailing P /E= Leading P/ E=
EPS EPS
12 M forecasted 12 months
previous next

Trailing Earnings
Normalized Earnings=Normal RoE∗BVPS NetProfitMargin=
Sales

P 0 RoE−g
=
B0 r −g

4∗most recent quarterly dividend

Trailing dividend yield (D/ P)=
Market Price per share

dividends
Forecasted 4 quarters
next
Leading dividend yield=
Market price per share

D 0 r −g
Justified Dividend Yield= =
P 0 1+ g

P P
S S TrailingP/ E
Trailing P /E= = Leading P /E=
E 0 Net Profit Margin 1+ g
S
Leading = =
D1
P P0 E 1 1−b
= Trailing
P P0
= =
( D
0∗1+ g
E0
=
)[ ( 1−b )∗(1+ g ) ]
E E 1 r −g r−g E E0 r−g r−g

Justified Trailing P /E=

[ ( 1−b )∗( 1+ g ) ] Justified leading P/ E=
1−b
r−g r −g

RoE−g
Justified Price Book=
r−g

Justified
P0
=
( S0 )
E0
∗[( 1−b )∗( 1+ g ) ]
=NPM∗Justified Trailing PE Ratio
S0 r−g

g=b∗NPM∗ ( Assets
Sales
)∗( assets
SE
)

PE Ratio
PEG Ratio=
g

EV =MV ( Common Stock )+ MV ( Preferred Equity ) + MVDebt + Minority Interest −Cash∧investments

Earnings Surprise=Reported−Expected EPS

Standardized Unexpected Earnings ( SUE ) =
SD of Earnings Surprise

Weighted Harmonic Mean=∑ ¿ ]

EVA=NOPAT −( WACC∗Total Capital [beginning balance ] )=( EBIT ( 1−t ) ) −$ WACC

Mrkt Value Added=Market Value−Total Capital [endingtotal capital ]

RI
=Expected EPS−( r∗BV Equity per share [ at time t−1 ] ) =( RoE−r )∗(BV Equity per share [ t−1 ] )
Share

RI equity charge=(r∗BVEquity per share)

Last RI
Continuing RI= where w=persistence factor
1+r −w

V 0=BV 0+ PV ( Residual Income per share ) =B 0+

[ ( RoE−r )∗B 0 ]
( r−g)

PV of Continuing RI ∈ year T =Pt ( MV )−Bt ( BV ) , where Pt=Bt∗Forecasted PB ratio

PV of continuing RI ∈ year T −1=

[ ( Pt −Bt ) + Residual Income @time T ]
1+r
Adjusted Control Premium ( for MVIC multiple )=( Control premium on equity )∗(1−DR )

1
Discount for Lack of Control=1−[ ]
1+ control premium

Total Discount=1−[ ( 1−DLOC )( 1−DLOM ) ]

Fixed Income
P ( j +k )
P ( j+k )=Pj∗F ( j , k )=F ( j , k )= i . e . S 2=4 % , S 5=6 % .
Pj

rate
Finding3 year bond ∈2 years =Apply S 5 rate for 5 years , divide by S 2 years .
2
j+ k k
Forward Rate Model=[ 1+ S ( j+k ) ] =( 1+Sj ) j∗[ 1+f ( j, k ) ]
j+ k
k
¿ [ 1+f ( j, k ) ] =
[ 1+ S ( j+ k ) ] Price of n− year zero−coupon bond=
1
j
( 1+ Sj ) ( 1+ Sn )n

Swap Spread t=Swap rate t−treasury yield t I −Spread=Yield on bond−swaprate

TED Spread ( T −bill Eurodollar )=( n−Month Libor )−( n−Month T −bill Rate)

Value Call=Value Straight Bond−ValueCallable Bond

Value Put =Value Straight Bond−Value Puttable Bond

Effective Duration=
[ ( BV −∆ y −BV +∆ y ) ]
2∗BV 0∗∆ y

ConversionValue ( Convertible Bond¿CS )=market price of stock∗conversion ratio

Market price of convertible bond

Market conversion price=
Conversion Ratio

Market conversion premium per share=Market Conversion Price−Stoc k ' s MV

 Market Conversion Premium Per share
Market Conversion Premium Ratio=
MV of CS

Premium Market Price of Convertible bond

value= −1
straight Straight Value

Put −Call Parity=C−P=PV ( Fwd . price of bond on exercise date )−PV ( Exercise price )
t
Probability of Survival ( PSt ) =( 1−hazard rate )

Conditional Probability of default ( PDt )=hazard rate∗PS(t−1)

∆ %P=−( Modified Duration of Bond )∗(∆ Spread)

Credit spread risky bond=YTM risky bond−YTM benchmark

❑
middle binomial tree term
+¿−2 ∂
=upper∧lower term
e

Credit Default Swaps:

Expected Loss=Hazard rate∗loss givendefault

Upfront premium onCDS=PV ( protection leg )−PV ( premium leg )

¿ ( CDS Spread −CDS Coupon )∗Duration

Profit for protection buyer=∆Change∈ Spread∗Duration∗Notional principal

Profit for protection buyer ( % ) =change∈spread ( % )∗duration

Derivatives

[
[1+ L 0 ( h+m )∗t h+m ] −1]∗1
FRA(0,h,m) fixed rate = [1+ L 0 ( h )∗t h]
tm

Lo(h) = h day libor, Lo(h+m) = h+m day libor

t (h+m) = t(h+m) days/360 t(h) = t(h) days/360

Dynamic Hedging Delta-neutral portfolio=Long Stock + Short Call

number of shares hedged

¿ of short calls ¿ hedge=
Delta of call option

−number of shares
¿ of long put=
Delta of put option

Value of Payer Swap=Value of Floating Rate Note−Value of ¿ Rate Note

Duration of payer swap=Duration floating note−duration ¿ bond

Duration receiver swap=duration ¿ rate bond−duration floating note

Long stock + short futures=Risk−free assetCovered Call Position=Long Stock + Short Call

Covered Call Delta=Long Stock Delta+ Short Call Delta

Delta protective put =delta stock+ delta put

Option Trading Strategies

 C0 and P0 = Time 0 call and put option values

X = Exercise Price

T=Option maturity

Strategy Options Involved Payoff

Covered Call Long stock, short call Max gain = X - S0+C0
Max loss = S0 - C0
Break Even = S0-C0
Protective Put Long put, long stock Max Gain = ST-(S0+P0)
(theoretically unlimited)
Max loss = (S0-X)+P0
Breakeven = S0 + P0
Bull Call spread Long call (lower strike), short call Max Gain = Xhigh-Xlow-
- Bet on higher stock price (higher strike) Clow+Chigh
with limited gain and loss Max loss = Clow – Chigh
Breakeven = Xlow+Clow-CHigh
Bear Call spread
- Opposite strategy options
Bear put spread Long put (high) and write put Max Gain = Xhigh – Xlow – Phigh
- Limited upside (lower) + P(low)
Max loss = PHigh-P(Low)
Breakeven = Xhigh+P(low)-PHigh

Bull put spread Short put spread (high price), long

put (low price)

Collar Long put (lower price than call), Max profit = Xh-S0-(P0-C0)
- Decrease volatility short call (higher price than put) Max Loss = S0-Xl+(P0-C0)
Breakeven = S0+(P0/C0)

Straddle Long call, long put @ same strike Maximum profit = St-X-(C0+P0)
- Bet on volatility (unlimited upside since St increases
forever)
Max loss = C0 + P0
Breakeven = X-(C0+P0) and X+
(C0+P0) [two break evens]
S0 and ST = stock price at time 0 and T

σ annual=% ∆ P∗¿

Alternative Investments
Net Operating Income=Rental Income if Fully Occupied +OtherIncome−Vacancy ∧collection loss−Operating ex
 NOI ∈Year 1
Capitalization Rate= =discount rate−growthrate
Value(¿ use comparable sales price)

NOI∈ year 1(¿ rent if tenant pays operating expenses)

Thus, Value (Vo )=
Caprate( all risk yield ( ARY ) if tenant pays rent )

First − year NOI

Debt Service Coverage Ratio ( DSCR )=
Debt Service [loan repayments interest + principal]

loanamount
Loan ¿ value ( LTV ) ratio=
Appraisal value

CFYear 1
Equity Dividend Rate=
Equity

NOI
Property Value=
Cap Rate

FFO=Accounting∋+ De p ' n+ Deferred Tax exp .−Gains ¿ Sales+ Loss ¿ sales

AFFO ( Adjusted funds ¿operations )=FFO−Non−cash rent −Recurring maint .

NAV after Dist=NAV Before Dist−Carried Interest −Distributions

NAV Before=NAV After Dist ( Year−1 ) +Capital Called Down−Mgmt Fees +Op. Results

Distributions
Distributions ¿ paid ∈capital ( DVI ) =
Total Paid ∈Capital

NAV after dist .

RVPI = TVPI =DVI+ RVPI
Paid ∈Capital

Single Step VC Valuation

Pre Money Value=Post money value−Investment

Investment
Post Money = [IRR method]
VC Share of company

Ownership ( f ) NPV Method=New investment ¿ VC ¿

Post money value after inv .

FV ( Inv . )
Ownership ( f ) IRR Method=
Exit Value

founder∗f Investment
Shares belonging¿ VC =Shares Price = VC ¿
1−f Shares ¿
Multi-step VC Valuation

Inv 2 Exit Value

f 2= , POST 2= , n 2=time of second financing round
POST 2 ( 1+r 2 )
n2

PRE 2
POST 1= n1
( 1+ r 1 )

SharesVC 2=( SharesVC1 + SharesFounders )∗

( )f2
1−f 2
, price 2=
INV 2
SharesVC 2

Adjusting Discount Rate ( adjust r ¿ reflect risk company fail∈any given year )

1+r
r∗¿ −1 , q=probability of failure
1−q

Current Price−Previous Price

Price Return=
Previous Price

Price of expiring futures contract − price of new futures contract

Roll Return=
Price of expiring futures contract

Portfolio Management
RRTTLLU (risk, return, time, taxes, liquidity needs, legal, unique circumstances)
2 2 2 2 2
σ Portfolio =W a∗σ a +W b∗σ b +2 W a∗W b∗COV ab

1 2 ∆Y
Change∈ Price=−Duration ( ∆ Y )+ ∗Convexity ( ∆ Y ) , ∆Y = if Macaulay duration
2 1+ y

1 2
Change∈call=delta∗( ∆ S ) + ∗gamma ( ∆ S ) + vega ( ∆ V )
2

∆ S=change price of underlying , ∆ V =change∈ future volatility

Rate of Return Risky Bond=Rf +exp . Inf + Actual Inf +Credit Spread

Rate of Return Equity=Rf +exp . Inf + Actual Inf +Credit Spread+ Risk Premium

Rate of Return Commercial R . Estate=Return Equity+ Risk Premium(illiquidity +uncertainity about terminal valu

VAR=¿

Rp−Rf
Sharpe Ratio= [ UNAFFECTED BY CASH ∧LEVERAGE ]
σp

Rp−Rb R A Active Return

Information Ratio= = =
σ ( of Rp−Rb ) σ A Active Risk

Information Ratio=TC∗IC∗√ BR

¿
Optimal Active Risk that Maximizese Sharpe=σ Active = ( SR IR )∗σ
Benchmark
Benchmark

Sharpe with Optimal Level of Active risk =SR p =√ SR 2Benchmark + Info Ratio 2
2 2 2
Total Risk =σ P =σ B+ σ A