4QQMN504 Principles of Finance

Midterm Exam Formula Sheet

Ct
Present Value: PV =
(1+r )t
T
C1 CT Ct
Net Present Value: NPV =−C 0+ 1
+ …+ T
=−C 0 + ∑
( 1+r ) ( 1+ r ) t=1 (1+r )t
C
Perpetuity: PV =
r
C1
PV of Growing Perpetuity¿
r−g

PV of t-year annuity¿ C × ( 1
−
1
r r (1+ r)t )
APR = rate per period × periods per year
EAR = (1 + rate per period)periods per year − 1
Bond valuation

PV =
C
+
C
1+ r ( 1+ r)2
+…+
(C + par)
(1+ r)
T or PV =C ×
( 1r − r (1+r1 ) )+ (1+rpar)
T T

1× PV (C 1) 2 × PV (C 2) 3 × PV (C 3 ) T × PV ( CT )
Duration of a Bond¿ + + +…+
PV PV PV PV
duration
Modified duration = volatility(%)¿
1+ yield
1+r nominal
Real rate of return: 1+r real =
1+ inflationrate
Stock Valuation Models

¿1 ¿2 ¿3 ∞
¿t
P0= + +
1+r (1+r ) (1+r )
2 3
+ …= ∑ t or
t =1 (1+ r)

¿1 ¿2 ¿ H + PH H ¿t PH
P 0= + 2
+…+ H
=∑ t
+ H
1+r (1+r ) ( 1+r ) t =1 (1+ r) (1+r )
Dividend Growth models
¿1
Zero growth: P0=
R
¿1
Constant growth: P0=
R−g
Variance (~r m ¿= expected value of ( ~r m−r m )
2

Standard deviation of ~r m =√ variance( ~r m)