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**during the final exam
**

TIME VALUE OF MONEY • Future value

**FVn = PV0 (1 + k ) n ⎡ (1 + k )n − 1 ⎤ FVn = PMT ⎢ ⎥ k ⎢ ⎥ ⎣ ⎦ FVn PV0 = (1 + k ) n
**

1 ⎡ n ⎢1 − ⎢ (1 + k ) PVn = PMT ⎢ k ⎢ ⎣ ⎤ ⎥ ⎥ ⎥ ⎥ ⎦

• •

Future value of annuity Present value

•

Present value of annuity

•

Present value of perpetuity Annual percentage rate (APR) or quoted rate

PV0 =

PMT k

= Rate per period * Compounding Periods per year

m

•

•

Effective annual rate

⎛ QR ⎞ f k = ⎜1 + ⎟ −1 m ⎠ ⎝

VALUATION OF BONDS

Let:

B = current price of a bond,

k = bond required return,

I = periodic payment,

F = face value,

n = years to maturity

•

• • •

1 ⎡ ⎤ n ⎥ ⎢1 − ⎛ ⎞ 1 + kb ) ⎥ ( 1 ⎟ Current price of an annual coupon bond B=I⎢ +F⎜ ⎜ (1 + k )n ⎟ ⎢ ⎥ kb b ⎝ ⎠ ⎢ ⎥ ⎣ ⎦ Semi annual coupon Semi-annual payment = I = annual coupon rate * face / 2 Yield to Maturity = The interest rate y such that: B0 = C * PVAy ,n + F * PV y ,n Investment rate of return = total income/investment

VALUATION OF STOCKS

Let: •

**P0,P1 = current stock price, stock price in one period, Stock expected return =
**

kc

kc = stock expected return,

D0,D1 = current dividend, dividend in one period

= =

expected dividend yield + expected capital appreciation

D1 P0

P0 = D0 (1 + g ) D1 = kc − g kc − g

+

(P1 − P0 )

P0

•

Constant growth (g) dividend discount model:

GDBA 505 Formula Sheet – must be returned after exam

Page 1 of 3

d = CCA rate... CF0 = initial investment.2 ) Correlation between the returns on stock 1 and stock 2: ρ12 = COV12 σ 1σ 2 σ P =B ( w1 ) (σ 1 ) 2 2 + ( w2 ) (σ 2 ) + 2 ( w1 )( w2 )( ρ12 )(σ 1 )(σ 2 ) 2 2 • • Sharpe Ratio = CAPM: ERP − RF σP E ( Ri ) = R f + β i ⎡ E ( RM ) − R f ⎤ ⎣ ⎦ GDBA 505 Formula Sheet – must be returned after exam Page 2 of 3 . + p k [Rk − E (R )] 2 2 2 • Expected return of a portfolio of j assets: E ( R p ) = w1 E ( R1 ) + w2 E ( R2 ) + . conditional returns and their probabilities: E (R ) = 1 (R1 + R2 + .... CF0 = capital cost of an asset in year 0.. R2 .INVESTMENT CRITERIA Let: • • • • CFt = cash flow in year t.σ2 = standard deviation of the returns for asset 1. SVn = salvage value in year n (C0 )(d )(T ) (1 + 0. k = discount rate. Rn : Variance for a single asset given k possible states of the economy. asset 2 Expected return for a single asset given n past historical realized returns R1 . ∑ t =1 n (1 + IRR ) CFt t = CF0 • • • Book (accounting) rate of return: Average book rate of return = (average annual net income)/(average annual book value of assets) CAPITAL BUDGETING Let: OI = Operating Income = Sales – Costs of goods sold. Rn : Expected return for a single asset given k possible states of the economy..5k ) ( SVn )(d )(T ) 1 * − * n d +k d +k (1 + k ) (1 + k ) • PV of perpetual tax shield with salvage value in year n = = • NPV = ⎜ ⎛ ⎞ ⎛ PVof After Tax ⎞ ⎛ PVof CCA ⎞ ⎜ PVof All Changes ⎟ 1 SVn − CF0 + ⎟+ ⎜ ⎟− ⎜ n ⎟ Operating cash flows ⎠ ⎝ Tax Shield ⎠ ⎜ in NWC ⎟ (1 + k ) ⎝ ⎝ ⎠ RISK & RETURN Let:w1. + (1 + k ) n t =1 CFT T = CF0 (1 + k ) 1 (1 + k ) 2 (1 + k ) 3 +K + (1 + k ) − CF0 = ∑ (1 + k ) CFt t − CF0 Internal Rate of Return .. asset 2. conditional returns and their probabilities: 1 σ = [R1 − E (R )]2 + [R2 − E (R )]2 + . CF1 + CF2 + . + p k Rk Variance of returns for a single asset given n past historical realized returns R1 .. k = opportunity cost of capital. σ1 ..Find IRR such that: CF3 CFn CF1 CF2 + + +K+ = CF0 1 2 3 n (1 + IRR ) (1 + IRR ) (1 + IRR ) (1 + IRR ) Profitability Index = PI = Equivalent annual NPV = PV (cash inflows ) PV (cash outflows ) Project NPV Annuity factor or . TC = corporate tax rate. + CFT = CF0 n = project life Ordinary Payback is the value of T such that: Discounted Payback is the value of T such that: Net Present Value: NPV = CF1 + CF2 + CF3 (1 + k ) CF1 1 + (1 + k ) CFn n CF2 2 + ... + w j E ( R j ) • • • σP = 2 2 2 2 ( w1 ) (σ 1 ) + ( w2 ) (σ 2 ) + 2 ( w1 )( w2 ) ( COV1..... R2 . + [Rn − E (R )]2 n 2 { } σ 2 = p1 [R1 − E (R )] + p 2 [R2 − E (R )] + . E(Rp) = portfolio expected return.... w2 = investment proportion in asset 1. σp = portfolio standard deviation... + Rn ) n E (R ) = p1 R1 + p 2 R2 + ..

t c ) − Preferred Share Dividends EPS = # of common shares M&M’s Capital Structure Theory No Tax With Tax EBIT = S L + D = VL VU = KU VU = EBIT (1 − T ) .taxes) WACC = LEVERAGE & CAPITAL STRUCTURE • • Indifference EBIT = When EPS under different capital structures are equal ( EBIT .R f ] β E Risk-free rate Return on the market portfolio The systematic risk of the asset Market risk premium • Cost of Preferred Stock: k Ps = D P0 βE Rm . KU VL = VU + D (T ) K e = KU + ( KU − K D ) D SL K e = KU + ( KU − K D ) (1 − T ) D SL GDBA 505 Formula Sheet – must be returned after exam Page 3 of 3 .Interest ) ( 1 . g may be estimated as a: 1) Compound rate 2) Average (Arithmetic) rate 3) Retention ratio X Return on Retained Earnings = Retention ratio * ROE ⎛ retained earnings ⎞ ⎛ ⎞ earnings =⎜ ⎟* ⎜ ⎟ earnings ⎝ ⎠ ⎝ shareholders equity ⎠ SML or CAPM Approach: Rf Rm = = = = RE = R f + [ Rm .COST OF CAPITAL • Dividend Growth Model: D Ke = 1 + g P0 kE D1 = = = Shareholders required return Next period's projected Constant growth rate dividend g • Note: Where appropriate.R f • • D P0 = = Fixed dividend Price per share of the preferred stock S D K e + K D (1 − T ) V V Net proceeds = issue price – issue price *floatation cost% * (1.

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