Selected Financial Formulae
Purpose Formula
Basic Time Value Formulae
Future Value of a Single Sum FV = PV ( 1 + i ) N
Present Value of a Single Sum FV 
PV = 
( 1 + i)N
Solve for N for a Single Sum FV
ln ⎛⎝ ⎞⎠
PV
N = 
ln ( 1 + i )
Solve for i for a Single Sum FV
i = N  – 1
PV
Present Value of an Ordinary Annuity 1 – 1 ⁄ ( 1 + i )N
PV A = Pmt 
i
Future Value of an Ordinary Annuity ( 1 + i)N – 1
FV A = Pmt 
i
Present Value of an Annuity Due 1 – 1 ⁄ ( 1 + i )(N – 1)
PV Ad = Pmt  + Pmt
i
Future Value of an Annuity Due ( 1 + i )N – 1
FV Ad = Pmt  ( 1 + i )
i
Present Value of an Annuity Growing at a Pmt 1 1+g N
Constant Rate (g) PV GA =  ⎛ 1 – ⎛ ⎞ ⎞
i–g⎝ ⎝ 1 + i⎠ ⎠
Future Value of an Annuity Growing at a Pmt 1 1+g N
FV GA =  ⎛ 1 – ⎛ ⎞ ⎞ ( 1 + i )
N
Constant Rate (g) i–g⎝ ⎝ 1 + i⎠ ⎠
Holding Period Return (single period)
P 1 + ∑ Cash Flows
HPR =  – 1
P0
Basic Financial Formulae © 19952008 by Timothy R. Mayes, Ph.D. 1
Selected Financial Formulae
Purpose Formula
Holding Period Return with Reinvestment
N
(for multiple subperiod returns)
HPR Reinvest = ∏ ( 1 + HPRt ) – 1
t=1
Basic Security Valuation Formulae
Dividend Discount Model (AKA, the Gordon D0 ( 1 + g ) D1
Model) V CS = 
 = 

k CS – g k CS – g
Twostage Dividend Discount Model D0 ( 1 + g1 ) 1 + g1 n
Notes: This equation is too long for one line. V CS =  1 – ⎛⎝ ⎞⎠
k CS – g 1 1 + k CS
g1 = Growth rate during high growth phase.
n
g2 = Growth in constant growth phase after n. D0 ( 1 + g1 ) ( 1 + g2 )

n = Length of high growth phase. k CS – g 2
Assume g1 <> kCS and g2 < kCS + 
n
( 1 + k CS )
Threestage Dividend Discount Model
Notes: D0 n1 + n2
n1 = Length of high growth phase. V CS =  ( 1 + g 2 ) +  ( g 1 – g 2 )
k CS – g 2 2
n2 = Periods until constant growth phase.
n2 = n1 + length of transistion phase.
Earnings Model
RE 1 ⎛ ROE  – 1⎞
EPS ⎝ k CS ⎠
V CS = 1 + 

k CS k CS – g
Constant Growth FCF Valuation Model FCF 1
VOps = Value of Total Operations V Ops = 

k CS – g
VDebt, VPref = Value of debt and preferred stock
VNonOps Assets = Value of nonoperating assets V CS = V Ops – V Debt – V Pref + V Non – OpAssets
Sustainable growth rate g = br
Note: b = retention ratio = 1  payout ratio
r = return on equity
Value of a Share of Preferred Stock D
V P = 
kP
Basic Financial Formulae © 19952008 by Timothy R. Mayes, Ph.D. 2
Selected Financial Formulae
Purpose Formula
Value of a Bond on a Payment Date 1 – 1 ⁄ ( 1 + kd )N FV 
V B = Pmt  + 
kd ( 1 + kd )N
Quoted Price of a Bond on a NonPayment α
V B, α = V B, 0 ( 1 + k d ) – α ( Pmt )
Date
VB,0 = Value of bond at last payment date
α = The fraction of the current period that has elaspsed
Basic Statistical Formulae
Arithmetic Mean (Average)
1 N
X = 
N ∑
t=1
Xt
Geometric Mean (used for averaging returns, N
growth rates, etc.) G = N ∏ ( 1 + Rt ) – 1
t=1
Expected Value (Weighted Average)
N
E(X) = ∑ ρt Xt
t=1
Variance
2 N
∑ ρt ( Xt – X )
2
σX =
t=1
Standard Deviation 2
σX = σX
Covariance
N
σ X, Y =
t=1
∑ [ ρt ( Xt – X ) ( Yt – Y ) ]
Correlation Coefficient σ X, Y
r X, Y = 

σX σY
Beta (Note: M is the market portfolio, and i is σ i, M r i, M σ i σ M
the security or portfolio) β i = 
 = 

2 2
σM σM
Basic Financial Formulae © 19952008 by Timothy R. Mayes, Ph.D. 3
Selected Financial Formulae
Purpose Formula
Portfolio Formulae
Expected Return of a Portfolio
N
E ( RP ) = ∑ wi Ri
i=1
Variance of a 2security Portfolio Using the covariance:
2 2 2 2 2
σ P = w 1 σ 1 + w 2 σ 2 + 2w 1 w 2 σ 1, 2
or, using the correlation coefficient:
2 2 2 2 2
σ P = w 1 σ 1 + w 2 σ 2 + 2w 1 w 2 r 1, 2 σ 1 σ 2
Variance of an Nsecurity portfolio Using the
2 N N
Covariance σP = ∑ ∑ w i w j σ i, j
i=1 j=1
Standard Deviation of a Portfolio 2
σP = σP
Portfolio Beta
N
βP = ∑ wi βi
i=1
95% Value at Risk (Variance/Covariance VaR = 1.645 × V p × σ p
Model)
Note: Vp is portfolio value
Capital Market Theory Models
Capital Market Line (CML) ( E ( RM ) – Rf )
E ( R P ) = R f + σ P 
σM
Capital Asset Pricing Model (CAPM) E ( Ri ) = Rf + βi ( E ( RM ) – Rf )
Note: This is also the equation for the Security
Market Line (SML)
Treynor’s Riskadjusted Performance Ri – Rf
Measure T i = 

βi
Sharpe’s Riskadjusted Performance Measure Ri – Rf
S i = 

σi
Basic Financial Formulae © 19952008 by Timothy R. Mayes, Ph.D. 4
Selected Financial Formulae
Purpose Formula
Jensen’s Alpha αi = ( Ri – Rf ) – βi ( RM – Rf )
The Information Ratio RP – RB
IR P = 

σ RP – RB
M2 (Modigliani & Modigliani) Performance σm
M = ⎛⎝ ⎞⎠ ( R i – R f ) + R f
2
Measure σi
Fama’s Risk Decomposition Risk Premium = R i – R f
Notes:
Risk = β i ( R M – R f )
Ri = Portfolio Return
RM = Market Return Selectivity = Risk Premium – Risk
Rf = Riskfree Rate Managers Risk = ( β i – β T ) ( R M – R f )
βi = Portfolio Beta Investors Risk = β T ( R M – R f )
βT = Target Beta σ
Diversification = ⎛ i – β i⎞ ( R M – R f )
⎝σ ⎠
M
Net Selectivity = Selectivity – Diversification
Brinson, Hood, and Beebower Additive
N
Attribution Model
Notes:
At = ∑ ( w i, t – w i, t ) ( R i, t – R t )
i=1
At = Overall Allocation Effect
St = Overall Selection Effect N
It = Overall Interaction Effect
St = ∑ wi, t ( Ri, t – Ri, t )
i=1
wi,t = Weight of Sector i in portfolio t
bars over variables represent benchmark N
weights and returns. It = ∑ ( wi, t – wi, t ) ( Ri, t – Ri, t )
i=1
Options and Futures Valuation Models
BlackScholes European Call Option – rt
C = SN ( d 1 ) – Xe N ( d2 )
Valuation Model
where:
S
ln ⎛  ⎞ + ( r + 0.5σ )t
2
⎝ X⎠
d 1 = 
σ t
d2 = d1 – σ t
Basic Financial Formulae © 19952008 by Timothy R. Mayes, Ph.D. 5
Selected Financial Formulae
Purpose Formula
BlackScholes European Put Option P = Xe – rt N ( – d 2 ) – SN ( – d 1 )
Valuation Model (see above for d1 and d2)
PutCall Parity for European Options with No C = P + S – Xe – rt
Cash Flows or,
P = C + Xe – rt – S
Singleperiod Binomial Option Pricing Model pC u + ( 1 – p )C d
for Call Options (r is the riskfree rate, u is the C = 
(1 + r)
up factor, and d is the down factor)
where,
r – d
p = 
u–d
Singleperiod Binomial Option Pricing Model pP u + ( 1 – p )P d
for Put Options P = 

(1 + r)
where,
r – d
p = 
u–d
Cost of Carry Model for Pricing Futures = S 0 e CC ( t )
T F0
Contracts (CC is the carrying costs as a % of
the spot price)
Bond Analysis Formulae
Macaulay’s Duration on a Payment Date (for
immunization). Note: Ct is the cash flow in
N Ct ( t )
period t, i is the yield to maturity
∑ (
1 + i)t

t=1
D = 
Bond Price
Modified Duration (for price volatility) on a D
D Mod = 
Payment Date (1 + i)
Convexity on a Payment Date
1  N 2 Cf t
( 1 + i ) 2 t∑
 ( t + t ) 

=1 ( 1 + i ) t
C = 
Bond Price
The nperiod forward rate given two spot rates i
(note that i > j, and n = i  j) ( 1 + Ri )
t + jRn = n 
j
( 1 + Rj )
Basic Financial Formulae © 19952008 by Timothy R. Mayes, Ph.D. 6
Selected Financial Formulae
Purpose Formula
Bank Discount Yield for discount securities FV – PP 360
(FV = face value, PP = purchase price, m = BDY =  × 
FV m
periods per year)
Bond Equivalent Yield for discount securities FV – PP 365 FV 365
(see definitions for BDY) BEY =  ×  = BDY ×  × 
PP m PP 360
Capital Budgeting Decision Formulae
Net Present Value (NPV)
N Cf t
NPV = ∑ t – IO
t = 1 (1 + i)
Profitability Index (PI)
N Cf t
∑ 
t = 1 (1 + i)
t
PI =  = NPV + IO = NPV
  + 1
IO IO IO
Internal Rate of Return (IRR). Note: This is a
trial and error procedure to find the i that
N Cf t
makes the equality hold (i.e., what discount
0 = ∑  – IO
t = 1 (1 + i)
t
rate makes the NPV = 0).
Modified Internal Rate of Return (MIRR). N (N – t)
∑
t=1
Cf t ( 1 + i )
N
MIRR =  – 1
IO
Stock Market Index Construction Formulae
Priceweighted Average (e.g., DJIA) N
Note: The divisor (Div) at period 0 is equal to ∑ Pj
the number of stocks in the average. It will be j=1
PWA t = 
adjusted for stock splits or any other corporate Div t
action that results in a noneconomic change
in the stock price.
Capitalizationweighted Index (e.g., S&P
N
500)
Note: The divisor (Div) at period 0 is the
∑ Pj Qj
j=1
divisor that makes the initial level of the index CWI t = 
Div t
equal to the desired starting point. It will be
adjusted for any corporate action that results
in a change in market capitalization.
Basic Financial Formulae © 19952008 by Timothy R. Mayes, Ph.D. 7
Selected Financial Formulae
Purpose Formula
Equallyweighted Arithmetic Index (e.g.,
VLA)
N P j, t ⎞
⎛ 
Note: At period 0 the index is set to some
EWAI t = EWAI t – 1 × ∑ ⎝ P j, t – 1⎠
 ⁄N
j=1
starting value (e.g., 100). To calculate the
index for any day, multiply the average %
change by the previous index level.
Equallyweighted Geometric Index (e.g., N P j, t
VLG) EWGI t = EWGI t – 1 ×
N ∏ Pj, t – 1

Note: See note above j=1
Corporate Financial Formulae
Net Operating Profit After Taxes (NOPAT) NOPAT = EBIT ( 1 – t )
Net Operating Working Capital (NOWC) NOWC = Op. C.A. – Op. C.L.
Operating Capital (Op. Cap.) Op. Cap. = NOWC + NFA
Free Cash Flow (FCF) FCF = NOPAT – Net Investment in Op. Cap.
Economic Value Added (EVA) EVA = NOPAT – ( Op. Cap. × Cost of Cap. )
Beta of a Leveraged Firm βL = βU [ 1 + ( 1 – t ) ( D ⁄ S ) ]
MM Value of Firm, No Corporate Taxes VL = VU = SL + D
MM Value of Firm With Corporate Taxes V L = V U + tD
Merton Value of Firm with Personal Taxes ( 1 – tC ) ( 1 – tS )
V L = V U + 1 – 

( 1 – tD )
Miscelaneous Formulae
Margin Call Trigger Price IM% – 1
P M =  × P 0
Note: IM% is the initial margin supplied, MM% – 1
MM% is the maintenance margin
requirement, P0 is the initial value of the
portfolio
Percentage gain to recover (% GTR) from a 1 –1
loss (%L) %GTR = 
1 – %L
Basic Financial Formulae © 19952008 by Timothy R. Mayes, Ph.D. 8