Corporate Finance Formula Sheet

Department of Financial Management and Capital Markets

Technische Universit
at M
unchen
April 14, 2015
Option pricing:
m
u
d
S0
c0
cu
cd
p0
T
n
Rf
p
N ()
X
V0
D

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=

hedge ratio
multiplicative upward movement of an asset
multiplicative downward movement of an asset
stock price in t = 0
value of a European call option in t = 0
value of a European call option in the up-state
value of a European call option in the down-state
value of a European put option in t = 0
time horizon
number of steps in a binominal tree
risk-free rate
risk-neutral probablilty
cumulative probablitiy function for a standard normal variable
exercise price of an option
value of the companys assets in t = 0
face value of the companys debt
annualized standard deviation of an assets continuous returns

Put-call parity
c0

p 0 = S0

Hedge ratio for call options

m=

uS0
cu

Up and down movements in a binomial tree

p
T /n
u=e

X
(1 + RF )T
dS0
cd

d = 1/u

Risk-neutral probability of an upward movement for call options

p=

(1 + Rf )
u d

Pricing a European call option in a binomial tree (for one step) using risk-neutral probabilities
c0 =

pcu + (1 p)cd
1 + RF

Black-Scholes pricing formula for European call options

c0 = S0 N (d1 )
where
d1 =

Xe

ln(S0/X ) + Rf T
1 p
p
+
T,
2
T

Rf T

N (d2 )
d2 = d1

Black-Scholes pricing formula when regarding equity as a call option on the firms assets
S0 = V0 N (d1 )

De

Rf T

N (d2 )

where

p
ln(V0/D) + Rf T
1 p
p
+
T,
d2 = d1
T
2
T
and S0 is here the total value of the firms equity (i.e. share price number of shares)
d1 =

Real option analysis:

Expansion option
Value of the project with a expansion option at a given node = max(value of the underlying
project, value of the underlying project expansion factor expansion costs)
Contraction option
Value of the project with a contraction option at a given node = max(value of the underlying
project, value of the underlying project contraction factor + gain from contraction)
Financial statement analysis:
Calculating free cash flow to the firm (FCFF)

=
+

EBIT
c EBIT
NOPAT
DEP
CAPEX
NWC
FCFF

earnings before interest and taxes

adjusted tax expense where c equals the corporate tax rate
net operating profit after taxes
depreciation
capital expenditure
change in net working capital
free cash flow to the firm (entity approach)

Calculating free cash flow to equity (FCFE)

NI
DEP
CAPEX
NWC
cash flow to debt
FCFE

net income
depreciation
capital expenditure
change in net working capital
repayment of debt new debt issued
free cash flow to equity (equity approach)

Cost of capital and the capital asset pricing model (CAPM):

kE
kD
RF
RE
RM
E
D
U

Cov(X, Y )
V ar(X)
VE
VD
V
c

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=

cost of equity
cost of debt
risk-free interest rate
return on equity
market return
beta of a stock
beta of debt
unlevered beta of a stock
covariance between the variables X and Y
variance of variable X
market value of equity
market value of debt
market value of the firm
corporate tax rate

Weighted average cost of capital

W ACC =

VE
VD
kE +
(1
V
V

c )kD

Capital asset pricing model

kE = RF +

E (RM

RF )

Beta of a security
E

Hamada equation (assuming

Cov(RE , RM )
V ar(RM )

= 0)
U

1
1+

VD/V

(1

c )

Valuation:
t
kE
k
kD
RF
VE
VD
V
D
E[F CF Et ]
E[F CF Ft ]
c
PV
g
r
CF

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=
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=
=
=
=
=
=
=
=
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=

index for a period in time

cost of equity
cost of unlevered equity
cost of debt
risk-free interest rate
market value of equity
market value of debt
market value of the firm
nominal value of debt
expected free cash flow to equity in period t
expected free cash flow to the firm in period t
corporate tax rate
present value
growth rate
required return
cash flow

Discounted cash flows equity valuation

VE =

1
X
E[F CF Et ]
t=1

(1 + kE )t

Discounted cash flows entity valuation

V =

1
X
t=1

E[F CF Ft ]
(1 + W ACC)t

Adjusted present value method

V =

1
X
E[F CF Ft ]
t=1

(1 +

k)t

1
X
c kD Dt
t=1

(1 + kD

1
)t

Value of a perpetuity: the value of a perpetual cash flow (CF ) starting in t1 with a required
return of r is given as
CF
PV =
r
Growing perpetuity: the value of a perpetuity that grows at rate g, where the first payment (in
t1 ) is CF1 and the required return is r is given as
PV =

CF1
r g

Decomposition of the firm value

V = VE + VD

cash

short-term investments

Project valuation:
t
T
I0
NP V
IRR
E[CFt ]
r

=
=
=
=
=
=
=

index for a period in time

time horizon
investment outlay
net present value
internal rate of return
expected project cash flow in period t
project required return

Net present value of a project

NP V =
Internal rate of return
I0 +

T
X
t=1

T
X
E[CFt ]
I0 +
(1 + r)t
t=1

E[CFt ]
!
=0
(1 + IRR)t

Capital structure:
W ACC
VE
VD
V
c
kE
k
kD

=
=
=
=
=
=
=
=

weighted average cost of capital

market value of equity
market value of debt
market value of the firm
corporate tax rate
cost of equity
cost of unlevered equity in the Modigliani-Miller framework
cost of debt

Modigliani-Miller framework:
Cost of levered equity
kE = k + (k

kD )(1

c )

VD
VE

Weighted average cost of capital

W ACC = k 1

VD
c
V

Dividend policy:
PB
PA
div
t0
tg

=
=
=
=
=

stock price before it trades ex-dividend

ex-dividend stock price
dividend per share
ordinary tax rate
capital gains tax rate

Elton and Gruber (1970) model

PB PA
1
=
div
1

t0
tg

Efficient capital markets:

V ()
q(m)
p(e | m)
U (a, e)
V (0 )

=
=
=
=
=

value of an information structure

the prior probability of receiving a message m
the conditional probability of an event e given a message m
the utility resulting from an action a if an event e occurs
the expected utility of the decision maker without the information

Value of an information structure

X
X
V () =
q(m) max
p(e|m)U (a, e)
m

V (0 )