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Formula sheet Present value calculations: Single cash flow: 𝐶 𝑃𝑉 = (1 + 𝑟)𝑁 Annuity: 1 1 𝑃𝑉 = 𝐶 ∙ ∙ (1 − ) 𝑟 (1 + 𝑟)𝑁 Annuity with constant growth rate: 1 1+𝑔 𝑁 𝑃𝑉 = 𝐶 ∙ ∙ (1 − ( ) ) 𝑟−𝑔 1+𝑟 Perpetuity: 𝐶 𝑃𝑉 = 𝑟 Perpetuity with constant growth rate: 𝐶 𝑃𝑉 = 𝑟−𝑔 Notations: C – cash flow, r – discount rate, N – number of periods, g – growth rate Capital budgeting: NPV formula: CF1 CF2 CFN NPV  CF0    ...  (1  r ) (1  r ) 2 (1  r ) N Value Created NPV Profitability Index   Resource Consumed Resource Consumed Bond valuation: Price of N-period zero-coupon bond: 𝐹𝑉 𝑃= (1 + 𝑌𝑇𝑀)𝑁 Price of a coupon bond: 1 1 𝐹𝑉 𝑃 = 𝐶𝑃𝑁 ∙ ∙ (1 − ) + 𝑌𝑇𝑀 (1 + 𝑌𝑇𝑀)𝑁 (1 + 𝑌𝑇𝑀)𝑁 Notations: FV – face value, YTM – yield to maturity, CPN – coupon Stock valuation: Total return of a stock: Div1  P1 Div1 P1  P0 rE   1   P0 P0 P0 Dividend Yield Capital Gain Rate Stock price from DDM: Div1 Div2 DivN PN P0      1  rE (1  rE ) 2 (1  rE ) N (1  rE ) N Constant dividend growth: Div1 P0  rE  g DDM with constant long-term growth: Div1 Div2 DivN 1  DivN  1  P0      N   1  rE (1  rE )2 (1  rE ) N (1  rE )  rE  g  Total payout model: PV (Future Total Dividends and Repurchases) PV0  Shares Outstanding 0 Discounted free cash flow model: V0  PV (Future Free Cash Flow of Firm) Stock price from discounted free cash flow model: V0  Cash 0  Debt 0 P0  Shares Outstanding 0 Risk and Return: Average annual return: 1 1 T R  T  R1  R2   RT    Rt T t 1 Variance of realized return: T  R  R 1 2 Var (R)  T  1 t t 1 Correlation among two stocks i and j: Cov(Ri ,R j ) Corr (Ri ,R j )  SD(Ri ) SD(R j ) Variance of 2 stocks portfolio: Var (RP )  xi2Var (Ri )  x 2jVar (R j )  2 xi x j Cov(Ri ,R j ) CAPM: E[RPortfolio ]  rf   Portfolio Mkt (E[RMkt ]  rf ) Modigliani-Miller: MM Proposition 1 (PCM, incl. no tax): E+D=U=A VL = V U MM Proposition 2 (PCM, incl. no tax): rWACC  rU  rA D rE  rU  (rU  rD ) E E D U  E  D ED ED D  E  U  ( U   D ) E MM Proposition 1 (with tax): VL = VU + PV(Interest tax shield) After-tax WACC (see above in Capital Budgeting) After-tax WACC with perpetual debt: rwacc  ru  d c rD Trade-off model of capital structure with taxes, financial distress costs (FDCs), and agency costs: VL = VU + PV(Interest tax shield) – PV(FDCs) +PV(Agency benefits of debt) – PV(Agency costs of debt) Option Pricing: Payoffs: Payoff = Max [0, ST – K] Page 13 of 14 BMAN23000 Payoff = Max [0, K – ST ] Put-call parity: Without dividends: C = S + P – PV(K) With dividends: C = S + P – PV(K) – PV(div) Time value (without dividends): C = S – K + dis(K) + P S – K = intrinsic value dis(K) + P = time value Replicating portfolio for the Binomial model: ∆=(Cu–Cd)/(Su–Sd) and B=(Cd–Sd∆)/(1+Rf) Black-Scholes Model: C  S * N (d1 )  X * N (d 2 ) * e  rt d1 and d2 values: S 2 ln( )  (r  )t d1  X 2 & d 2  d1   t  t