Beruflich Dokumente
Kultur Dokumente
00 Finance
Final Exam Formula Sheet
1 1
PV of an annuity = C t
r r (1 r ) (1 r ) t 1
FV of an annuity = C
1 (1 r ) t r
= C (easier to calculate)
r
1 1
C1 1 g t Annuity factor = t
PV (Growing Annuity) = 1 r r (1 r )
r g 1 r
1 (1 r ) t
C1 =
1 r 1 g r
t t
FV (Growing Annuity) =
rg
(lower version is easier to calculate)
1 Nomimal rate
1 + Real rate =
1 Inflation rate
APR = Period Rate m
EAR = 1 Period Rate 1
m
where m = number of periods per year
1
Period Rate = (1 EAR ) 1m
1
Bonds and Stocks
1 1 Face Value
Price of a bond = PV (Coupons) + PV (Face Value) = C t
r r (1 r ) (1 r ) t
Yield to maturity (YTM) = interest rate for which the present value of the bond’s
payments equals the price
Stock Price
Price earnings (P/E) ratio =
Earnings per share
DIV1
Constant-Growth Dividend Discount Model: P0
rg
DIV1 DIV1 P1 P0
Expected Rate of Return Formula: r g or r
P0 P0 P0
2
Net Present Value and Other Investment Criteria
Payback = time periods it takes for the cash flows generated by the project to cover the
initial investment (C0)
Internal Rate of Return (IRR) = the discount rate at which project NPV is zero
NPV
Profitability Index: PI =
Initial Investment (C 0 )
PV of Costs
Equivalent Annual Cost =
Annuity Factor
Capital Budgeting
Incremental cash flow = cash flow with project – cash flow without project
Total project cash flows = cash flow from investment in plant and equipment
+ cash flow from investment in working capital
+ cash flow from operations, including
operating cash flows
CCA tax shield
There are three equivalent ways to compute the cash flow from operations:
1) Method 1: Cash flow from operations = revenues – cash expenses – taxes paid
2) Method 2: Cash flow from operations = net profit + depreciation
3) Method 3: Cash flow from operations = (revenues – cash expenses) (1 tax rate)
+ (depreciation tax rate)
3
Accounting break-even level of revenues =
NPV break-even level of sales = The sales level at which NPV is zero
Expected market return = interest rate on Treasury bills + normal market risk premium
Sample variance = 2 = sum of squared deviations around the average return, divided by the
number of observations minus 1
4
Cov (r j , rm )
Correlation: j ,m
j m
Cost of Capital
After-tax cost of debt = pretax cost of debt (1 – tax rate) = rdebt (1 Tc )
D E
WACC = [ (1 Tc )rdebt ] [ requity ], where V = D + E.
V V
If firm has a third type of securities, e.g. preferred stocks, in its capital structure,
D P E
WACC = [ (1 Tc ) rdebt ] [ rpreferred ] [ requity ], where V = D + P + E.
V V V
DIV1
requity r f ( rm r f ); or requity g.
P0
Dividend
rpreferred
Price of preferred
Average inventory
Inventory period =
Annual cost of sales/ 365
Average trade receivables
Trade receivables period =
Annual sales / 365
Average trade payables
Trade payables period =
Annual cost of goods sold / 365
5
For bank loans (where m is the number of periods per year):
1) Simple interest:
quoted annual interest rate m
Effective annual rate = (1 ) 1.
m
2) Discount interest:
m
1
Effective annual rate = 1.
quoted annual interest rate
1
m
3) Interest with compensating balances:
actual interest paid
Effective annual rate = (1 ) m 1.
borrowed funds available
For inventories, total costs = order costs + carrying costs
365
discount
For trade credit, effective annual rate = (1 ) extra days credit 1.
discounted price
The break-even probability of collection is the probability p that makes the expected
profit from granting credit, p PV(REV COST) (1 p ) PV(COST), equal to zero.
When there is no possibility of repeat order, break-even probability of collection
PV(COST)
p .
PV(REV)