Present Value Annuity Factor The present value annuity factor is used to calculate the present value of futur

e one dollar cash flows. This formula relies on the concept of time value of money. Time value of money i s the concept that a dollar received at a future date is worth less than if the same amount is received today. An amount received today can be invested towards future earnings or receive sooner utility. For this particular formula, the pres ent value of one dollar periodic cash flows is to be used for simplifying the ca lculation of payments larger than one dollar. An example of this equation in pra ctice is determining the original amount of a loan. Use of Present Value Annuity Factor Formula The present value annuity factor is used for simplifying the process of calculat ing the present value of an annuity. A table is used to find the present value p er dollar of cash flows based on the number of periods and rate per period. Once the value per dollar of cash flows is found, the actual periodic cash flows can be multiplied by the per dollar amount to find the present value of the annuity . For example, an individual wants to calculate the present value of a series of $ 500 annual payments for 5 years based on a 5% rate. By looking at a present valu e annuity factor table, the annuity factor for 5 years and 5% rate is 4.3295. Th is is the present value per dollar received per year for 5 years at 5%. Therefor e, $500 can then be multiplied by 4.3295 to get a present value of $2164.75. Present Value Present Value (PV) is a formula used in Finance that calculates the present day value of an amount that is received at a future date. The premise of the equatio n is that there is "time value of money". Time value of money is the concept that receiving something today is worth more than receiving the same item at a future date. The presumption is that it is pre ferable to receive $100 today than it is to receive the same amount one year fro m today, but what if the choice is between $100 present day or $106 a year from today? A formula is needed to provide a quantifiable comparison between an amoun t today and an amount at a future time, in terms of its present day value. Use of Present Value Formula The Present Value formula has a broad range of uses and may be applied to variou s areas of finance including corporate finance, banking finance, and investment finance. Apart from the various areas of finance that present value analysis is used, the formula is also used as a component of other financial formulas. Example of Present Value Formula An individual wishes to determine how much money she would need to put into her money market account to have $100 one year today if she is earning 5% interest o n her account, simple interest. The $100 she would like one year from present day denotes the C1 portion of the formula, 5% would be r, and the number of periods would simply be 1. Putting this into the formula, we would have When we solve for PV, she would need $95.24 today in order to reach $100 one yea r from now at a rate of 5% simple interest. Alternative Formula The Present Value formula may sometimes be shown as Future Value Future Value (FV) is a formula used in finance to calculate the value of a cash flow at a later date than originally received. This idea that an amount today is worth a different amount than at a future time is based on the time value of mo ney. The time value of money is the concept that an amount received earlier is worth

more than if the same amount is received at a later time. For example, if one wa s offered $100 today or $100 five years from now, the idea is that it is better to receive this amount today. The opportunity cost for not having this amount in an investment or savings is quantified using the future value formula. If one w anted to determine what amount they would like to receive one year from now in l ieu of receiving $100 today, the individual would use the future value formula. See example at the bottom of the page. The future value formula also looks at the effect of compounding. Earning .5% pe r month is not the same as earning 6% per year, assuming that the monthly earnin gs are reinvested. As the months continue along, the next month's earnings will make additional monies on the earnings from the prior months. For example, if on e earns interest of $40 in month one, the next month will earn interest on the o riginal balance plus the $40 from the previous month. This is known as compound interest. Use of Future Value The future value formula is used in essentially all areas of finance. In many ci rcumstances, the future value formula is incorporated into other formulas. As on e example, an annuity in the form of regular deposits in an interest account wou ld be the sum of the future value of each deposit. Banking, investments, corpora te finance all may use the future value formula is some fashion. Example of Future Value Formula An individual would like to determine their ending balance after one year on an account that earns .5% per month and is compounded monthly. The original balance on the account is $1000. For this example, the original balance, which can also be referred to as initial cash flow or present value, would be $1000, r would b e .005(.5%), and n would be 12 (months). Putting this into the formula, we would have: After solving, the ending balance after 12 months would be $1061.68. As a side note, notice that 6% of $1000 is $60. The additional $1.68 earned in t his example is due to compounding. Alternative Formula The Future Value formula may also be shown as Compound Interest The compound interest formula calculates the amount of interest earned on an acc ount or investment where the amount earned is reinvested. By reinvesting the amo unt earned, an investment will earn money based on the effect of compounding. Compounding is the concept that any amount earned on an investment can be reinve sted to create additional earnings that would not be realized based on the origi nal principal, or original balance, alone. The interest on the original balance alone would be called simple interest. The additional earnings plus simple inter est would equal the total amount earned from compound interest. Rate and Period in Compound Interest Formula The rate per period (r) and number of periods (n) in the compound interest formu la must match how often the account is compounded. For example, if an account is compounded monthly, then one month would be one period. Likewise, if the accoun t is compounded daily, then one day would be one period and the rate and number of periods would accommodate this. Example of Compound Interest Formula Suppose an account with an original balance of $1000 is earning 12% per year and is compounded monthly. Due to being compounded monthly, the number of periods f or one year would be 12 and the rate would be 1% (per month). Putting these vari ables into the compound interest formula would show The second portion of the formula would be 1.12683 minus 1. By multiplying the o riginal principal by the second portion of the formula, the interest earned is $ 126.83.

Simple Interest vs. Compound Interest Using the prior example, the simple interest would be calculated as principal ti mes rate times time. Given this, the interest earned would be $1000 times 1 year times 12%. After using this formula, the simple interest earned would be $120. Using compound interest, the amount earned would be $126.83. The additional $6.8 3 earned would be due to the effect of compounding. If the account was compounde d daily, the amount earned would be higher. Compound Interest Formula in Relation to APY The compound interest formula contains the annual percentage yield formula of This is due to the annual percentage yield calculating the effective rate on an account, based on the effect of compounding. Using the prior example, the effect ive rate would be 12.683%. The compound interest earned could be determined by m ultiplying the principal balance by the effective rate. Alternative Compound Interest Formula The ending balance of an account with compound interest can be calculated based on the following formula: As with the other formula, the rate per period and number of periods must match how often the account is compounded. Using the prior example, this formula would return an ending balance of $1126.83 . Simple Interest The simple interest formula is used to calculate the interest accrued on a loan or savings account that has simple interest. The simple interest formula is fair ly simple to compute and to remember as principal times rate times time. An exam ple of a simple interest calculation would be a 3 year saving account at a 10% r ate with an original balance of $1000. By inputting these variables into the for mula, $1000 times 10% times 3 years would be $300. Simple interest is money earned or paid that does not have compounding. Compound ing is the effect of earning interest on the interest that was previously earned . As shown in the previous example, no amount was earned on the interest that wa s earned in prior years. As with any financial formula, it is important that rate and time are appropriat ely measured in relation to one another. If the time is in months, then the rate would need to be the monthly rate and not the annual rate. Ending Balance with Simple Interest Formula The ending balance, or future value, of an account with simple interest can be c alculated using the following formula: Using the prior example of a $1000 account with a 10% rate, after 3 years the ba lance would be $1300. This can be determined by multiplying the $1000 original b alance times [1+(10%)(3)], or times 1.30. Instead of using this alternative formula, the amount earned could be simply add ed to the original balance to find the ending balance. Still using the prior exa mple, the calculation of the formula that is on the top of the page showed $300 of interest. By adding $300 to the original amount of $1000, the result would be $1300. Continuous Compounding The continuous compounding formula is used to determine the interest earned on a n account that is constantly compounded, essentially leading to an infinite amou nt of compounding periods. The effect of compounding is earning interest on an investment, or at times payi ng interest on a debt, that is reinvested to earn additional monies that would n ot have been gained based on the principal balance alone. By earning interest on prior interest, one can earn at an exponential rate.

The continuous compounding formula takes this effect of compounding to the furth est limit. Instead of compounding interest on an monthly, quarterly, or annual b asis, continuous compounding will effectively reinvest gains perpetually. Example of Continuous Compounding Formula A simple example of the continuous compounding formula would be an account with an initial balance of $1000 and an annual rate of 10%. To calculate the ending b alance after 2 years with continuous compounding, the equation would be This can be shown as $1000 times e(.2) which will return a balance of $1221.40 a fter the two years. For comparison, an account that is compounded monthly will r eturn a balance of $1220.39 after the two years. Although the concept of infinit e seems that it would return a very large amount, the effect of each compound be comes smaller each time. How the Continuous Compounding Formula is derived The continuous compounding formula can be found by first looking at the compound interest formula where n is the number of times compounded, t is time, and r is the rate. When n, or the number of times compounded, is infinite the formula can be rewrit ten as The limit section in the middle of the formula can be shown as er, which leads t o the formula at the top of the page. Doubling Time - Continuous Compounding PV - Continuous Compounding FV - Continuous Compounding FV of Annuity - Continuous Compounding http://www.financeformulas.net/Continuous_Compounding.html Rule of 72 The Rule of 72 is a simple formula used to estimate the length of time required to double an investment. The rule of 72 is primarily used in off the cuff situat ions where an individual needs to make a quick calculation instead of working ou t the exact time it takes to double an investment. Also, one is more likely to r emember the rule of 72 than the exact formula for doubling time or may not have access to a calculator that allows logarithms. Example of Rule of 72 An individual is earning 6% on their money market account would like to estimate how long it would take to double their current balance. In order for this estim ation to be remotely accurate, we must assume that there will be no withdrawals nor deposits into this account. We can estimate that it will take approximately 12 years to double the current balance after dividing 72 by 6. Alternative Formula for Rule of 72 Alternatively, the rule of 72 can be applied to estimate the rate needed to doub le an investment within a specific time period. This alternative formula to the rule of 72 can be shown as If we take a look at the prior example of Rule of 72, we can apply the same exam ple to an individual wanting to estimate what their rate needs to be in order to double their money within a specific period of time. If an individual wants to estimate the rate needed to double their money within 12 years, this can be esti mated as 6% from dividing 72 by 12 years. Breakdowns of Rule of 72 The rule of 72 is generally used for quick estimates in situations where the rat e is in the several percent range. As the rate gets too low or too high below an d above approximately 8%, the estimate becomes less accurate. Another issue with the rule of 72 is with large sums of money. If a company or i ndividual has large sums involved, this doesn't necessarily affect the outcome o f the formula, but the company or individual may choose to use the actual doubli

ng time formula as each decision could affect their profitability on a larger sc ale. Weighted Average The weighted average formula is used to calculate the average value of a particu lar set of numbers with different levels of relevance. The relevance of each num ber is called its weight. The weights should be represented as a percentage of t he total relevancy. Therefore, all weights should be equal to 100%, or 1. The most common formula used to determine an average is the arithmetic mean form ula. This formula adds all of the numbers and divides by the amount of numbers. An example would be the average of 1,2, and 3 would be the sum of 1 + 2 + 3 divi ded by 3, which would return 2. However, the weighted average formula looks at h ow relevant each number is. Say that 1 only happens 10% of the time while 2 and 3 each happen 45% of the time. The percentages in this example would be the weig hts. The weighted average would be 2.35. The weighted average formula is a general mathematical formula, but the followin g information will focus on how it applies to finance. Use of Weighted Average Formula The concept of weighted average is used in various financial formulas. Weighted average cost of capital (WACC) and weighted average beta are two examples that u se this formula. Another example of using the weighted average formula is when a company has a wi de fluctuation in sales, perhaps due to producing a seasonal product. If the com pany would like to calculate the average of one of their variable expenses, the company could use the weighted average formula with sales as the weight to gain a better understanding of their expenses compared to how much they produce or se ll. Example of Weighted Average Formula A basic example of the weighted average formula would be an investor who would l ike to determine his rate of return on three investments. Assume the investments are proportioned accordingly: 25% in investment A, 25% in investment B, and 50% in investment C. The rate of return is 5% for investment A, 6% for investment B , and 2% for investment C. Putting these variables into the formula would be which would return a total weighted average of 3.75% on the total amount investe d. If the investor had made the mistake of using the arithmetic mean, the incorr ect return on investment calculated would have been 4.33%. This considerable dif ference between the calculations shows how important it is to use the appropriat e formula to have an accurate analysis on how profitable a company is or how wel l an investment is doing. A - C A ________________________________________ Annual Percentage Yield (APY) Annuity - Future Value Annuity - Future Value w/ Continuous Compounding Annuity - (FV) Solve for n Annuity - Payment (PV) Annuity - Payment (FV) Annuity - Payment Factor (PV) Annuity - Present Value Annuity - (PV) Solve for n Annuity - PV Factor Annuity Due - Present Value Annuity Due - Future Value Annuity Due Payment (PV) Annuity Due Payment (FV) Asset to Sales Ratio

 Asset Turnover Ratio Avg Collection Period B ________________________________________ Balloon Loan - Payments Bid Ask Spread Bond Equivalent Yield Book Value per Share C ________________________________________ Capital Asset Pricing Model Capital Gains Yield Compound Interest Continuous Compounding Contribution Margin Current Ratio Current Yield D - F D ________________________________________ Days in Inventory Debt Coverage Ratio Debt Ratio Debt to Equity Ratio Debt to Income Ratio (D/I) Dividend Payout Ratio Dividend Yield - Stock Dividends Per Share Doubling Time Doubling Time - Cont. Compounding E ________________________________________ Earnings Per Share Equity Multiplier Equivalent Annual Annuity Estimated Earnings F ________________________________________ Future Value FV - Continuous Compounding Future Value Factor G - I G ________________________________________ Geometric Mean Return Growing Annuity - Future Value Growing Annuity - Payment (PV) Growing Annuity - Payment (FV) Growing Annuity - Present Value Growing Perpetuity - Present Value H ________________________________________ Holding Period Return I ________________________________________ Interest Coverage Ratio Inventory Turnover Ratio

J - L J ________________________________________ K ________________________________________ L ________________________________________ Loan - Balloon Balance Loan - Payment Loan - Remaining Balance Loan to Deposit Ratio Loan to Value (LTV) M - P M ________________________________________ N ________________________________________ Net Asset Value Net Present Value Net Profit Margin Net Working Capital Number of Periods - PV & FV O ________________________________________ P ________________________________________ Payback Period Perpetuity Preferred Stock Present Value PV - Continuous Compounding Present Value Factor Price to Book Value Price to Earnings (P/E Ratio) Price to Sales (P/S Ratio) Q - S Q ________________________________________ Quick Ratio R ________________________________________ Rate of Inflation Real Rate of Return Receivables Turnover Ratio Retention Ratio Return on Assets (ROA) Return on Equity (ROE) Return on Investment Risk Premium Rule of 72 S ________________________________________ Simple Interest Stock - PV with Constant Growth Stock - PV with Zero Growth

T - V T ________________________________________ Tax Equivalent Yield Total Stock Return U ________________________________________ V W - Z W ________________________________________ Weighted Average X ________________________________________ Y ________________________________________ Yield to Maturity Z ________________________________________ Zero Coupon Bond Value Zero Coupon Bond Yield Return on Equity (ROE) The formula for return on equity, sometimes abbreviated as ROE, is a company's n et income divided by its average stockholder's equity. The numerator of the retu rn on equity formula, net income, can be found on a company's income statement. Average Stockholder's Equity in the ROE Formula The denominator of the return on equity formula, average stockholder's equity, c an be found on a company's balance sheet. Stockholder's equity is a company's as sets minus its liabilities. When calculating the return on equity, the stockhold er's equity should be averaged based on the time being evaluated. For example, i f an investor is calculating the return on equity for 2012, then the beginning a nd ending stockholder's equity should be used. Stockholder's equity is also referred to as net assets. ROE Formula vs. Return on Assets Formula The difference between return on equity and return on assets can be found in the denominators of each formula. For return on assets, the denominator is average total assets and for the return on equity formula, the denominator is average st ockholder's equity. Both of these variables can be found on a company's balance sheet. Assets shown on a balance sheet is stockholder's equity plus liabilities. Theref ore, the return on equity formula is the same as return on assets except that it does not include liabilities. Use of ROE Formula The return on equity can be used internally by a company or can be used by an in vestor to evaluate how well the company is turning a profit relative to its stoc kholder's equity. Alternative ROE Formula The return on equity can also be calculated by multiplying Profit Margin x Asset Turnover x Equity Multiplier. See Return on Equity DuPont for further explanati on. http://www.financeformulas.net/Return-on-Equity.html