Formula sheet for Financial Management N12403

Note: This formula sheet is not exhaustive. It contains most commonly used formulae for
financial management module

 P/E ratio = Price per share ÷ Earnings per share

 Dividend payout ratio = Cash dividends ÷ Net Income

 Future value = $1 * (1 + r)t

 PV = = $1/(1 + r)t
C
=
 Present value of Perpetuity r
C
=
 Present value of growing perpetuity r−g
N
C C C C C
 Present value of Annuity PV = + 2
+ 3
+.. .+ =∑
(1+r ) ( 1+r ) ( 1+r ) (1+r ) n=1 ( 1+r )n
N

[ ( )]
T
 Present value of growing Annuity CF 1+g
PV = 1−
r−g (1+r)
k
� APR �
 Converting an APR to an EAR 1 + EAR = �
1 + �
� k �
Div 1 + P1
 Price of Share = 1+r E If Dividend of year 1 is given and Rate of return is
given
Div N +1
PN =
 r E −g
for any year where N is year
 Div1 = Div0 (1+g) where g is growth rate of dividend, if g is given

Div 1 + P1
r E=
−1
P0
Div 1
or . +g
 Cost of equity or Return on Equity = P 0

R P=∑i x i Ri
 Return of portfolio where x is weight of the stock and Ri is return on
stocks
 Variance = Probability * (Observed return – Expected Return)2
if more than 2 stocks , summation of all stocks

 Standard Deviation = σ =√Var ( R )

Cov ( Ri , R j )
Corr ( R i , R j )=
SD ( R i ) SD ( R j )
 Correlation of Stock i and j =
 2 2
 Variance of Portfolio = Var ( R p )=x 1 Var ( R1 ) +x 2 Var ( R 2 ) +2 x 1 x2 Cov ( R1 , R2 )
2 2 2 2
Or Var ( R p )=x 1 SD ( R 1 ) +x 2 SD ( R2 ) +2 x 1 x 2 Corr ( R1 , R 2 ) SD ( R 1 ) SD ( R 2 )

SD ( R i ) ×Corr ( R i , R Mkt ) Cov ( Ri , R Mkt )

β i=β iMkt= =
SD ( R Mkt ) Var ( R Mkt )
 Beta of stock where i is stock and Mkt
is market

 Return on stock = E [ R ] =r f + β×( E [ R Mkt ]−r f ) where rf is risk free rate (rate of
treasury bond) and RMkt is market return and (RMkt - rf )is risk premium

D
r E=r 0 +
( r −r )
 Cost of Equity = E 0 D where r0 is rate for all equity firm
D
r E=r 0 + ( r 0 −r D )∗(1−Tc)
 Cost of Equity = E where r0 is rate for all equity firm
and If tax rate (Tc) is given.

 WACC =
r WACC = ( D+E E )r +( D+D E ) r =r =r
E D 0 A
where r0 is rate for all equity
firm

 Put call parity C = P + S - PV (K) – PV (Div)

 Black Scholes Formula

C = S �N (d1 ) - PV (K ) �N (d 2 )

Where S is the current price of the stock, K is the exercise price, and N(d) is the
cumulative normal distribution
ln[S / PV (K )] s T
d1 = + and d 2 = d1 - s T
s T 2

 Cost of Retaining Cash (Effective tax advantage in the presence of interest income)

 PVL = PVU + PV (Interest tax shield)

 PVL (in the presence of distress) = probability of outcome X [(CF x distress cost) / (1+K)]
 YTM of Zeros = (Future Value / Value) – 1
 NPV = PV of Cash inflows – PV of cash outflows
 IRR (approximation) =