Formula Sheet

FORMULAE SHEET Page |1
Financial Mathematics and Interest Capital Budgeting

Future Value : Present value: Net Present Value
n
FVt
FVt  C0  (1  r) t
PV 
Ct NPV    C0
(1  r) t t 1 (1  r) t
Internal Rate Of Return
With compounding more than once a period: n
FVt
 r 
mt
FVt IRR    C0  0
FVt  PV0 1   PV  t 1 (1  r)
t
 m 
1 r
m
mt
 ProfitabilityIndex 
PVAll FutureCash Flows
Time period discount rate: Initial Investment
1/t Equivalent Annual Cost (annuity)
log(FVt /C 0 )  FV 
t r   t  1 NPV  r
log(1  r)  PV  EAC 
Real Rate Of Return  1 
1  t 
real rate 
1 + nominal rate
1  (1  r) 
1 + inflation rate
Perpetuities Annuities
Present Value of a perpetuity: Present Value of an annuity:
PV 
C C  1 
PV   1 
r r  1  r t 
Present Value of growing perpetuity
Future Value of an annuity:
C1
PV   (1  r) t  1
(r  g ) FVt  C   
 r 
Valuation of Stocks and Bonds Risk and Return, CAPM
Bond valuation ri  rf  βi (rm  rf) )
1 1  FVfinal payment
Vbond  Ccoupon    t 
 Mean or expected return Standard deviation
 r r(1  r)  (1  r) T n n
Zero-growth share valuation(perpetuity): E(r) = r =  ri pi σ 2r =  (ri - r) 2 pi

i=1 i=1
D
P0  Beta of Equity for levered firm with tax
r  D 
Constant-growth share valuation:  E   A 1  [1  Tc ] 
D 0 1  g  D  E 
P0   1 Coefficient of variation
rg rg
σr
CV =
D1 r
r g
P0 Portfolios
n
Present value of growth opportunities β p =  w iβ i
D1 i=1
PVGO  P0 
r Expected return for a portfolio
Sustainable growth rate assuming n
Return On Equity x Plowback Ratio E (rp )   wi ri

i 1
NOTE: This is not an exhaustive list of formulas used in this unit; (c) means alphabet sub|superscript usage is to be interpreted in context of its application
Alphabet use: B(c): Coupon or Cash flow D(c): Dividend or Debt;:E(c): Equity, Earnings or Expected; F: Future or foreign; g:growth rate; i: inflation rate; K(c);
rates of return, cost of capital or interest rate; L is levered; ,Log: natural logarithm P(c);: Price or Present; Q:quantity;S(c):Shares or Spot rate T: Tax rate; U is
unlevered V(c); Value or Value of firm, Sub/superscript use a: assets AT: after tax ; BT: before tax; c: corporate tax rate; d:debt; e : equity; f:risk free; m(c):no
of periods in year or market; p(c): portfolio or :probability t: at time t; w: portfolio weight; 0: today; 1 :next period;  :change across 1 period or 1st difference.
Price earnings ratio (contant growth & return) Valuations with Free Cash-Flow
P0 D1 / E1 Payout _ ratio1 Free Cash Flow to the Firm
 
E1 rg rg FCFF = EBIT(1-T) - (Capex - Dep r+ WC)
Additional Funds needed Free Cash Flow to Equity
TA AP  AL0 NI FCFE = NI - (Capex–Depr+WC)(1-DR)

AFN  (NS )  0 (NS )  ( NS1 ) 0 ( RR0 )
NS0 NS0 NS0 Free Cash Flow to Equity
FCFE= NI - (Capex–Depr+WC)+NetDebt - Divs
Cost of Capital International Interest, Exchange Rates and Inflation
With classical tax after tax cost of capital Interest rate parity:
D E 1 + rforeign f foreign/$
WACCAT,C  K d (1  Tc )     K e   =
 
V V  1 + r$ S foreign/$
With Dividend Imputation Tax & franking ratio (γ) Purchasing power parity:
 D
1 + i foreign E(s foreign/$ )
Ke  E  
WACCAT  Kd        [1  (1   )Tc ] 1 + i$ S foreign/$
  V  (1 - Tc )  V 
No Tax Expectations theory:
f foreign/$ E(s foreign/$ )
D E =
WACCBT  K d    K e,BT   S foreign/$ S foreign/$
V  V 
International fisher effect(expected inflation):
Cost of Debt after tax (Classical tax)
1 + rforeign 1 + i foreign
K d , AT  K d ,BT (1  T ) 1 + r$
=
1 + i$
Capital Structure Leverage

Value of Levered firm and Unlevered Firm before tax: Degree of operating leverage:
VLBT = VU Q( P  V )
DOL  or Gross Contribn/EBIT
Return on equity levered firm before tax: Q( P  V )  F
re = ra + (D / E) (ra – rd) Degree of financial leverage:
Q( P  V )  F
Value of Levered firm after tax: DFL  or EBIT/(EBIT-I)
EBIT  I
VLAT = VU + Tc × D
Degree of combined leverage:
Return on equity levered firm after tax DCL  DOL DFL
re = ra + (D/E)×(1-Tc)×(ra– rd) EBIT and EPS indifference point
( EBIT  I )(1  T ) ( EBIT  I )(1  T )
EPS  
S plan_ A S plan_ B
1 Net Advantage of leasing 2
NAL  PVlea sin g  PVborrowing
RATIO CALCULATION
Return on equity Net Profit 100

Average shareholders' funds 1
Return on Assets EBIT 100

Average assets 1
Profit Ratio or EBIT Margin EBIT 100

Sales 1
Gross Profit Ratio or Gross Margin Gross profit 100

Sales 1
Asset Turnover Rate Sales
Average assets
Days Inventory (Based on 365 days) Average stock 365

Cost of goods sold 1
Days Debtors (Based on 365 days) Average debtors
 365
Sales
Working Capital Ratio Current assets 100

Current liabilitie s 1
Quick Asset Ratio Current assets - stock 100

Current liabs. - bank odft 1
Gearing Ratio (Debt Ratio) Liabilitie s 100

Assets 1
Gearing Ratio (Equity Ratio) Equity 100

Assets 1
Gearing Ratio (Debt to Equity Ratio) Liabilitie s 100

Equity 1
Interest Coverage EBIT
Interest
Earnings per share Earnings available to shareholders
No. ord shares on issue
Dividend per share Interim  Final Div
No. ord shares on issue
Retention Ratio (Reinvestment Rate) DPS
1
EPS
Price Earnings Ratio Share Price
EPS
Alphabet use: B(c): Coupon or Cash flow D(c): Dividend or Debt;:E(c): Equity, Earnings or Expected; F: Future or foreign; g:growth rate; i: inflation rate; K(c); rates of return, cost of capital or
interest rate; L is levered; ,Log: natural logarithm P(c);: Price or Present; Q:quantity;S(c):Shares or Spot rate T: Tax rate; U is unlevered V(c); Value or Value of firm, Sub/superscript use a: assets
AT: after tax ; BT: before tax; c: corporate tax rate; d:debt; e : equity; f:risk free; m(c):no of periods in year or market; p(c): portfolio or :probability t: at time t; w: portfolio weight; 0: today; 1 :next
period;  :change across 1 period or 1st difference.

Formula Sheet

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FORMULAE SHEET Page |1

Financial Mathematics and Interest Capital Budgeting

Zero-growth share valuation(perpetuity): E(r) = r =  ri pi σ 2r =  (ri - r) 2 pi

Return On Equity x Plowback Ratio E (rp )   wi ri

TA AP  AL0 NI FCFE = NI - (Capex–Depr+WC)(1-DR)

Capital Structure Leverage

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