Formulae

EAR = (1+ periodic rate)

m
1
It represents the annual rate of return actually being earned after adjustments have been
made for different accounting periods.

Future value of a single sum:

FV= PV (1+ I/Y)
n

This formula will determine the value of an investment at the end of N compounding periods,
given that it can earn I/Y over all of the periods.

FV amount to which a current deposit will grow over time when it is placed in an account
paying compound interest.
PV amount of money invested today at t=0
I/Y rate of return per compounding period
N total number of accounting period

Present value of a single sum:

PV= FV
(1+ I/Y)
n

It is todays value of a cash flow that is to be received at some point in the future at a given
rate of return at a given period.

NPV : A project with a positive NPV should be accepted because it increases shareholders
wealth and for mutually exclusive projects, the project with the higher NPV should be accepted.



IRR: The discount rate for which the NPV of an investment is zero

Accept projects IRR > Opportunity cost of capital
Reject projects IRR < Opportunity cost of capital

Perpetuity: Pays a fixed amount of money at set intervals over an infinite period of time.

Bank Discount Yield : This yield is based on the face value of the bond rather than purchase
price. It annualizes based on a 360-day year and with simple interest (ignores compound interest)

Holding Period Yield : It is the total return an investor earns between the purchase date and
the sale or maturity date.

Money Market Yield This yield is based on purchase price.

Effective Annual Yield It is annualized based on 365-day year and incorporates the effects
of compounding.

Nominal scale
Observations are
classified but not in
order
Ordinal scale
Observations are
categorized and then
ranked in order
Interval scale

Ratio scale
This scale ranks, has
equal differences in
scale values and
includes zero as a
true point of origin.

Geometric Mean: It is used to calculate investment returns over many periods.

n

When returns are negtive add 1 to G and to Xi, then at the end subtract 1 from the result

Harmonic Mean: It is used for computations such as, for average cost of shares purchased
over time.

h

Weighted mean: The return for a portfolio is the weighted average of the returns of the
individual assets in the portfolio

Arithmetic mean > Geometric Mean > Harmonic Mean

Median for odd numbered sample :

Median for even numbered sample :

Mode: most frequently occuring value in a distribution.

Mean Return Dispersion
y Tells where returns are centered y Tells us how returns are dispersed
y Addresses Reward y Addresses Risk

Quantile: It is a measure of location and is the general term for a value at or below which a
stated proportion of the data in a distribution lies.

Measures of Absolute Dispersion:

1. Range: Difference between Maximum and Minimum. Reflects on extreme values that are
not representative of the entire distribution.

2. Mean Absolute Deviation: Tells us how far is the mean from a value in the observation.


i
n

3. Population Variance : It is the average of squared deviations from the mean.

4. Population Standard Deviation: Square Root of the Population Variance

5. Sample Variance: when sample is used, same formula as population variance except
sample mean is used and denominator is n 1. It is a biased estimator of the population
variance.

6. Sample Standard Deviation : It is the square root of Sample Variance.

Chebysevs Inequality: Measures the percentage of the observations that lie within k standard
deviations of the mean is defined by this equation

36% of observations lie within + 1.25 standard deviations of the mean.
56% of observations lie within + 1.50 standard deviations of the mean
75% of observations lie within + 2 standard deviations of the mean
89% of observations lie within + 3 standard deviations of the mean
94% of observations lie within + 4 standard deviations of the mean
Coefficient of Variation: It measures the amount of risk per unit of mean return.







Sharpe Ratio: It measures the reward, interms of mean excess return per unit of risk.
Investors prefer large Sharpe ratios.


p f
p


R
p
mean return to the portfolio
R
f
mean return to the risk-free asset
S
p
standard deviation of return on portfolio

Normal distribution characteristics:
y Its mean, median and mode are equal
y It is defined by 2 parameters, mean and variance
y Roughly 68% of its observations lie between +/- 1 standard deviation
95% of its observations lie between +/- 2 standard deviation
99% of its observations lie between +/- 3 standard deviation

Skewness: refers to the extent to which a distribution is not symmetrical and results from the
occurence of extremely large values positive or negative in the data set.
y A positively skewed distribution has frequent small losses and a few extreme gains. Mode is
less than Median which is less than Mean.
y A negatively skewed distribution has frequent small gains and a few extreme losses. Mean is
less than Median which is less than Mode.

Kurtosis is a measure of the degree to which a distribution is more or less peaked
than a normal distribution.
y Leptokurtic is a distribution that is more peaked than a normal distribution
y Platykurtic is a distribution that is flatter than a normal distribution
y Mesokurtic is a distribution has same kurtosis as a normal distribution

Excess kurtosis = Sample kurtosis 3

A normal distribution has excess kurtosis equal to 3. Greater positive kurtosis and negative
skewness in returns distribution indicates increased risk.

Measure of Sample Skew

Sample skewness for large sample:

When;
Distribution is right skewed then sample skewness is positive
Distribution is left skewed then sample skewness is negative

Sample Kurtosis

Sample kurtosis is interpreted relative to the kurtosis of normal distribution which is 3.
Positive values show leptokurtic distribution; negative values show platykurtic distribution

Joint Probability:

Addition Rule:

Multiplication rule:

Total Probability Rule:

Unconditional probability:

Expected Value:

Portfolio expected Return:

Bayesformula:





Combination formula:

Permutation formula:

Binomial probability:

Binomial random variable: E(x)=np; variance = np(1p)

For a uniform distribution:

Sampling error of the mean= sample meanpopulation mean

Standard error of the sample meab, known population variance:

Standard error of the sample meab, unknown population variance:

Straight-line depreciation = Cost Residual value
Useful life

Double-declining balance depreciation = (2/useful life) * (cost accumulated depreciation)

Inventory Accounting methods for:

1. FIFO
COGS: Cost of inventory first acquired
Ending Inventory: Cost of the most recent purchases

2. LIFO
COGS: Cost of inventory recently acquired
Ending Inventory: Cost of the most earlier purchases

3. Weighted average cost

Cost per unit = cost of goods available
Total goods available

Basic EPS = net income preferred dividends
Weighted avg. No. Of shares outstanding






Diluted EPS = adjusted income available for common shares
Weighted avg. Common and potential shares outstanding

Adjusted income available for common shares:
Net income preferred dividends + convertible preferred dividends + convertible debt int (1-t)

To determine whether convertible debt is Anti-dilutive:

Convertible debt interest (1-t)
Convertible debt shares

ACTIVITY RATIOS:

Receivables turnover = annual sales
Average receivables

Days of sales outstanding = 365 / Receivables turnover
(aka average collection period)

Inventory turnover = cost of goods sold
Average inventory

Days of inventory on hand = 365 / inventory turnover


Payables turnover = purchases
Avg. trade payables

Number of days of payables = 365 / payables turnover ratio

Total Asset turnover = revenue
Avg. Total assets

Fixed Asset turnover = revenue
Average net fixed assets

Working Capital turnover = revenue
Avg. Working capital


LIQUIDITY RATIOS

Current ratio = current assets
Current liabilities

Quick ratio = cash + marketable securities+ receivables
Current liabilities

Cash ratio = cash + marketable securities
Current liabilities

Defensive interval = cash + marketable securities+ receivables
Average daily expenditures

Expenditures include cash expenses for COGS, SG&A and research and development

Cash conversion cycle = (days sales outstanding) + (days of inventory on hand) - (number of
days of payables)
SOLVENCY RATIOS:

Debt-to-equity = Total debt
Total shareholders equity

Debt-to-capital = Total debt
Total debt + total shareholders equity

Debt-to-Assets = total debt
Total assets

Financial Leverage = average total assets
Average total equity

Interest Coverage = earnings before interest and taxes
Interest payments

Fixed charge coverage = earnings before interest and taxes + lease payments
Interest payments +lease payments

PROFITABILITY RATIOS

Net profit margin = net income
Revenue

Gross Profit margin = gross profit margin
Revenue

Operating profit margin= operating profit
Revenue

Return on Assets = net income
Avg. Total assets

Return on total capital = EBIT
Avg. Total capital

Return on equity = net income
Average total equity

Return on common equity = net income preferred dividends
Average common equity



Cash paid for new asset = ending gross asset + gross cost of old assets sold beginning gross
asset

Cash from asset sold = book value of the asset + gain(or - loss) on sale

Cash from bond issue = ending bonds payable + bonds repaid beginning bonds payable

Cash to reacquire stock = beginning common stock + stock issued ending common stock

Cash dividends = increase in dividends payable dividends declared

Dividends declared = beginning retained earnings + net income ending retained earnings

Cash collections = Sales increase in a/c receivables

Cash paid to suppliers = COGS + decrease in inventory + increase in a/c payable

Cash wages = wages decrease in wages payable

Cash interest = interest expense + increase in int payable

Cash taxes = tax expense + increase in taxes payable + increase in deferred tax liability

COGS= beginning inventory + purchases ending inventory

Free cash flow to the firm = Net income + Non-cash charges (depr) + [Int* (1-tax rate)] Net
capital exp Working capital investment

FCFF = CFO + [Int* (1-tax rate)] Net capital exp

Free cash flow to equity = CFO Net Capital exp + net borrowing

Net borrowing = debt issued debt repaid.

CORPORATE FINANCE

Unlevered Asset Beta:

Project Beta:

Cost of common equity with country risk premium:

CRP=country risk premium.
S.y.s=sovereign yield spread

M-squared measure: provides the same portfolio rankings as the Sharpe ratio but is stated
in percentage terms

Treynor measure: measures a portfolios excess return per unit of systematic risk

Jensens alpha: is the difference between a portfolios return and the return of a portfolio
on the SML that has the same beta.

Commercial paper cost:

EQUITY INVESTMENTS

Preferred stock valuation: dividend is fixed and income stream is infinite

Preferred stock value =

Value of preferred stock for 1-year Holding Period:


Value = dividend + year-end price
(1 + Ke) (1 + Ke)

Steps to determine a stocks value:

y Identify all expected future cash flows
y Multiply dividend with (1 + growth rate)
y Calculate the equity discount rate Ke = RFR + (Rmkt - RFR)
y Lastly, calculate the value of preferred stock using the above equation of Value

Value of preferred stock for Multiple-year Holding Period:

For a multistage model:

D
1
= D
0
*(1+g)

For an infinite period:

Earnings multiplier:

Growth rate = (1- dividend payout ratio) * ROE
Retention rate = (1- dividend payout ratio)

Where: book value of equity= total assets total liabilities preferred stock

Enterprise value = market value of common stock + market value of debt cash and short-
term investments

Fixed Income

Spot rates from forward rates:

Forward rate from spot rates:

Effective duration:

V
-
increase in price when yield falls
V
+
decrease in price when yield rises
V
0
initial price

DERIVATIVES

Value of a long FRA at settlement

Moneyness Call Option Put Option
In the money S>X S<X
At the money S=X S=X
Out of the money S<X S>X

Intrinsic value of a call: C = Max [0, S X]
Intrinsic value of a put: P = Max [0, X S]

Option value = intrinsic value + time value

Lower and upper bounds for options:
Option Minimum value Maximum value
European call c
t
Max[0, S
t
X/(1+RFR)
T-t
] S
t

American call C
t
Max[0, S
t
X/(1+RFR)
T-t
] S
t

European put P
t
Max[0, X/(1+RFR)
T-t
S
t
] X/(1+RFR)
T-t

American put P
t
Max[0, X S
t
] X

Put-call parity: c + X/ (1+RFR)
T-t
= S + p
Put-call parity with asset cash flows: C+X/ (1+RFR)
T-t
= (S
0
PV
CF
) + P

ECONOMICS

Price elasticity of Demand: measures the change in quantity demanded in response to
the change in price

Price elasticity of Supply: measures the change in quantity supplied in response to the
change in price

Consumer Price Index: measures the average price for a defined basket of goods and
services that represents the purchasing pattern of a typical household.







Inflation rate: measures the percentage change in the price level from a year ago.






unu consupion invsn ovnn spnuin n pos










c
c





Equation of exchange:



0uni ho of on