# Finance Formula

**Topics:**Net present value, Internal rate of return, Cash flow

**Pages:**3 (327 words)

**Published:**October 28, 2012

Financial Environment:

Quoted rate k = k* + IP + [DRP+LP+MRP]

Risk & Return:

Expected Returnkˆ = P1k1 + P2k2………Pnkn

Standard Deviation:

The Coefficient of Variation (CV): CV = σ/kˆ

The Expected Return on a Portfolio: kˆp = w1kˆ1+ w2kˆ2+……….+ wnkˆ n

Portfolio Beta:bp = w1b1+w2b2 …….+wnbn

Security market Line = SML = k = krf + (km-krf)b

k = krf + (RPm)b

Security Valuation:

Current yield = annual interest payment

market price of bonds.

Basic Security Valuation Equation: Value (V) = CF1 + CF2 + …… + CFn + Mn

(1+k)1 (1+k)2 (1+k)n (1+k)n

Valuing Preferred Stock: Vps = annual dividend = D required rate of return kps

Valuing Common Stock:

Common Stock Value With Zero Growth. “A zero growth stock is perpetuity”

P0 = D where: D dividend the investor expect

ks ks required rate of return

Common Stock with Single Holding (one year holding)

Vcs = D1+ P1

(1+ks) (1+ks)

Common Stock : Multiple Holding Periods

Vs = D1

ks – g

Cost of Capital:

Cost of Common Equity

DCF Approach:ks = D1 + g

P0

The CAPM Approach:ks = krf + (km-krf)β

The Risk-Premium Approach: ks = krf + (RPM)β

After-tax cost of debt = kd(1-Tax rate).

Cost of New Common Equity

ks = D1 + g

P0 - flotation cost

Cost of Retained Earning, ks = (D1 /P0) + g

Weighted Average Cost of Capital (WACC)

Capital Budgeting:

Payback Period = BY + UC

CF

BY= the year before full recovery

UC= the unrecovered cost at start of year

CF= the cash flow during the year

Net Present Value

NPV = S Annual Cash Flow - Initial Investment

(1+k)t

Internal Rate of Return: IRR

Initial Investments - S Annual Cash Flows...

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