Finance Formula

FORMULA

Financial Environment:

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

Risk & Return: Expected Return kˆ = 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