Finance 222 –Formula Sheet
Cost of equity = Risk-Free rate + Beta (Mature MRP) + Lambda (CRP)
FCFF & FCFE
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FCFF = EBIT (1-T) – (CAPEX – Depreciation) - ∆NWC
FCFE = NI – (CAPEX – Depreciation) - ∆NWC + New Debt – Debt Repayment
FCFE = NI – (CAPEX – Depreciation)(1-δ) – (∆NWC)(1-δ)
o δ = Debt / Capital
ROC & ROE

ROC = [EBIT (1-T)] / [BV(D+E)]
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ROE = NI / BV (E)
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ROC with OL and R&D = [(EBIT + Current OL – Depreciation of OL)(1-T) +
Current R&D expense – Depreciation R&D] / [BV (D) + PV of OL + BV (E) +
Value of R&D asset]

ROE = [NI + Current R&D expense – Dep R&D asset] / [BV(E) + Value of R&D
asset]
Growth
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Historical Growth Rate:
where g = (Rev 1 – Rev 0) / Rev 0
o Arithmetic = g1 + … + gN / N
1/n
o Geometric = (Rev N / Rev 0) – 1
Fundamental Growth Rate (sustainable growth rate)
a. g EPS = Retention Ratio x ROE
i. Retention ratio = 1 – DPS/EPS
b. g NI = Equity reinvestment x ROE
i. Equity reinvestment rate = [(CAPEX – Depreciation)(1-δ) +
∆NWC(1-δ)] / NI
c. g EBIT = Reinvestment rate x ROC
i. Reinvestment rate = [(CAPEX – Depreciation) + ∆NWC] /
[EBIT(1-T)]
 Efficiency Growth
o g EBIT = Reinvestment rate x ROC new projects + (ROC old project, new returns –
ROC old project, old return) / ROC old project, old return
o g NI = Equity reinvestment rate x ROE new projects + (ROE old project, new
return – ROE old project, old return) / ROE old project, old return
DDM Valuation
 Retention Ratio terminal year = g terminal year / ROE terminal year
Valuation Multiples
PE Ratio

For High Growth Firms – PE Ratio:
PEG Ratio
PB Ratio
EV/EBITDA Ratio
EV/Sales Ratio
Price/Sales Ratio