STRATEGIC FINANCIAL MANAGEMENT - MBSA 1463
FORMULA
TIME VALUE OF MONEY
Present value = 𝑃𝑉 =
𝐹𝑉
or 𝑃𝑉 = 𝐹𝑉(1 + 𝑖)
(1+𝑖)𝑛
n
Future Value = FV = PV(1+i)
−𝑛
𝑙𝑜𝑔 𝐹𝑉
𝑃𝑉 ] ; to find i = 𝑛√𝐹𝑉 − 1
=> To Find n = [𝑙𝑜𝑔 1+𝑖
𝑃𝑉
Annuities
Ordinary
Annuity Due
Present Value
Annuity
𝑃𝑉𝐴𝑛 = 𝑃𝑀𝑇 [
1 − (1 + 𝑖)−𝑛
]
𝑖
1 − (1 + 𝑖)−𝑛
𝑃𝑉𝐴𝑛 = 𝑃𝑀𝑇 [
] (1 + 𝑖)
𝑖
Future Value
Annuity
(1 + 𝑖)𝑛 − 1
𝐹𝑉𝐴𝑛 = 𝑃𝑀𝑇 [
]
𝑖
(1 + 𝑖)𝑛 − 1
𝐹𝑉𝐴𝑛 = 𝑃𝑀𝑇 [
] (1 + 𝑖)
𝑖
Perpetuity = 𝑃𝑉 =
𝑃𝑀𝑇
𝑖
EFFECTIVE ANNUAL RATE (EAR)
𝐴𝑃𝑅 𝑚
𝐸𝐴𝑅 = [1 +
] −1
𝑚
APR = Annual Published rate
m = n x (number of payment in a year) or Compounding period per year
RULES 72 (double your money)
72
n = interest rate ;
PERPETUITY
PV Level Perpetuity =
𝑃𝑀𝑇
𝑖
;
PV Level Perpetuity =
𝑃𝑀𝑇𝑝𝑒𝑟𝑖𝑜𝑑 1
𝑖−𝑔
𝐴𝑃𝑅 (𝑄𝑢𝑜𝑡𝑒𝑑 𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝐴𝑡𝑒
𝑚
Effective Annual Rate (EAR) = (1 + 𝐶𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 (𝑚)) − 1
EAR To compare equivalent rate if there is different compounding period (semiannually, quarterly or
monthly)
Page 1 of 2 (Version date June 20, 2021)
STRATEGIC FINANCIAL MANAGEMENT - MBSA 1463
FORMULA
BOND VALUATION
1 

1 - (1  r) t 
FV

or ; Vb
Bond Value  $CP 
t
r

 (1  r)


AnnualInterestEarn
BondCurren tYield 
CurrentMar ket Pr ice
= $I (PVIFAkb, n) + $M (PVIFkb, n)
 C  P - MV  
 m   nxm  

  or YTM (interpola tion)  LR   LRV - DRV  ( HR  LR ) 
YTM  


 LRV - HRV

 P  MV



2
EQUITY VALUATION
Constant Dividend Growth Model
P0 
D t 1
D t2
D t 3
D 0 (1  g)
D
D


 ... 
 1 or P t 
t 1
t2
t 3
(1  rs )
(1  rs )
(1  rs )
(1  rs ) 
R -g
R -g
Pt 
D 0 (1  g) t 1
D (1  g) t  2
 Pt 1  0
r g
r g
Finding Rate of Return (rcs)
𝐷
𝑟𝑐𝑠 = 𝑃1 + 𝑔 or using CAPM 𝑟𝑐𝑠 = 𝑟𝑓 + 𝛽[𝐸(𝑟𝑚 ) − 𝑟𝑓 ]
0
Finding Dividend Growth Rate (g)
Dividend growth rate = Retention ratio (b) X Rate of Return on Equity (ROE)
g  ROE x b ; Where b  (1 - Dividend payout ratio)  retention ratio
𝑔 = (1 −
𝐷1
) 𝑋 𝑅𝑂𝐸
𝐸1
Constant Dividend or Zero Growth Dividend  P0 
D
 zero growth dividen
R
PREFERRED STOCK VALUATION
Vps =
D
,
rps
finding Required Yield on P/Stock  rps 
D
P0
WEIGHTED AVERAGE COST OF CAPITAL (WACC)
WACC = 𝑊𝑒 𝑅𝑒 + 𝑊𝐷 𝑅𝐷 (1 − 𝑇𝑐 ) + 𝑊𝑝𝑠 𝑅𝑝𝑠
Re = Cost of Equity ; RD(1-Tc) = Cost of Debt after tax ; Rps = Cost of Preferred stock ;
We = Weighted for Equity ; WD = Weighted for Debt/bond ; Wps = Weighted for Preferred stock
Page 2 of 2 (Version date June 20, 2021)