Formula Sheet Finance 1.5 (2020-2021)
BDM, chs. 1-7, 9-12, 20
Chapter 2: Financial Statement Analysis
(
)=
(
)=
+
Chapter 4: Time Value of Money
(
Present Value of an Annuity:
×
1−(
)=
ℎ
)
Future Value of an Annuity:
(
)=
×
1−
Internal Rate of Return with two cash flows only:
=
Present Value of a Growing Annuity:
=
× ((1 + ) − 1)
/
−1
Chapter 5: Interest Rates
Effective Annual rate:
= (1 + ) − 1
−
Discount rate period conversion:
= 1+
PV using term structure of interest rates:
−1
=
+(
)
+ ⋯+ (
)
Chapter 6: Valuing Bonds
The amount of coupon payment CPN:
×
=
Yield to maturity y of n-period coupon bond:
=
/
=
Yield to maturity of an n-period zero-coupon bond:
×
1−(
−1
)
+(
)
Page 1
=
Price of n-period coupon bond using zero-coupon yield curve:
⋯+ (
+(
)
+
+ ⋯+ (
)
)
Chapter 7: Investment Decision Rules
=
Profitability index:
Chapter 9: Valuing Stocks
Total return one-period investor:
=
+
=
+(
Dividend-Discount model with infinite horizon:
=∑
Dividend-Discount model with horizon N:
Constant dividend growth model:
)
+(
)
=
+(
)
+(
)
+ ⋯+
)
=
Total payout model:
Enterprise value:
=
Free cash flow:
=
(
)
+
× (1 −
)+
−
ℎ
−
−
)
∆(
EV with discounted free cash flows (constant long-term growth):
(
)
×
Dividend-Discount model (constant long-term growth):
(
(
+(
=
=
Long-term growth rate:
)
)
+(
)
+⋯+(
)
+(
=
+
)
Stock price valuation with discounted free cash flow model:
=
Page 2
Chapter 10: Capital Markets and the Pricing of Risk
= [ ]=∑
Expected (mean) return:
×
( ) = [( − [ ]) ] = ∑
Variance of return distribution:
Annualizing quarterly returns: 1 +
= (1 +
)(1 +
)(1 +
+
+ ⋯+
)= ∑
( )=
∑
− )
= (
Average return using realized returns:
Variance estimate using realized returns:
× ( − [ ])
(
)(1 +
)
Standard error of the estimate of the expected return:
(
(
)=
,
)
±
95% confidence interval for the Expected Return:
(2 ×
)
Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
=
Return of portfolio:
+
=∑
+ ⋯+
Expected return of portfolio: [
]=∑
Covariance between Ri and Rj:
,
[ ]
(
=
− [ ])
−
,
∑
Estimating the covariance between Ri and Rj :
,
Correlation:
(
(
Variance of large portfolio:
=∑ ∑
Sharpe Ratio of risky asset i:
Beta of a portfolio:
[
−
)
(
(
(
)+2
(
,
)
)
)
,
)
)
,
(
)+
]
(
(
=
,
,
Capital Asset Pricing Model (CAPM): [ ] =
(
−
)
=
=
,
,
=
Variance of 2-stock portfolio:
Beta of stock i:
=
)
=
=∑
(
[
+
]−
)
,
(
)
(
)
,
(
)
=∑
Page 3
Chapter 12: Estimating the Cost of Capital
Deviations from CAPM: ( ) =
Expected return of a bond:
[
+
]−
+
= (1 − ) + ( − )
=
Weighted Average Cost of Capital:
∗
∗ (1 −
)+
∗
Chapter 20: Financial Options
Put Call parity (without dividends):
Put Call parity (with dividends):
=
=
+ −
+ −
( )
(
)−
( )
Page 4