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Finance 331: Principles of Financial Management
STUDY GUIDE (FORMULAS) (CHAPTERS 5-9, 13, 14)
CHAPTER 5-6:
Future Value:
FVN = PV(1+I)^N
Present Value: PV = FVN/(1+I)^N
Ordinary Annuity:
Annuity Due:
FVdue = FVordinary(1+I)
PVdue = PVordinary(1+I)
Effective Annual Rate: (1+Inominal/M)^M – 1
FVN = PV(1+Inominal/M)^MxN
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NOTE: Iperiod
= Inominal/M*
*M = # of compounding periods
CHAPTER 7:
Coupon Payment: Coupon Interest Rate x Par Value
Bond Selling At:
Par Value:
When, Yield-to-Maturity = Coupon Rate
Premium:
When, YTM < CPR
Discount:
When, YTM > CPR
The Fisher Effect:
(1+R) = (1+r)(1+h)
NOTE: R = Nominal Rate, r = Real Rate, h = Inflation Rate
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CHAPTER 8:
Computing Future Dividends:
Constant Dividends:
Constant Growth Rate:
P0 = [D0(1+g)/R-g] = D1/R-g
P0 = D/R
Non-Constant Growth:
-Use Timeline
-Find Future Dividend and Price
-Find PV of each then ADD
R = [D0(1+g)/P0]+g = [D1/P0] +g
Value of a Perpetuity:
P0 = D/R
Pt = Benchmark PE Ratio x Earnings-Per-Share
or
Pt = Benchmark Price-Sales Ratio x Sales-Per-Share
NOTE: Compute the future dividend stream based on the dividend growth rate (if using a timeline). Use the dividend growth model to
determine the price of the stock.__________________________________________________________________________________________
CHAPTER 9:
Technique
Payback
Discounted Payback
Net Present Value
Internal Rate of Return
Units
Time
Time
Money ($)
Percentage (%)
Accept if
Payback < Management’s #
Payback < Management’s #
NPV > $0
IRR > R (Required Return)
Mutually Exclusive Projects:
Choose project with the higher NPV or (if NPV is not used) choose project with the higher IRR.
If there is a conflict between NPV and another decision rule, you should always use NPV.
NPV directly measures the increase (or decrease) in value the project provides to the firm.
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CHAPTER 13:
Return: [Expected Ending Value – Cost /Cost]
Expected Return: (The sum of each return times their respective probabilities)
Coefficient of Variation: CV = (Variance/Expected Return), measures the risk per unit of return
Stand-Alone Risk (Total Risk):
= Market Risk (Systematic Risk, measured by Beta)
+ Diversifiable Risk (Unsystematic Risk, measured by Standard Deviation)
Beta:
Measures stock’s market risk by showing the volatility relative to the market
Indicates how risky a stock is if the stock is held in a well-diversified portfolio
Capital Asset Pricing Model:
Expected Return = Risk-Free Rate + (Market Return – Risk-Free Rate) x Beta
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CHAPTER 14:
Weighted Average Cost of Capital:
Cost of Equity: P0 = D1/R-g

R = D1/P0 + g
Cost of Preferred Stock: P0 = D/RPS
Cost of Debt:

or
R = Risk-Free Rate + (RM – RF) x Beta
RPS = D/P0
Yield-to-Maturity
Equity Market Weight/Value: Number of shares outstanding x the market price of one share
Debt Market Weight/Value: Number of bonds outstanding x the market price of one bond
WACC:
WACC = (Weight of Equity x Return of Equity) + (Weight of Preferred Stock x Return of Preferred
Stock) + [(Weight of Debt x (Return of Debt)(1 – Tc)]
Note: Use after-tax cost of debt = Rd(1 – Tc), where Tc is corporate tax rate