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Formula Sheet -Corporate Finance

Time Value of Money


Future value of a single amount

n
n
i PV FV ) 1 ( + = or
m n
m n
i PV FV

+ = ) 1 (
n
i n
i FVIF ) 1 (
,
+ =
Present value
n
n
i
FV PV
|
.
|

\
|
+
=
1
1
or
m n
m n
m i
FV PV

|
.
|

\
|
+
=
/ 1
1

n
i n
i
PVIF
|
.
|

\
|
+
=
1
1
,

Future value of an annuity
(

+
=
i
i
PMT FV
n
n
1 ) 1 (

(

+
=
i
i
FVIFA
n
i n
1 ) 1 (
,

Present value of an ordinary annuity
(

+
=

i
i
PMT PV
n
) 1 ( 1

(

+
=

i
i
PVIF
n
i n
) 1 ( 1
,

Future value of an annuity due
( ) i
i
i
PMT FV
n
n
+
(

+
= 1
1 ) 1 (

Present value of an annuity due
( ) i
i
i
PMT PV
n
+
(

+
=

1
) 1 ( 1


PV of perpetuity

Interest rate
1 =
n
n
PV
FV
i OR 1
1

|
.
|

\
|
=
n
n
PV
FV
i
Nominal interest rate Rr R r i + + =
Taxes
Imputation Credit = Grossed-up Dividend
- Dividend Received
Grossed-up Dividend = Dividends
Received +
Imputation credit





) 1 ( U T T
eff
=
Valuation of securities
Intrinsic value of an ordinary share
g R
D
V
E
E

=
1

Intrinsic Value of an Irredeemable Preference
Share
p
p
R
D
V =
Value of a bond

=
+
+
+
=
n
t
n
b
t
b
t
b
R
M
R
I
V
1
) 1 ( ) 1 (

n
b b
n
b
b
R
M
R
R
I V
) 1 (
) 1 ( 1
+
+
(

+
=


M PVIF I PVIFA V
b b
R n R n b
+ =
, ,

Value of a redeemable preference share

=
+
+
+
=
n
t
n
P
t
P
t
p
R
M
R
D
V
1
) 1 ( ) 1 (

M PVIF I PVIFA V
p p
R n R n b
+ =
, ,

n
p p
n
p
p
R
M
R
R
I V
) 1 (
) 1 ( 1
+
+
(
(

+
=


Risk and return
Capital assets pricing model
) (
f j f j
R Rm R R + = |
Beta of a portfolio

=
=
n
i
i i p
w
1
| |

Holding period return
( )
1
1

+
=
t
t t
t
P
P DIV
R

Average return
n
R
R
n
i
i
=
=
1
Expected return

=
=
n
i
i i
R P R R
1
*
) (
Standard deviation of expected return

=
=
n
i
i i
R P R R
1
2 * *
) ( ) ( o

Standard deviation of return
( )
1

1
2

=

=
n
R R
n
i
i

Expected return of a portfolio

=
=
n
i
i i p
R w R E
1
) (
Standard deviation of two-asset portfolio
B A AB B A B B A A P
CORR w w w w o o o o o . . . . . 2 .
2 2 2
.
2
+ + =

)(



Covariance Correlation

B A
AB
AB
o o
o
=


Beta
Leverage
Break-even Point
V P
F
BEP
quantity

=
) (

] / ) [( 1
) (
S VC
F
BEP
Voluem



Degree of Combined Leverage





Degree of financial leverage




Degree of operating leverage

Cost of capital
Cost of equity before tax
g
NP
T D
K
BT E
+

=
0
1
,
) 1 /(

Cost of equity after tax
g
NP
D
K
AT E
+ =
0
1
,

Calculating growth rate (g) of dividends
1
0
= n
n
D
D
g
OR
1
1
0

|
|
.
|

\
|
=
n
n
D
D
g

Expected dividend at n
th
period
n
n
g D D ) 1 (
0
+ =
Cost of preference shares (before tax)
p
p
BT P
NP
T
D
K
) 1 (
,

=

Cost of preference shares (After tax)
p
p
BT P
NP
D
R =
,

Cost of bonds before tax
2 / ) (
/ ) (
0
0
,
NP M
n NP M I
K YTM
bt d
+
+
= =
Cost of debt after tax
) 1 (
, ,
T K K
bt d at d
=
Profitability index
IO
k
ACF
PI
n
t
t
t

=
+
=
1
) 1 (

Net present value
IO
k
ACF
NPV
n
t
t
t

+
=

=1
) 1 (

Formula to find indifference level of EBIT
( )(1 ) ( )(1 )
s b
EBIT I T PREFF EBIT I T PREFF
S S

=

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