FORMULA SHEET (to be provided with the exam paper)

A future sum (S) from

principal (P) invested
at simple interest rate
(r) for time period (t):

S = P(1 + rt)

As above except that

interest (i) is paid and
reinvested after each
period:

S = P(1 + i)n

Future value
(continuous
compounding)

S = Pe jn

Present value of
future sum:

Present value
(continuous
compounding)
Effective rate of
interest:

Effective rate of
interest (continuous
compounding)

Mean geometric rate

of return

Present Value of an
Ordinary Annuity
where C is the
periodic cash flow:

Loan term (solving

the present value of
an ordinary annuity
formula for n)

P=

S
(1 i) n

P= Se jn
i = (1 +

j m
) 1
m

i= e j 1

i = 1 + r1 1 r2 ......1 rn n 1
1

P=

C
1
1

i
( 1 i)n

n=

log C/ (C Pi)
log ( 1 i)

or

P
i = n
P0

1
n

Present Value of an
Annuity Due, where
C is the periodic cash
flow:

P=C+

C
1
1

i
( 1 i) n-1

Present Value of a
Deferred Annuity:

P=

Present Value of an
Ordinary Perpetuity:

P =

C
i

Future Value of an
Ordinary Annuity:

S =

C
(1 i) n 1
i

Future Value of an
Annuity Due:

S = C

Real Rate of Interest

(i*)

i*

Zero growth model:

P=
or

C
1
1
(1 i )

i
( 1 i)n

1
C
1

(1 i) k -1 i
(1 i) n

(1 i) n 1
(1 i )
i

1 i
1
1 p

P0

D0
ke

Constant growth
model:

P0

D1
ke g

Variable growth
model:

P0

or

D0 (1 g ) t

t 1

(1 k e ) t

P0

D 0 (1 g )
ke g

n
(1 k e )

Bond Value

D0 (1 g ) n (1 g )

ke g

C
1
Pn
P0 [1
]
n
i
(1 i )
(1 i ) n
or

P0
t 1

It
(1 i )

Pn
(1 i ) n

Net Present Value

Net Present Value in

Perpetuity:

Equivalent Annual
Value:

NPV =

C1
C2
Cn

...
- C0
2
1 + k (1 + k)
(1 + k) n

(1 + k) n
NPV = NPV0

n
(1 + k) 1
EAV

NPV0
or EAV
A n, k)

NPV0
1
1 (1 k ) n

Accounting Rate of
Return:

Benefit-Cost Ratio:

ra =

Benefit - cost ratio =

Variance of returns
on an individual
asset:

2 [ Ri E ( R )] 2 Pi

Expected Return for

Portfolio:

E(R p ) w i x E(R i )

Beta:

Capital Asset Pricing

Model

present va lue of net cash flows

initial cash outlay

E(R i ) R i Pi

Capital Market Line

averageannualearnings
averageannualearnings
or

initialinvestment
averageinvestment

Expected return on
an individual asset:

Variance of the return

on portfolio of two
securities:

i 1

i 1

i 1

2 p w12 12 w22 22 2 w1w2 1, 2 1 2

E ( RM ) R f )
p
M

E ( Rp ) R f

Cov( Ri , RM )
M2

E(R ) R [E(R ) R ]
i

N(M - S)
N 1

Value of a Right

Value of Ex-Right
Shares

Promissory notes

NM S
N 1

F
1 (r )( d / 365)

Value of a levered
firm

VL VU t c D

Weighted Average
Cost of Capital

E
D
k o k e k d (1 t e )
V
V

Economic Order
Quantity

Q*

Total cost of
acquisition and
carrying

TC =

Target cash balance

Upper limit of cash

balance

2aD
c
aD

T* 3

cQ
2

3a 2
above the lower limit, L*
4i

above the lower limit, L*

U* = 3T*