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BA 640 Formula

Chapter 6 Risk and Return

1) Rate of return = Amount received - Amount invested


Amount invested
n

k = k i Pi

2) Expected rate of return

Pi = Probability ,

ki = Rate of return

i =1

Calculator 1) Selecting Mode LR : MODE 5


2) Clear Data : CST EXE AC
3) Insert return before : -22 ALFHA Nj 0.1 MAR SHIFT 1 EXE
x
;
DT

= Variance =

3) Risk or Standard deviation

(k
n

i =1

)P
2

Calculator 1) Insert return before : -22 ALFHA Nj 0.1 MAR SHIFT 2 EXE
x n
;
DT

CV

4) Coefficient of variation

Risk / Return =

/ x

5) Beta coefficient ( ) Calculator

insert Mkt. before : 25.7 ALFHA CFj 40 MAR SHIFT 8 EXE

,
DT
insert Mkt. before : 25.7 ALFHA CFj 40 MAR SHIFT 9 EXE
,
DT
r

6) Correlation ( r ) Calculator
( -1 < r < 1 )

wi ki

7) Expected return on a portfolio k p =

, Risk on a portfolio

i =1

(k
n

i =1

pi

k p

8) Security Market Line (SML) : ki = kRF + (RPM)bi


Required return = Risk-free return + Premium for risk
Required return on stock i = Risk-free rate of return + (Market risk premium)(Stock i s beta)
Chapter 9 Bonds and Their Valuation
1) PV =

CF1

CF2

(1+ k) (1+ k)
1

+ .....+

CFn

(1+ k)n

Calculator 1) Selecting Mode FIN : MODE 4

2) Clear Data :

SHIFT AC EXE AC

3) PV = 10 n 10 i% 100 PMT 1000 FV COMP PV EXE


2) Yield to maturity (YTM) or kd = 10 n -887 PV 90 PMT 1000 FV COMP i% EXE
Chapter 10 Stock and Their Valuation
1) Stock Value

D1
D2
D3
D
+
+
+
.
.
.
+
(1+ ks )1 (1+ ks )2 (1+ ks )3
(1+ ks )
D (1 + g )
D1
D1
P0 = 0
=
+ g
3) k s =
ks g
ks g
P0

2) If g is constant, then
3) k s

4)

P0 =

= PV of Dividends

= Actual dividend yield + Actual capital gains yield

V ps =

ps

ps

k ps =

or

D ps
V ps

5) Use the SML to calculate kS ;

kS

Chapter 11 The cost of Capital

1) After-tax component cost of debt = kd ( 1-T )

2) The cost of preferred stock

ps

kRF + (kM - kRF) bFirm

ps

Pn

)P
2

3) Weighted Average Cost of Capital (WACC) ;


4)

ks = k s

WACC = wdkd (1-T) + wpskps + wceks

= kRF + RP = D1 / P0 + expected g

5) ks = Bond yield + Risk premium


6) g = (Retention rate)(ROE) = (1.0 Payout rate)(ROE) = b(ROE)
Chapter 13 The Basics of Capital Budgeting : Evaluating Cash Flows
1) Payback period = Year before full recovery + Unrecovered cost at start of year
Cash flow during year
2) Net Present Value (NPV) : Sum of PVs of inflows and Outflows = PV inflow PV outflow

NPV

t=0

Calculator

CF t
(1 + k )t

-100 CFj 10 CFj

NPV =

or

t =1

60 CFj 80 10 i% COMP NPV EXE

3) Internal Rate of Return (IRR) : NPV =0 ;

IRR =

CF t
IRR

(1 +
t=0

Calculator

-100 CFj 10 CFj

CFt
CF0
(1 + k )t

)t

= 0

60 CFj 80 10 i% COMP IRR EXE

4) Modify Internal rate of return (MIRR) : PV costs = PV terminal value

: PV costs =

TV
(1 + MIRR ) n

Chapter 8 Time Value of Money

FVn = PV (1 + i )

1)

2)

FV

or

PV

= PV 1 + Nom
m

FV

(1 + i )n

= FV

1+ i

mn

or

Effective annual rate

= 1 + Nom
m

mn

1 .0

Chapter 14 Cash Flow Estimate and Risk Analysis


1) Net Proceeds from sales (NP) = MV + Tax
= MV + Tax rate ( MV-BV)
2) Net operating working capital (NOWC)

; MV = Market value
; BV = Book value

All current assets that _ All current liabilities that


do not pay interest
do not pay interest

= Operating current assets operating current liabilities


3) Operating capital = (Net operating working capital) (Net plant and equipment)
4) NOPAT = Net operating profit after taxes = EBIT(1-Tax rate)
5) Operating cash flow (OCF) = NOPAT + Depreciation = EBIT(1-Tax) + Depreciation
= (Sales CGS Operating Expense depreciation)(1-Tax) + Depreciation
= (Sales CGS Operating Expense)(1-Tax) + (Depreciation x Tax)
6) Free cash flow (FCF) = Operating cash flow - Gross investment in operating capital
= NOPAT Net investment in operating capital
7) Free cash flow (FCF) = EBIT(1-Tax) + Depreciation + NWC + CAPEX
8) EBIT = Sales CGS Operating Expense depreciation
= Sales Variable Cost Fixed Cost