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NAME
FORMULAS
EXPLANATORY NOTES
Value of Debt
Ve
= Net Income
Cost of Equity
= NI
Ke
Vd
= Interest
Cost of Debt
= Interest
Kd
Value of the firm = Value of Equity + Value of Debt
V F = V e + Vd
Decision making
If ROI > Interest Charges Go with that source.
Also the Cost of Debt < Cost of Returns Go with that source.
D.
V
W = weight
E = value of equity
D = value of debt
V = value of firm
Opportunity cost of
capital
Kd = Cost of debt
Ke = Cost of equity
Ko = overall cost of capital
Ko = Ke E + K d D
V
V
or
Ko = KeWe+ Kd Wd
Ke = Risk Free + Business Risk + Financial Risk
= RF + RPa + RP (Ba B d) D
E
Valuation of firm
Valuation of firm
Vf =
Ko = KeWe + KdWd
Favorable when debt quantity is fixed
Adjusted Present Value
Dividend Policy
Walter Model
or
EPS (1- b)
K - br
Derivatives
Future Price
NAME
Return on Share
FORMULAS
Return on Share = Dividend Yield + Capital Gain Yield
= Div. + P1 P0
P0
P0
Portfolio
EXPLANATORY NOTES
Dividend = Par Value x Dividend Rate
P = probability
R = return
(R)x = Expected Return on x security
(R)y = Expected Return on y security
Standard Deviation of
Portfolio
If cor = 1
2p = ( x.wx + y.wy)2
If cor = -1
2p = ( x.wx - y.wy)2
If cor = 0
2p = x2.wx2 + y2.wy2
Minimum variance
portfolio
wx =
y2 - covxy .
x2 + y2 - 2covxy
cov = Covariance
cor = Correlation
covxy = x.y.corxy
p = 2p
w y = 1 - wx
wx = Weight of X security
wy = Weight of Y security
FORMULAS
Future Value (FV)
Present Value (PV)
FV = PV(1+i)n
PV = FV .
(1+i)n
or
or
FV = PV x CVF
Annuity
(Regular Annuity)
PV = FV x PVF
PVA = FVx PVFA
FVA = PV x CVFA(i,n)
or
FVA = A / PV [ (1+i)n-1
i
or
PVA =
FV / A .
[(1+i)n-1]
i
EXPLANATORY NOTES
r = i (is in decimal)
n = t = time period
Regular annuity = annuity at the end of the year
Annuity Due = annuity at the beginning of the year
Annuity
(Annuity Due)
FVA = PV x CVFA(i,n)
or
or
FVA = A [ (1+i)n-1
i
](1+i)
PVA = A [ (1+i)n-1
i (1+i)n
](1+i)
Valuation of Securities
1. Value of Bonds
C
+
(1+r)t
(Annuity)
MV
.
(1+r)n
(Lumpsum)
or
Int
(1+Kd) t
(Annuity)
Bn .
(1+Kd) n
(Lumpsum)
or
VB = Int * PVFA + MV * PVF
Yield to Maturity
YTM=
C+
M-P
n
.4M +.6P
M = Maturity Value
P = Present Value
Int = Face Value x Coupon Rate
Or
Amount of Interest
Current Value of Bond
Vp =
Div
+
Redemption Value
(1+r)t
(1+r)n
(Annuity)
(Lumpsum)
.
Valuation of Preference
Shares
or
Vp = Div * PVFA + RV * PVF
FORMULAS
Po = Div1 + P1
(1+r)
No growth Model
P0 = Div1
ke
P0 = Div1
ke- g
or
P0 = EPS (1-b)
ke- g
P0 = Div1
1-(1+g1)n
1+r
r-g1
D1(1+g1)n-1(1+g2) x
r-g2
1 n
1+r
EXPLANATORY NOTES
Po = Current Price
Div1 = Dividend expected a year hence
P1 = Price of share expected after a year i.e P1 = P0(1+g )
r = Rate of Return
Price-Earning Approach
P0 = EPS + Vg
ke
Vg = NPV1
ke-g
or
Capital Budgeting
Payback Period
NPV
Average Profit
Average Investment
+ Scrap Value
Cost of Capital
Cost of Debt
Irredeemable
Cost of Debt
Redeemable
Kd = Interest / Bo
B0 =
INT + MV
(1+ kd) t (1+ kd) n
t=1
Cost of Irredeemable
Preference Shares
kp = PDIV
P0
Cost of Redeemable
Preference Shares
P0 =
Normal Growth
Supernormal Growth
PDIV + Pn
(1+kp)t (1+ kp)n
.
t=1
kp = Div + g
P0
or
= EPS (1-b) + g
P0
P0 =
Div0(1+gs)t + Pn
(1+ke)t
(1+ ke)n
.
t=1
Ke = Div.
P0
or
Zero Growth
= EPS(1-b)
P0
= EPS
Po
CAPM Approach
[ as b= 0]
ke = Cost of Equity
Rf = Risk free rate
(Rm Rf) = Risk Premium
kp = Cost of Preference Shares
kd = Rf + (Rm Rf) d
kd = Cost of Debt
OTHERS
Real Rate
Nominal Rate