LIST OF FORMULAE

Variable Definitions:
m = number of times interest is compounded per year
n = number of years or, in annuity formulae, the number of payments
r = rate of return
i = interest rate applied to each year or, in annuity formulae, the effective rate per compounding
and payment period
g = rate of growth
PMT = payment each period
PV = principal or present value
FVn
= future value or compound amount after n years
Pt
= price at time t
Ct
CFt
or
= any cash flow (i.e. dividends, net cash flow) associated with ownership of the asset at
time t.
rj
j
= required return on asset
bj
= beta coefficient of asset/portfolio j
RF
= risk free rate of return
rm
= required return on the market portfolio
I = annual interest payment
M = par (face) value of a bond
Dt
= dividend for period t
Dp
= dividend for period t
C0
or II = initial investment
TR
T or = effective company income tax rate
Pri
= probability of state of nature i occurring
FVt
For simple interest: FVt PV (1 it ) PV
1 it
i

Compound interest: FVn ,m PV 1

m

mn

i
PV FVn 1

( mn )

i
Effective annual rate of interest EAR 1 1
m

FVAn
PVAn

PMT [(1 i ) n 1]
i

(future value of ordinary annuity)

PMT [1 (1 i ) ]
i

(present value of ordinary annuity)

Future value ordinary annuity for n years compounded m times a year:

i
PMT 1
1
m

FVAn ,m
i

m
Present value ordinary annuity for n years compounded m times a year:

n m

PVAn ,m

PMT 1

i
1
m
i

n m

PMT [1 (1 i ) n ]

PVAn (due) (1 i )

PMT [(1 i ) n 1]

FVAn (due) (1 i )

PMT
i

FVAn ,m (due) 1
m

i
1
m
i

m

n m

PVAn ,m (due) 1
m

n m

PMT
1

PMT
i

PVA

PMT
PVA
i

(present value of ordinary perpetuity)

PMT (due)

P1 P0 C1
P0

(return earned on a particular asset over a given period from time 0 to 1)

n

r ri Pri
t 1

(expected return where there is a discrete probability distribution of returns)

n

(r r )

i 1

Pri

(standard deviation of returns where there is a discrete probability

distribution of returns)
n

r
i 1

(sample/historical mean return)

n

(r r )
i 1

n 1

(Sample/historical standard deviation of returns)

sd
Coefficient of Variation=CV r 100%
100%
r
mean

Standard deviation of

returns to a portfolio of 2 assets

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

security market line rj RF b j ( rm RF )

(rm-RF = market risk premium) (bj (rm-RF) = the risk premium for an individual asset)
Value of Bond
B0

I [1 (1 rd ) n ]
M

(Compounded annually)
rd
(1 rd ) n

I
rd

1 1
m
m

B0
rd

m

( n m )

M
rd
1
m

( n m )

(Compounded 'm' times a year)

P0

D1
rs

(Share value, constant dividend)

D0 (1 g )
P0
rs g
(Share value, constant dividend growth)
N
DN (1 g 2 )
D (1 g1 )t
1

P0 0

t
N
(1 rs )
(1 rs ) rs g 2
t 1
(Share value, variable dividend growth)
n
CFt
NPV
CF0
t
t 1 (1 r )

ANPV

NPV
PVIFAr ,n

(annualized net present value)

ra wi ri w p rp ws rs
ri rd (1 T )
(weighted average cost of capital), where

TR
franking ratio
1 TR

dividend

Tax credit

break even sales volume

(dividend imputation tax credit)

FC
Q
P VC

DOL

% Change in EBIT
Q ( P VC )

% Change in sales ( revenue) Q ( P VC ) FC

DFL

% Change in EPS

% Change in EBIT

DTL

% Change in EPS
DOL DFL
% Change in sales revenue

EBIT
1

EBIT I D p

1 T

V L VU TD

(value of financially leveraged firm under Miller-Modigliani capital structure

irrelevance assumptions, except for existence of corporate taxes)
Ratio of Exchange

amount paid per shar e of target company

market price per share of acquiring comp any

MPR

MPacquiring RE
Price paid per share of the target firm

market price per sha re of the target firm

MPtarget

Operating and cash conversion cycle formulae:

OC AAI ACP
AAI

ACP

365
(Annual) C ost of Goods Sold
Average In ventory

Average Ac counts Rec eivable

Annual Credit Sales
365

CCC OC APP
APP

Average Ac counts Payable

Annual Credit Purchases
365

Resources invested in the CCC = Inventory + Accounts receivable Accounts payable