z r

l1
n
n
ArlLhmeLlc Mean (AM)
CeomeLrlc Mean (CM) (1+r
1
) x (1+r
2
)
CeomeLrlc Mean (CM) (1+r
1
) x (1+r
2
) x (1+r
3
)
3
?CM ower ((1+r
1
) x (1+r
2
) x (1+r
3
) 1/3) 1
Lxce| GM ower ((1+r
1
) x (1+r
2
) 1]2) 1
I
2
I

x (1+r
1
) x (1+r
2
) I

x (1+y)
2
I
L
I

x (1+CM)
L
I
L
I

x (1 + )
m

L A8
m
Lxce| V
t
V
0
x (ower (1+ ) m x t)
Ak
m
I
L
I

x (1 + )
mxL
r
m
Annual m1
SemlAnnual m2
CuarLerly m4
MonLhly m12
ually m363
ConLlnuous m~
LA8r
efL
(1 + )
m
1
A8
m
Lxce| LAkr
eft
ower (1+ m) 1
Ak
m
I
L
I

x (e
r
)
L
Lxce| V
t
V
0
x exp (r x t)
Convers|on of the annua| return
to sem| month|y
r (1+r
annual
)
m
(1 + r)
m
1+r
annual
Compound|ng Interva|s lf lnLeresL ls pald aL lnLervals less Lhan one year Lhen lnLeresL wlll compound over Llme
LA8r
efL
e
A8
1
Lxce| LAkr
eft
exp (Ak) 1
LAk (r
eft)
equ|va|ent effect|ve annua| rate of |nterest
loans have dlfferenL A8 so LhaL can be compared wlLh LA8
nonConLlnuous
ConLlnuous
r
efL
A8
Cont|nuous Compound|ng
1
If |nterest rate var|es from per|od to per|od ca|cu|ate average (mean) rate of return for a per|od on the |nvestment
AMCM
(1 + )
A8
m
CrowL
h
facLor

lnLeresL raLe always quoLed as A8

W bank loan lnLeresL raLe
W bank loan deposlL raLe
W bond coupon raLe
W bond ylelds
W dlvldend ylelds
W lnvesLmenL reLurn (elLher CM or AM)
Always need Lo know compoundlng lnLerval
uSL LAk Lo compare loans wlLh dlfferenL
compoundlng lnLervals
Annual average growLh raLe (nonconLlnuous) Annual average growLh raLe (conLlnuous)
I
L
I

x (1+y)
L
I
L
I

x (e
y
)
L
I
L y ( ) 1
I

1
L
y x (ln ) 1 I
L
I

1
L
? average yleld of reLurn (Lhe
average reLurn on lnvesLmenL
unLll maLurlLy (CM))
I
1
r 1
I

ne erlod
lnLeresL raLe (yleld)

x (1+r)
1
+ulI
(
1

)+ulI
r

I
1
I

x (1+r) I
n
I

x (1+r)
n
I
@
I

x (1+r
1
)
@1
x (1+r
2
)
@2
CaplLal galns + lncome
r
lnlLlal lnvesLmenL
I|na| va|ueIn|t|a| va|ue x Growth factor
keturn on Assets
Income and Cap|ta| Ga|ns (rreturn)
Grow|ng Cash I|ow
1L8lu 2L8luS nL8luS @L8luS ulfferenL lnLeresL raLe
kCI return on Investment
Caln from lnvesLmenL CosL of lnvesLmenL
8l
CosL of lnvesLmenL

1
+ulI
r 1

lncome
SLocks ulvldends
8onds lncome ln lnLeresL whlch ls deLermlned by
lnLeresL raLe
real esLaLe 8enL
Lxce| I|na| Va|ue V
0
* (power( 1+r n)
I
2
I

x (1+r)
2
Compoundlng of
lnLeresL
|scount|ng kates (for nomlnal and real Cash flow) Cne per|od present va|ue (V)
Mu|t|p|e per|ods present va|ue (V)
I C x
1
1+r
I
n
C x( )
n
1
1+r
I C x ul
I
n
C x (ul)
n
kece|ve Cash I|ow (CI) every per|od for mu|t|p|e per|ods present va|ue (V)
I C
1
x ul
1
+ C
2
x ul
2
+ C
3
x ul
3
++ + C
n
x ul
n C
1
x
1
1+r
I C
2
x
1
1+r
2
C
3
x
1
1+r
3
C
n
x
1
1+r
n
+ + + +
Growth kates (for nomlnal and real Cash flow)
nomlnal growLh raLe 1+r
1+r
8eal growLh raLe
1+l
1
nomlnal ulscounLlng lacLor (ul)
1+r
1+ l
8eal ulscounL raLe
1+ r
1+ l
1+ r
1
Net present va|ue (NV)
nI ICo
Lxce| NV (rate (S) Va|ue 1 Va|ue 2 Va|ue n) Co
Net present va|ue (NV) kLAL CI
nI
C
1+r
+
Cx (1+l)
(1+r)
2
++
Cx (1+l)
n1
(1+r)
n
Co
1+r
1+ r
real

1+l
Ck
1+r
r
real
1
1+l
nI ( ) x ( 1 )
(1+r
real
)
L
1 C
1
r
rea
l
C
C
1

1+ l
IkkInterna| kate of keturn (hurd|e rate)

C
1
1+lrr
+
C
2
(1+lrr)
2
++
C
n
(1+lrr)
n
Lxce| Ikk Ikk (a1a6 0)
If |rregu|ar kIkk (A1a6 0)
Mod|f|ed rate of return MIkk (va|ues rate new rate)
I
C
1
+
C
2
++
C
n
y
n
1+
2
y
n
1+
L
y
n
1+
8onds and Notes
8onds ald 2 Llmes per year n2 (number of compoundlng perlods per year
@he bonds prlce corresponds dlrecLly Lo Lhe yleld demanded by lnvesLors
@o flnd y use Ikk(a1a6 0)*2 (lnclude cosL of Lhe lnvesLmenL and all Cl)

C
1+l88
+
Cx (1+g)
(1+l88)
2
++
Cx (1+g)
n1
(1+l88)
n
Va|ue of erpetu|ty
I C x
1
r
I
C
r
r|ce of Annu|ty (V)
I
lI
(1+r)
L
I ( ) x ( 1 )
(1+r)
L
1 C
r
Lxce|
V C]r x (1 ower (1+r t)
Va|ue of Annu|ty (IV)
C
lI ( ) x (1+r)
L
1
r
lIIx (1+r)
L
Lxce|
IV C]r x (ower (1+r t) 1)
C
(1+r)
L
1
lI x r
Lxce|
C IVx r ](ower (1+r t) 1)
1ax and IV lIIx (1+r)
n
x (1Lax)
n
Lxce|
C V x r ](1 ower (1+r t)
Cne extra payment
I Cx ( 1+ ) x ( 1 )
(1+r)
L
1
1
r
I
C
1+r
+
Cx (1+g)
(1+r)
2
++
Cx (1+g)
n1
(1+r)
n
CI growth at rate g and d|scount|ng (y r)
V of grow|ng Annu|ty
I ( ) x ( 1 )
1 + r
1 +g C
rg
L
C
I x r
1
(1+r)
L
1
1|me per|od of va|ue of annu|ty IV
L
log (1+r)
log
lI
I
1|me per|od of V
L
log (1+r)
log
1 r x I
C
L
log (1+r)
log
1 + r x lI
C
Cash f|ow repayments
If compound|ng
I x 1
(1+ r )
m x L
1 C
r
m m
I ( )
(1+r)
L
1 C
r
C
r
8CUGn1 perpetu|ty
SCL perpetu|ty at per|od 1
SnAkLS
ulI

r g
ulI
r + g

LS

r

ulI
1+r
+
ulIx(1+g)
(1+r)
2
++
ulIx(1+g)
n1
(1+r)
n
r|ce |v|dend growth mode| of stock mode|s a share as a c|a|m on a stream of
d|v|dends that grows at a constant tare |nto the future
In terms of d|v|dend share |s a growlng perpeLulLy
1ota| return on stock
(
1

) +ulI
@S8 r

(1+ g)

2

1
(1+ g)
ulI
2
ulI
1
(1+ g)
|v|dend and cap|ta| ga|n |n each future per|od
|v|dend y|e|d (rat|o of d|v|dend to share pr|ce)
ulI
ulv yleld
rlce
ulv yleld r g
L kat|o
MarkeL caplLallsaLlon (MkL Cap) (number of Shares lssued) x (rlce per Share)
MkL Cap
L raLlo
neL lncome
rlce per Share
L raLlo
neL lncome per share

L raLlo
LS
LS
I + IC
r
VGC (present va|ue) as a funct|on of Market cap|ta||sat|on
IC

LS

1
r
1 x
IC

1
/L
1
r
1 x
ulvldend pald aL Lhe end of Lhe year (known)
g C8J@ 8A@L of dlvldends (grow aL g per year ln all fuLure years)
r CAl@ALlSA@ln raLe reLurn expecLed on slmllar shares
(r esLlmaLed glves g and vlce versa
prlce (known)
ls Lhe amounL LhaL musL be lnvesLed Loday aL Lhe reLurn of r Lo
dellver requlred dlvldend and caplLal galn ln each fuLure perlod
|nc|udes cap ga|n
W ln Lhe model boLh dlvldend and prlce grow aL g per year so
Lhe dlvldend yleld ls consLanL (rg)
W prlce doesn'L lmply requlred reLurn (yleld) because Cl musL me
modeled uslng g (model noL exacL)
W ulLlmaLe deLermlnanL of value of lnvesLmenLs ls lLs
capaclLy Lo generaLe earnlngs
WLS and /L raLlo key meLrlcs Lo value shares
W /L raLlo share prlce per dollar of @uA?'S earnlngs
I of perpeLual sLream of
currenL earnlngs
nI of growLh
opporLunlLles
ueLermlnanLs of Lhe lnvesLors J@ per $ of currenL earnlngs
W rlsklness of Cl (rlskler less J@ for shares
W growLh opporLunlLles
lf flrm larger opporLunlLy Lo lnvesL ln poslLlve nI pro[ecLs recognlsed by hlgher sLock prlce
lf /L raLlo hlgher Lhe larger Lhe growLh opporLunlLy of flrm (larger IC)
ln Lhe dlvldend dlscounL model
W rcaplLallsaLlon raLe raLe aL whlch mkL dlscounLs Lhe sLream
of fuLure dlvldends Lo geL Lhe currenL sLock prlce)
W share value ls a sum of perpeLulLy of currenL earnlngs
W share ls Lhe growLh opporLunlLy of Lhe flrm
W llrm has consLanL earnlngs and pays Lhem all ouL
LS d|v g0
W lf flrm relnvesLs some of earnlngs and earn a
reLurn r Lhen earnlngs wlll grow LS d|v g 0
W lf flrm geLs reLurn h|gher Lhan r Lhen
ulI

r g
LS

r

ulI
1
1+r
+
ulI
2
(1+r)
2
++
ulI
3
x erpeLulLy
(1+r)
3
erpeLulLy
ulIx(1+g)
n
r
AnnulLy
4
z x
l
l1
n
n
Sample Mean ( x )
z (x
l
x )
l1
n
n
Sample Iarlance ( Su
2
)
z (x
l
x )x (?
l
?)
l1
n
n
Covarlance
SuvIarlance
SLandard Lrror (SL)
v n
Su
Covarlance (x y) CorrelaLlon (x y) x Su(x) x Su(y)
CorrelaLlon
Su(x) x Su(y)
Covarlance (x y)

Lr
A
r
f
L M8 Lr
A
r
f
+ x(M8)
Lr
A
r
f
+ 8lsk remlum + LlquldlLy remlum
Lr
A
r
f
+
A
x Lr
m
r
f

correlaLlon (r
a
r
m
) x
Su
a
Su
m
(p
am
) x
o
a
o
m
kISk (tota| systemat|c + d|vers|f|ab|e)
Compensat|on for r|sk bear|ng
8equlred reLurn r r
f
+ rlsk premlum + llquldlLy premlum
r
f
Llme value of money (opporLunlLy cosL of lnvesLlng ln rlsk free (hlghly llquld) asseL ln Lhe
yleld of governmenL debL of Lhe same duraLlon
r|sk prem|um rlsklness of Cl( cosL of bearlng rlsk for rlskler asseLs demand hlgher reLurn
(buL don'L have compensaLlon for rlsk LhaL can be dlverslfled away lnvesLors demand
compensaLlon only for S?S@LMA@lC rlsk)
||qu|d|ty prem|um llllquldlLy of Lhe asseL (Lhe cosL of glvlng up Lhe llquldlLy demand hlgher
reLurn on lnvesLmenLs LhaL have lower asseL llquldlLy)
ulscounL raLe lncludes compensaLlon for absorblng rlsk (buL excludes rlsk LhaL can
be ellmlnaLed by cosLless dlverslflcaLlon)
M8 r
sLock markeL
r
@bllls
Market r|sk prem|um (Mk) return on the stock market m|nus return on r|sk free assets
Norma| |str|but|on (68 2S 9S 4 S 997 6 S)
Confldence lnLerval
Mk random varlable normal dlsLrlbuLlon
z (r
m
r
f
)
l1
n
n
M8 Mean
Iar (x)
(Su (x)
2
)
4
2
x (23)
2
Cov (xy)
Su(x) x Su (y)
4 x 6 x (43) x (23)
Cov (xy)
Su(x) x Su (y)
4 x 6 x (43) x (23)
Iar (y)
(Su(y)
2
)
(6)
2
x (3)
2
x
x
y
y
Iar (3x + 4y) 3
2
Iar(x) + 4
2
Iar(y) + 2x3x4xCovar(xy) (Iar Su
2
eg Su33 Iar33x33 )
Iar (x
1
+ x
2
+ + x
12
) Iar(x
1
) + Iar(x
2
) + + Iar(x
12
) 12xIar (x
1
)
SuvIar (x
1
+ x
2
+ + x
12
) v12xIar (x
1
) v12 x Su (x
1
)
Iar (r
p
) 4
2
Iar(r
1
) + 6
2
Iar(r
2
) + 2x4x6xCovar(r
1
r
2
)
L g SLock 14 sLock 26 Lr
1
14

Lr
2
12 Su(r
1
)23

Su(r
2
)3 CorrelaLlon 43
Suv4
2
x (23)
2
+ (6)
2
x (3)
2
+2 x 4 x 6 x (43) x (23) x (3)
ortfo||o Var|ance
Lr
porLfollo
(4) x Lr
1
+ (6) x Lr
2
(4 ) x (14) + (6) x (12) 12
CAM (Cap|ta| Asset r|c|ng Mode|)
r
f
Llme value of money

A
on asseL A (amounL of markeL rlsk)
Lr
m
r
f
expecLed markeL rlsk premlum ln Lhe nexL perlod
M8 requlred reLurn per unlL of markeL rlsk
CAM (components)
of LoLal rlsk remalnlng afLer dlverslflcaLlon ln porLfollo correlaLlon beLween sLock a and Lhe markeL
LoLal rlsk broughL lnLo Lhe porLfollo as a mulLlple of Lhe markeL rlsk
Su of reLurn on sLock a
Su of markeL porLfollo reLurn
r
m
r
f

Su
year
v12 x Su
monLh
v12
Su
monLh

Su
year
Su (reLurn) of Lhe year from monLh daLa Su of Lhe monLh from year Su on reLurn
Jhen 2 or more sLock ln porLfollo

a
(p
am
) x
o
a
o
m

b
(p
am
) x
o
b
o
m
8
porLfollo
J
a
x
a
+ J
b
x
b
1) CalculaLe beLa of each sLock
2) 8eLa of porLfollo ls a sum of
welghLed (welghL of Lhe sLock
ln porLfollo ln )
3
Components of ILL
?leld r
f
+ credlL spread + llquldlLy spread
r
f
rlsk free raLe of lnLeresL
Iarles accordlng Lo lengLh of Llme Lo maLurlLy of Lhe bond
ls lL @lML Ialue of money
dlffers across currencles
credlL spread compensaLes lnvesLors for Lhe rlsk of defau|t by lssuers of flxed lncome securlLy
llquldlLy spread compensaLes bond holders for |ow asset ||qu|d|ty (loss of value lf bond musL be qulckly sold)
lnLeresL
raLe
A8 rlnclpal $ @erm monLhs
MonLhly
raLe
A8/12 AnnulLy facLor
(1JL8(1+ monLhly
raLe) Lerm ln monLhs
MonLhly
paymenL
rlnclpal x MonLhly raLe /
AnnulLy lacLor
1|me Cashf|ow I CI We|ghts We|ghts x 1|me Start|ng pr|nc|pa|
1 MonLhly aymenL
JL8(1+A8/12
Llme)
(Cl) x ul uCl / SuM of uCl
welghLs x (Llme / 12)
(12 monLhs)
orlglnal loan
orlglnal loan (monLhly paymenL
monLhly paymenLs x monLhly raLe)
amounL from prevlous cell (monLhly
paymenL monLhly paymenLs x monLhly
raLe)
1|me Interest payment r|nc|pa| repayment
month|y
repaymet
1 sLarLlng prlnclpal for Lhe perlod (Llme) x MonLhly raLe MonLhly repaymenL lnLeresL repaymenL consLanL
urat|on and Loan amort|zat|on
UkA1ICN
1 Mot|vat|on change ln prlce of flxed
lncome lnsLrumenL for a 1 change ln yleld

C
1
+
C
2
++
C
n
y
n
1+
2
y
n
1+
L
y
n
1+
uuraLlon
A rlce
A (1 + y)
A

A (1 + y)
(1 + y)

2 Ca|cu|at|on a welghLed average lengLh of Llme Lo recelve Cl
uuraLlon z
l1
@
(JelghL on cash flow L ln Lhe I of Cl x Llme of recelpL of Cl L)
SUM of welghLs 1
A
A (1 + y)
(1 + y)
x u
orlglnal loan amounL
y A8/Llme (12 monLhs)
lf lnLeresL raLe 8lSL for 1 from 77
Lo 7 Lhen I of Lhe loan wlll fall
(calculaLed by delLa )
UkA1ICN
ALSC use Ikk (prlnclpal () paymenLs (c) compoundlng perlod (n)
1) use Ikk ln excel Lo fln y
2) use y ln formula Lo deLermlne duraLlon
uu8A@ln
C
1
+
C
2
++
C
n
y
n
1+
2
y
n
1+
L
y
n
1+
I I I
1 x 2 x n x
I of Cl
@oLal I
(
1

x u x A (1 + y)
ld value
A (1 + y)
use coupon raLe and yleld raLe
Lo deLermlne change ln yleld see how lL
changes compared Lo coupon raLe or
any oLher yleld menLloned ln Lhe LexL
6
Cap|ta| 8udget|ng
C

lnlLlal cosL funded by uebL and LqulLy

8evenue
peraLlng Lxpenses (subLracL from
revenue CosL Coods Sold (CoCS) +
Ceneral selllng expenses (CSL) +
uepreclaLlon)
Cash flow Lo Lhe Lax offlce
(@c effecLlve corporaLe Lax
raLe)
CaplLal LxpendlLure (Capex) on long Lerm asseLs
Change ln worklng caplLal requlred (AJC8)
or (AnJC change ln neL worklng caplLal)
AfLerLax cash
flow Lo
shareholders and
debLholders (Lhls
Cl ls dlscounLed ln
cap budgeLlng
process Lo ensure
we have only one
seL of Cl Lo
dlscounL
(dellberaLe flcLlon))
C
t
L8I1
t
(11c) + ep
t
WCk Capex
t
)
eprec|at|on
Add afLer Lax offlce
Cl noncash
expense reflecLs LhaL
Lhose Cl are Lo be
pald Lo lnvesLors or
used ln Lhe flrm)
L8I1
lrom revenue Lo lnvesLors Cl dlagram conLalns
dellberaLe flcLlon
@he remalnlng Cl L8l@ Larnlngs 8efore lnLeresL and @ax
@Ax ls applled Lo L8l@
JACC x r
L
+ x (1 @c) x r
u
L
L + u
L
L + u
nI C

+
C
1
1+JACC
+
C
2
(1+JACC)
2
++
C
n
(1+JACC)
n
Leverage
8uslness 8lsk
r
L
u
r
A

L
r
L
L
r
L
u
8eLurn due Lo buslness rlsk r
A

L
r
L
L
8eLurn due Lo buslness rlsk +
reLurn due Lo leverage rlsk
Leverage of Lhe Lerm ln markeL
value Lerms
Lr
L
r
f
+
L
x (MarkeL 8lsk remlum)

L

o
LM
o
2
M
Cov (r
L
r
M
)
Iar (r
M
)

u
L
8eLa due Lo buslness rlsk
A

L
L
8eLa due Lo buslness rlsk +
+ 8eLa due Lo leverage

L
u

A
or

L
L
or
Lqu|ty 8eta and Asset 8eta
kequ|red return on Lqu|ty
8eLa and reLurn on equlLy separaLe graphs for space
reason all on one graph
Income tax on d|v|dend
Crossed up value
ulvldend
(1 CorporaLe @ax raLe)
1)
2) lncome @ax (Crossed up value) x (Marglnal personal Lax raLe)
3) lmpuLaLlon @ax credlL (Crossed up value) x (CorporaLe Lax raLe (3)
Income tax payab|e Income tax Imputat|on tax cred|t
L8@
L8@ x (1@
8
)
ulvldend
8eLalned
Larnlngs
CorporaLe Lax
(L8@) x @
8
@ax payable Crossed up ulvldend x (@

@
8
)
ulv
1 @
8
@ax payable x (@

@
8
)
@

Marglnal personal Lax raLe

@
8
AcLual CorporaLe Lax raLe
Crossed up ulvldend ulvldend before Lax
u
L
r
L
L
r
A
+ x (r
A
r
u
)
r
A
8equlred reLurn on Lhe equlLy of Lhe
unLLIL8Lu flrm
r
L
8equlred reLurn on Lhe equlLy
of Lhe levered flrm
r
u
L
r
A
when Lhere ls no debL
u
L
r
L
L
r
u
L
+ x (r
u
L
r
u
)
r
u
reLurn on Lhe debL
r
L
reLurn on Lhe equlLy
u x (1 @c)
L
r
L
L
r
A
+ x (r
A
r
u
)
ulscounLed aL Lhe
afLer Lax raLe cap
budgeLlng wlLh
JACC)
UNC I|ct|on lnclude (1@c ) ln
JACC calc (lnLeresL pald Lo
debLholders ls before corporaLe Lax ls
applled ln dlagram (dellberaLe flcLlon)
Cl Lo debLholders ls afLer Lax
@he welghLs of equlLy and
debL ln Lhe flrm
8elaLlve Lax LreaLmenL
of debL and equlLy
(corporaLe Lax raLe) @argeL raLlon of
equlLy Lo long Lerm
caplLal employed
M8 r
sLock markeL
r
@bllls
r
m
r
f

u x (1 @c)
L

L
L

A
x

L
L
beLa due Lo buslness rlsk + beLa due Lo leverage
@o geL from unlevered Lo levered
lf you have r
a
(reLurn on asseLflrm) and lf n debL
Lhen r
a
r
u
L
Lhen lf lssue debL have Lo flnd r
L
L
u x (1 @c)
L
r
L
L
r
A
+ x (r
A
r
u
)
uSL @lS r
L
L
ln JACC equaLlon
Ialue from sLarL CosL of debL
Cl
L+u
JACC
llrm's L+u
See wrlLLen noLes