Finance Formula Sheet
FORMULA SHEET – for student reference only
Perpetuity:
The value of a perpetuity of $RM1 per year is:
Equivalent Annual Cost:
If an asset has a life of ‘t’ years, the equivalent annual cost is:
Annuity:
The value of an annuity of $RM1 per period for t years (t-year annuity factor) is:
Measures of Risk:
Variance of returns = σ2 = expected value of
Standard deviation of returns, σ =
Covariance between returns of stocks 1 & 2 = σ1,2 = expected value of
Correlation between returns of stocks 1 & 2:
Beta of stock i = βi =
The variance of returns on a portfolio with proportion xi invested in stock i is:
A Growing Perpetuity (Gordon model):
If the first period’s cash flow is $RM1 at year 1 and if cash flows thereafter grow at a constant rate of ‘g’ in perpetuity:
A Growing Annuity:
The formula for an annuity discounted at an annual rate (i) and where cash flows are growing at an annual rate (g) is as follows:
An = 1- {(1+g)n/(1+i)n} x (1+g) ( i-g ) Continuous Compounding/Discounting:
If ‘r’ is the continuously compounded rate of interest, the present value of $RM1 received in year ‘t’ is: Capital Asset Pricing Model (CAPM):
The expected risk premium on a risky investment is: r – rƒ = β(rm – rƒ)
Bond Duration and Volatility:
Duration of T-period bond =
Volatility (modified duration) = Duration/(1+y)
Weighted Average Cost of Capital:
WACC = rD(1 – TC)(D/V) + rE(E/V) + rP(P/V)
where: rD = expected return on debt, D. rE and rP = expected return on common equity, E, and preferred equity, P. TC = corporate tax V = total value = D + E + P MM’s Proposition II:
The required return on equity (rE) increases in line with the debt-equity ratio calculated using market values (D/E): rE = r + (r –
Perpetuity:
The value of a perpetuity of $RM1 per year is:
Equivalent Annual Cost:
If an asset has a life of ‘t’ years, the equivalent annual cost is:
Annuity:
The value of an annuity of $RM1 per period for t years (t-year annuity factor) is:
Measures of Risk:
Variance of returns = σ2 = expected value of
Standard deviation of returns, σ =
Covariance between returns of stocks 1 & 2 = σ1,2 = expected value of
Correlation between returns of stocks 1 & 2:
Beta of stock i = βi =
The variance of returns on a portfolio with proportion xi invested in stock i is:
A Growing Perpetuity (Gordon model):
If the first period’s cash flow is $RM1 at year 1 and if cash flows thereafter grow at a constant rate of ‘g’ in perpetuity:
A Growing Annuity:
The formula for an annuity discounted at an annual rate (i) and where cash flows are growing at an annual rate (g) is as follows:
An = 1- {(1+g)n/(1+i)n} x (1+g) ( i-g ) Continuous Compounding/Discounting:
If ‘r’ is the continuously compounded rate of interest, the present value of $RM1 received in year ‘t’ is: Capital Asset Pricing Model (CAPM):
The expected risk premium on a risky investment is: r – rƒ = β(rm – rƒ)
Bond Duration and Volatility:
Duration of T-period bond =
Volatility (modified duration) = Duration/(1+y)
Weighted Average Cost of Capital:
WACC = rD(1 – TC)(D/V) + rE(E/V) + rP(P/V)
where: rD = expected return on debt, D. rE and rP = expected return on common equity, E, and preferred equity, P. TC = corporate tax V = total value = D + E + P MM’s Proposition II:
The required return on equity (rE) increases in line with the debt-equity ratio calculated using market values (D/E): rE = r + (r –