formula sheet

Formula Sheet for the Corporate Finance Final Examination Paper

1.

r = cost of capital t = year

2. Pure Play approach bL = bU[1 + (1 – T)(D/E)] bL = levered beta bU = unlevered beta T = tax rate D/E = debt to equity ratio

3. Firm value

Rs = Cost of equity
G = cash flow growth rate

4.

rRF = the risk-free interest rate RPM = the expected market risk premium on an average stock = rM – rRF rM = the expected return on the market portfolio bi = the beta coefficient for the ith security

wd = the % of debt in the capital structure ws = the % of common equity in the capital structure rd(1 – T) = the after-tax component cost of debt, where T is the firm’s marginal tax rate. The after-tax cost of debt is used because interest is deductible for tax purposes rs = the component cost of common equity

5. Dividend growth model

P0 = D1 / (r-g) P0 = current share price D1 = next period dividend amount r = required rate of return g = dividend growth rate

6. Right price

where n = number of shares held to obtain a right r = number of addition shares offered for a right M = market price before issuing S = subscription or issue price of the rights issue

Ex-right share price

7. Annual Equivalent Value (Equivalent annual annuity)