FNCE 201 Formula Sheet

FNCE 201 Formula Sheet
Time Value of Money

APR m
EAR = [1 + ] −1
m
𝐶𝐹 𝐶𝐹
PV of Perpetuity : 𝑟
PV of Growing Perpetuity : 𝑟−𝑔
𝐶𝐹 1 𝐶𝐹 (1+𝑔)𝑡
PV of Annuity : 𝑟
[1 − (1+𝑟)𝑡 ] PV of Growing Annuity: 𝑟−𝑔 [1 − (1+𝑟)𝑡 ]
Valuation
𝑐𝑝𝑛 1 𝑝𝑎𝑟
Price of Bond : 𝑟
[1 − (1+𝑟)𝑡 ] + (1+𝑟)𝑡
𝐷
Price of Constant Dividend Stock : 𝑟
𝐷 𝐷1
Price of Constant Dividend Growth Stock : 𝑟−𝑔
1
,𝑟 = 𝑃0
+𝑔
Some Financial Ratios

Total debt ratio = Total debt / Total assets
Debt/equity ratio = Total debt / Total equity
Profit margin = Net income / Sales
Return on assets (ROA) = Net income / Total assets
Return on equity (ROE) = Net income / Total equity
Earnings per share (EPS) = Net income / Shares outstanding
Price-earnings ratio (P/E) = Price per share / Earnings per share
Market-to-book ratio = Price per share / Book value (of Equity) per share
Risk and Returns

D1 +P1 D1 (P1 −P0 ) Dt +Pt
R1 = P0
−1= P0
+ P0
; Rt = Pt−1
−1
R1 +R2 +⋯+RT
̅=
Arithmetic average return: R T
Geometric average return = [(1 + R1 ) ∗ (1 + R 2 )∗ … ∗ (1 + R T )]1/T − 1

1
Historical return variance = [(R1 ̅ )2 + (R 2 − R
−R ̅ )2 + ⋯ + (R T − R
̅ )2 .
T−1
Standard deviation (Std) = ( Variance )1/2
* Expectation, Variance, Covariance, and Correlation:

E(R) = ∑ni=1 pi R i (where i = 1 to n are the n states, and pi is the probability measure for
state i )
n n
2
Var (𝑅) = ∑ pi [R i − E(R)] Cov (𝑅𝐴 , 𝑅𝐵 ) = ∑ pi (R𝐴i − E(R𝐴 ))(R 𝐵i − E(R 𝐵 ))
i=1 i=1
Cov (𝑅𝐴 , 𝑅𝐵 )
Corr (𝑅𝐴 , 𝑅𝐵 ) =
Std (𝑅𝐴 )Std (𝑅𝐵 )
* Portfolio Expected Returns:

𝐸(𝑅𝑃 ) = ∑𝑚𝑗=1 𝑤𝑗 𝐸(𝑅𝑗 ) where 𝑗 = 1 to 𝑚 refer to 𝑚 assets in portfolio 𝑃, and 𝑤𝑗 is the
weight for asset 𝑗.
* Blume's Formula: R(T) = [(T − 1)/(N − 1)] Geometric Average +[(N − T)/(N − 1)]
Arithmetic Average (where N is #. historical observations and T is #. forecasting periods)
* CAPM:
Cov (𝑅𝑖 , 𝑅𝑀 )
E(R i ) = R f + 𝛽i × ⌊E(R M ) − R f ⌋, 𝛽𝑖 =
Var (𝑅𝑀 )
𝐸(𝑅𝑖 )−𝑅f
Reward − to − risk ratio = 𝛽𝑖
Cost of capital and capital structure

∗ WACC = (E/V) × R E + (P/V) × R P + (D/V) × R D × (1 − TC )
∗ WACC = (E/V) × R E + (D/V) × R D (Assuming no preferred stock and no Tax ) 𝑅𝐸 =

𝑅𝐴 + (𝑅𝐴 − 𝑅𝐷 ) × (𝐷/𝐸) 𝛽𝐸 = 𝛽𝐴 (1 + 𝐷/𝐸)
𝐸 𝐷
* Project unlevered (asset) cost of capital: 𝑅𝑈 = 𝐸+𝐷 𝑅𝐸 + 𝐸+𝐷 𝑅𝐷
𝐸 𝐷 𝐷
* Project unlevered (asset) beta: 𝛽𝑈 = 𝐸+𝐷 𝛽𝐸 + 𝐸+𝐷 𝛽𝐷 ; 𝛽𝐸 = 𝛽𝑈 + 𝐸
(𝛽𝑈 − 𝛽𝐷 )
* Asset value of unlevered firm: VU = EBIT (1 − T)/R U

𝐷
* Cost of levered equity: 𝑅𝐸 = 𝑅𝑈 + (𝑅𝑈 − 𝑅𝐷 )
𝐸
∗ Annual interest tax shield = Annual interest expense ∗ Tc
* Asset value of levered firm with taxes: VL = VU + DTC (DTC equals the present value of
interest tax shield. These formulas assume perpetual earnings and debt)
∗ WACC with Taxes = (E/V) × R E + (D/V) × R D × (1 − TC ) (Assuming no preferred stock)

𝑅𝐸 = 𝑅𝑈 + (𝑅𝑈 − 𝑅𝐷 ) × (𝐷/𝐸) × (1 − 𝑇𝐶 ) (where 𝑅𝑈 is the cost of capital for the
unlevered firm)
* Effective tax advantage of debt (with personal taxes):
(1 − 𝜏𝑖 ) − (1 − 𝜏𝑐 ) (1 − 𝜏𝑒 ) (1 − 𝜏𝑐 ) (1 − 𝜏𝑒 )
𝜏∗ = =1−
(1 − 𝜏𝑖 ) (1 − 𝜏𝑖 )
* Asset value of levered firm with taxes and distress cost and agency costs:
𝑉 𝐿 = 𝑉 𝑈 + 𝑃𝑉(𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑇𝑎𝑥 𝑆ℎ𝑖𝑒𝑙𝑑) − 𝑃𝑉(𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐷𝑖𝑠𝑡𝑟𝑒𝑠𝑠 𝐶𝑜𝑠𝑡𝑠) − 𝑃𝑉(𝐴𝑔𝑒𝑛𝑐𝑦 𝐶𝑜𝑠𝑡𝑠 𝑜𝑓 𝐷𝑒𝑏𝑡)

+ 𝑃𝑉(𝐴𝑔𝑒𝑛𝑐𝑦 𝐵𝑒𝑛𝑒𝑓𝑖𝑡𝑠 𝑜𝑓 𝐷𝑒𝑏𝑡)
Equity and Debt Financing
* Post-money valuation = Pre-money valuation + Amount invested
* Debt financing under perfect markets,

𝑃𝑉(𝐿𝑒𝑎𝑠𝑒 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠) = 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒 − 𝑃𝑉(𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒)
Payout
* cum-dividend price = current dividend + PV(future dividends)
* Equilibrium condition for Effective Dividend Tax Rate:
(𝑃𝑐𝑢𝑚 − 𝑃𝑒𝑥 )(1 − 𝜏𝑔 ) = 𝐷𝑖𝑣(1 − 𝜏𝑑 )
1 − 𝜏𝑑 𝜏𝑑 − 𝜏𝑔
(𝑃𝑐𝑢𝑚 − 𝑃𝑒𝑥 ) = 𝐷𝑖𝑣 × ( ) = 𝐷𝑖𝑣 × (1 − ) = 𝐷𝑖𝑣(1 − 𝜏𝑑∗ )
1 − 𝜏𝑔 1 − 𝜏𝑔
, where 𝑃𝑐𝑢𝑚 is cum-dividend price, 𝑃𝑒𝑥 is ex-dividend price, 𝜏𝑔 is capital gains tax and
𝜏𝑑 is dividend tax rate
𝜏𝑑 −𝜏𝑔
* Effective dividend tax rate -> 𝜏𝑑∗ = ( )
1−𝜏𝑔
∗ (1−𝜏𝑐 )(1−𝜏𝑔 )
* With interest income tax -> 𝜏𝑟𝑒𝑡𝑎𝑖𝑛 = (1 − (1−𝜏𝑖 )
), where 𝜏𝑐 is the corporate tax, 𝜏𝑔
is the capital gains tax, and 𝜏𝑖 is interest income tax rate
Mergers and Acquisitions

𝐴+𝑇+𝑆 𝐴
* Stock swap: 𝑁𝐴 +𝑥
> 𝑁 = 𝑃𝐴 , where A is pre-merger value of acquirer, T is pre-merger
𝐴
value of target, S is value of synergy, N is shares outstanding, x is new shares issued, and
P is the share price
𝑥 𝑃𝑇 𝑆
* Exchange ratio: < (1 + )
𝑁𝑇 𝑃𝐴 𝑇

FNCE 201 Formula Sheet

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FNCE 201 Formula Sheet

Time Value of Money

Some Financial Ratios

Debt/equity ratio = Total debt / Total equity

Profit margin = Net income / Sales

Return on assets (ROA) = Net income / Total assets

Return on equity (ROE) = Net income / Total equity

Earnings per share (EPS) = Net income / Shares outstanding

Price-earnings ratio (P/E) = Price per share / Earnings per share

Risk and Returns

Geometric average return = [(1 + R1 ) ∗ (1 + R 2 )∗ … ∗ (1 + R T )]1/T − 1

Standard deviation (Std) = ( Variance )1/2

* Expectation, Variance, Covariance, and Correlation:

* Portfolio Expected Returns:

Cost of capital and capital structure

∗ WACC = (E/V) × R E + (D/V) × R D (Assuming no preferred stock and no Tax ) 𝑅𝐸 =

* Asset value of unlevered firm: VU = EBIT (1 − T)/R U

∗ Annual interest tax shield = Annual interest expense ∗ Tc

∗ WACC with Taxes = (E/V) × R E + (D/V) × R D × (1 − TC ) (Assuming no preferred stock)

𝑉 𝐿 = 𝑉 𝑈 + 𝑃𝑉(𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑇𝑎𝑥 𝑆ℎ𝑖𝑒𝑙𝑑) − 𝑃𝑉(𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐷𝑖𝑠𝑡𝑟𝑒𝑠𝑠 𝐶𝑜𝑠𝑡𝑠) − 𝑃𝑉(𝐴𝑔𝑒𝑛𝑐𝑦 𝐶𝑜𝑠𝑡𝑠 𝑜𝑓 𝐷𝑒𝑏𝑡)

Equity and Debt Financing

* Post-money valuation = Pre-money valuation + Amount invested

* Debt financing under perfect markets,

* cum-dividend price = current dividend + PV(future dividends)

* Equilibrium condition for Effective Dividend Tax Rate:

(𝑃𝑐𝑢𝑚 − 𝑃𝑒𝑥 )(1 − 𝜏𝑔 ) = 𝐷𝑖𝑣(1 − 𝜏𝑑 )

Mergers and Acquisitions

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