FORMULA SHEET – for student reference only

Perpetuity: Equivalent Annual Cost:

The value of a perpetuity of RM1 per If an asset has a life of ‘t’ years, the
year is: 1 equivalent annual cost is:
PV  PV (Costs)
r
t  yearannuit yfactor
Annuity:
Capital Asset Pricing Model (CAPM):
The value of an annuity of RM1 per
period for t years (t-year annuity factor) The expected risk premium on a risky
is: investment is:
r – rƒ = β(rm – rƒ)
1 1
PV  
r r (1  r ) t
A Growing Perpetuity (Gordon Weighted Average Cost of Capital:
model):
WACC = rD(1 – TC)(D/V) + rE(E/V) + rP(P/V)
If the first period’s cash flow is RM1 at
year 1 and if cash flows thereafter grow
where: rD = expected return on debt, D.
at a constant rate of ‘g’ in perpetuity:
rE and rP = expected return on
1
PV  common equity, E, and
rg preferred equity, P.
TC = corporate tax
A Growing Annuity: V = total value = D + E + P
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: 1
PV 
e rt