Formula Sheet

Financial Mathematics Capital Budgeting

𝐹𝐹𝐹𝐹𝑛𝑛 = 𝑃𝑃𝑃𝑃 × (1 + 𝑟𝑟)𝑛𝑛 𝑁𝑁𝑁𝑁𝑁𝑁1 𝑁𝑁𝑁𝑁𝑁𝑁2
𝑁𝑁𝑁𝑁𝑁𝑁 = 𝑁𝑁𝑁𝑁𝑁𝑁0 + + +⋯
(1 + 𝑟𝑟) (1 + 𝑟𝑟)2
𝐹𝐹𝐹𝐹𝑛𝑛 𝑁𝑁𝑁𝑁𝑁𝑁𝑛𝑛
𝑃𝑃𝑃𝑃 = +
(1 + 𝑟𝑟)𝑛𝑛 (1 + 𝑟𝑟)𝑛𝑛
𝑁𝑁𝑁𝑁𝑁𝑁𝑡𝑡
𝐶𝐶 1 � =0
𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝑎𝑎𝑎𝑎 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 = �1 − � (1 + 𝐼𝐼𝐼𝐼𝐼𝐼)𝑡𝑡
𝑟𝑟 (1 + 𝑟𝑟)𝑛𝑛
𝑁𝑁𝑁𝑁𝑁𝑁
𝐶𝐶 𝑃𝑃𝑃𝑃 =
((1 + 𝑟𝑟)𝑛𝑛 − 1) 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
𝐹𝐹𝐹𝐹 𝑜𝑜𝑜𝑜 𝑎𝑎𝑎𝑎 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 =
𝑟𝑟
(1 + 𝑟𝑟)𝑛𝑛
𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑜𝑜𝑜𝑜 𝑎𝑎𝑎𝑎 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑑𝑑𝑑𝑑𝑑𝑑 = 𝑁𝑁𝑁𝑁𝑁𝑁∞ = 𝑁𝑁𝑁𝑁𝑁𝑁0
(1 + 𝑟𝑟)𝑛𝑛 − 1
𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 × (1 + 𝑟𝑟)
𝑁𝑁𝑁𝑁𝑁𝑁 × 𝑟𝑟
𝐶𝐶 𝐸𝐸𝐸𝐸𝐸𝐸 =
𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝑎𝑎 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = 1
𝑟𝑟 �1 − �
(1 + 𝑟𝑟)𝑛𝑛
𝐶𝐶
𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 =
𝑟𝑟 − 𝑔𝑔 𝐹𝐹𝐹𝐹𝐹𝐹 = (𝑅𝑅𝑅𝑅𝑅𝑅 − 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 − 𝐷𝐷𝐷𝐷𝐷𝐷) × (1 − 𝑡𝑡𝑐𝑐 )
+ 𝐷𝐷𝐷𝐷𝐷𝐷 − 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 − 𝐶𝐶ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑁𝑁𝑁𝑁𝑁𝑁
𝐶𝐶 1 + 𝑔𝑔 𝑛𝑛
= �1 − � � �
𝑟𝑟 − 𝑔𝑔 1 + 𝑟𝑟 1 + 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅
1 + 𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅
=
𝐴𝐴𝐴𝐴𝐴𝐴 𝑚𝑚 1 + 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
𝐸𝐸𝐸𝐸𝐸𝐸 = �1 + � −1
𝑚𝑚
After-tax salvage = SV – (SV – BV)tc
𝜆𝜆 = 𝐴𝐴1 /(𝐴𝐴1 – 𝐴𝐴2 )
Working Capital
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑟𝑟 = 𝑟𝑟1 + λ(𝑟𝑟2 − 𝑟𝑟1 )
Inventory
Inventory Days =
Valuation of Bonds and Shares Average daily COGs
𝐶𝐶 1 𝐹𝐹𝐹𝐹𝑛𝑛
𝑃𝑃𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 = �1 − �+ A/R Days =
Accounts receivable
𝑖𝑖 (1 + 𝑖𝑖) 𝑛𝑛 (1 + 𝑖𝑖)𝑛𝑛 Average daily sales

𝐹𝐹𝐹𝐹𝑛𝑛 Accounts Payable

𝑃𝑃𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 = A/P Days =
Average daily COGs
(1 + 𝑖𝑖)𝑛𝑛
𝐷𝐷1 CCC = Inventory Days + A/R Days – A/P Days
𝑃𝑃0 =
𝑟𝑟𝐸𝐸
International Corporate Finance
𝐷𝐷1
𝑃𝑃0 = (1 + 𝑟𝑟$ )𝑇𝑇
𝑟𝑟𝐸𝐸 − 𝑔𝑔 ⁄€
𝐹𝐹𝑇𝑇$ = 𝑆𝑆 $⁄€ ×
𝐷𝐷1 𝐷𝐷2 𝐷𝐷𝑛𝑛 + 𝑃𝑃𝑛𝑛 (1 + 𝑟𝑟€ )𝑇𝑇
𝑃𝑃0 = + + ⋯+
(1 + 𝑟𝑟𝐸𝐸 ) (1 + 𝑟𝑟𝐸𝐸 ) 2 (1 + 𝑟𝑟𝐸𝐸 )𝑛𝑛
(1 + 𝑟𝑟£ )
𝑟𝑟£∗ = �1 + 𝑟𝑟$∗ � − 1
(1 + 𝑟𝑟$ )

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 Formula Sheet (Cont’d)
Risk and Return Cost of Capital
𝑛𝑛
𝐷𝐷𝐷𝐷𝐷𝐷𝑝𝑝
𝐸𝐸(𝑅𝑅𝑖𝑖 ) = �(𝑅𝑅𝑖𝑖𝑖𝑖 × 𝑃𝑃𝑘𝑘 ) 𝑅𝑅𝑝𝑝 =
𝑘𝑘=1
𝑃𝑃𝑃𝑃
𝑛𝑛
𝐸𝐸 𝑃𝑃 𝐷𝐷
𝜎𝜎𝑖𝑖2 = �{[𝑅𝑅𝑖𝑖𝑖𝑖 − 𝐸𝐸(𝑅𝑅𝑖𝑖 )]2 × 𝑃𝑃𝑘𝑘 } 𝑟𝑟𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊 = 𝑟𝑟𝑒𝑒 + 𝑟𝑟𝑝𝑝 + 𝑟𝑟𝑑𝑑 (1 − 𝑇𝑇𝑐𝑐 )
𝑉𝑉 𝑉𝑉 𝑉𝑉
𝑘𝑘=1
𝑉𝑉 = 𝐸𝐸 + 𝑃𝑃 + 𝐷𝐷
𝐷𝐷𝐷𝐷𝐷𝐷𝑡𝑡+1 + 𝑃𝑃𝑡𝑡+1 − 𝑃𝑃𝑡𝑡
𝑅𝑅𝑡𝑡+1 = Capital Structure – No Tax World
𝑃𝑃𝑡𝑡
𝐸𝐸 + 𝐷𝐷 = 𝑈𝑈 = 𝐴𝐴
1
𝑅𝑅� = (𝑅𝑅1 + 𝑅𝑅2 + ⋯ 𝑅𝑅𝑇𝑇 ) 𝐸𝐸 𝐷𝐷
𝑇𝑇 𝑟𝑟𝑈𝑈 = 𝑟𝑟𝐸𝐸 + 𝑟𝑟𝐷𝐷
𝐸𝐸 + 𝐷𝐷 𝐸𝐸 + 𝐷𝐷
1 𝐷𝐷
𝑉𝑉𝑉𝑉𝑉𝑉(𝑅𝑅) = ((𝑅𝑅1 − 𝑅𝑅� )2 + (𝑅𝑅2 − 𝑅𝑅� )2 𝑟𝑟𝐸𝐸 = 𝑟𝑟𝑈𝑈 + (𝑟𝑟𝑈𝑈 − 𝑟𝑟𝐷𝐷 )
𝑇𝑇 − 1 𝐸𝐸
+ ⋯ + (𝑅𝑅𝑇𝑇 − 𝑅𝑅� )2 ) 𝑟𝑟𝑈𝑈 = 𝑟𝑟𝐴𝐴
𝑁𝑁

𝐶𝐶𝐶𝐶𝐶𝐶(𝑅𝑅𝑖𝑖 , 𝑅𝑅𝑗𝑗 ) = �(𝑅𝑅𝑖𝑖,𝑛𝑛 − 𝐸𝐸(𝑅𝑅𝑖𝑖 )) × (𝑅𝑅𝑗𝑗,𝑛𝑛 Capital Structure –Tax World

𝑛𝑛=1 𝑉𝑉 𝐿𝐿 = 𝑉𝑉 𝑈𝑈 + 𝑃𝑃𝑃𝑃(𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑡𝑡𝑡𝑡𝑡𝑡 𝑠𝑠ℎ𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖)
− 𝐸𝐸(𝑅𝑅𝑗𝑗 )) × 𝑃𝑃𝑛𝑛
𝑁𝑁
1 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑡𝑡𝑡𝑡𝑡𝑡 𝑠𝑠ℎ𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 = 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 × 𝑇𝑇𝑐𝑐
𝐶𝐶𝐶𝐶𝐶𝐶(𝑅𝑅𝑖𝑖 , 𝑅𝑅𝑗𝑗 ) = �(𝑅𝑅𝑖𝑖,𝑛𝑛 − 𝑅𝑅𝑖𝑖 ) × (𝑅𝑅𝑗𝑗,𝑛𝑛
𝑁𝑁 − 1
𝑛𝑛=1
− 𝑅𝑅𝑗𝑗 )
𝑃𝑃𝑃𝑃(𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑡𝑡𝑡𝑡𝑡𝑡 𝑠𝑠ℎ𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑜𝑜𝑜𝑜 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷)
𝐶𝐶𝐶𝐶𝐶𝐶(𝑅𝑅𝑖𝑖, 𝑅𝑅𝑗𝑗 ) = 𝑇𝑇𝑐𝑐 × 𝐷𝐷
𝜌𝜌𝑖𝑖𝑖𝑖 = 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶�𝑅𝑅𝑖𝑖, 𝑅𝑅𝑗𝑗 � =
𝜎𝜎𝑖𝑖 × 𝜎𝜎𝑗𝑗
𝜎𝜎𝑅𝑅𝑖𝑖 𝐷𝐷
𝐶𝐶𝐶𝐶 = 𝑟𝑟𝐸𝐸 = 𝑟𝑟𝑈𝑈 + (𝑟𝑟 − 𝑟𝑟𝐷𝐷 )(1 − 𝑇𝑇𝑐𝑐 )
𝐸𝐸[𝑅𝑅𝑖𝑖 ] 𝐸𝐸 𝑈𝑈
𝐸𝐸�𝑅𝑅𝑝𝑝 � = 𝑤𝑤1 𝐸𝐸[𝑅𝑅1 ] + 𝑤𝑤2 𝐸𝐸[𝑅𝑅2 ] + ⋯ + 𝑤𝑤𝑛𝑛 𝐸𝐸[𝑅𝑅𝑛𝑛 ]
𝜎𝜎𝑝𝑝2 = 𝑤𝑤𝑖𝑖2 𝜎𝜎𝑖𝑖2 + 𝑤𝑤𝑗𝑗2 𝜎𝜎𝑗𝑗2 +2 𝑤𝑤𝑖𝑖 𝑤𝑤𝑗𝑗 𝜌𝜌𝑖𝑖𝑖𝑖 𝜎𝜎𝑖𝑖 𝜎𝜎𝑗𝑗 𝐸𝐸 𝐷𝐷
𝑟𝑟𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊 = 𝑟𝑟𝐸𝐸 + 𝑟𝑟𝐷𝐷 (1 − 𝑇𝑇𝑐𝑐 )
𝐸𝐸 + 𝐷𝐷 𝐸𝐸 + 𝐷𝐷
𝐸𝐸[𝑅𝑅𝑃𝑃 ] − 𝑟𝑟𝑓𝑓
𝑆𝑆ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 =
𝜎𝜎𝑃𝑃
𝐶𝐶𝐶𝐶𝐶𝐶(𝑅𝑅𝑖𝑖, 𝑅𝑅𝑀𝑀 )
𝛽𝛽𝑖𝑖 =
𝜎𝜎𝑀𝑀 2
𝐸𝐸[𝑅𝑅𝑖𝑖 ] = 𝑟𝑟𝑓𝑓 + 𝛽𝛽𝑖𝑖 �𝐸𝐸[𝑅𝑅𝑀𝑀 ] − 𝑟𝑟𝑓𝑓 �
𝛽𝛽𝑝𝑝 = 𝑤𝑤1 𝛽𝛽1 + 𝑤𝑤2 𝛽𝛽2 + ⋯ 𝑤𝑤𝑛𝑛 𝛽𝛽𝑛𝑛

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