Last Updated: May 25, 2020

Formula Sheets

LEGEND
EAR Effective Annual Rate PV Present Value
FV Future Value NPV Net Present Value
r Discount Rate/Opportunity cost of TWRR Time Weighted Rate of Return
capital/Rate of Return/Expected Return
HPR Holding Period Return HM Harmonic Mean
df Degrees of Freedom GDP Gross Domestic Product
CPI Consumer Price Index EPS Earnings Per Share
FCFF Free Cash Flow to the Firm FCFE Free Cash Flow to Equity
CFO Cash Flow Out FCInv Free Cash Investments
DOH Days on Hand DSO Daily Sales Outstanding
EBIT Earnings Before Interest & Taxes EBITDA Earnings Before Interest, taxes, depreciation &
amortization
ROE Return on Equity BV Book Value
Cf Cash flow E Earnings
ROA Return on Assets COGS Cost of Goods Sold
LIFO Last In First Out FIFO First In First Out
NRV Net realizable value DTA Deferred Tax Asset
DTL Deferred Tax Liability DTL Degree of Total Leverage
t *superscript = time t *subscript = tax
WACC Weighted Average Cost of Capital P/B Price-To-Book Ratio
DOL Degree of Liability IRR Internal Rate of Return
VPRI Value of Price Return Index 𝐕𝐏𝐑𝐈𝐓 Value of Price Return Index over Periods
VTRIP Value of Total Return Index over Periods 𝐏𝐑 𝐈 Price Return of an Index
TRI Total Return of an Index 𝐰𝐢𝐩 Weighted Index; P = price
wiE Equal weighting 𝐰𝐢𝐦 Market Capitalization weighting
wiF Fundamental weighting EV Enterprise Value
EAY Effective Annual Yield MacDur Macaulay Duration
ModDur Modified Duration PVBP Price Value of Basis Point
LGD Loss Given Default FFO Funds from Operations
FCF Free Cash Flow DCL Degree of Combined Leverage
I/Y Interest/Yield Rate DFL Degree of Financial Leverage
PMT Periodic Deposit G Growth Factor
N Number of Periods g Sustainable Growth Rate/Dividend Growth Rate
EAR Effective Annual Rate Ra Expected Return on a Security
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CF Cash Flow Rf Risk-free Rate
n Number of Periods 𝜷i Beta of Asset i
D Discount Rate (% per annum) E(Ri) Expected return on asset i
DOL Degree of Operating Leverage E(RM) Expected return on the market portfolio that
contains all assets
Q Quantity at which DOL is computed E(RM)-Rf Market risk premium, a measure of excess return
of the market portfolio over the risk-free rate
P Price Per Unit CAPM Capital Asset Pricing Model
VC Variable Cost Per Unit S Spot Price
FC Fixed Costs FWD Forward
P/E Price-To-Earnings Ratio F Futures Price
D/E Debt-To-Equity Ratio D Current value of Dividend
DPS Dividends per Share V Intrinsic Value
P Price of Stock

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QUANTITIVE METHODS
READING 6:
Time Value of Money
𝐸𝐴𝑅 = (1 + 𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑟𝑎𝑡𝑒) = − 1
Effective Annual Rate
𝑆𝑡𝑎𝑡𝑒𝑑 𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑎𝑡𝑒
𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑟𝑎𝑡𝑒 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑃𝑒𝑟𝑖𝑜𝑑𝑠 𝑂𝑛𝑒 𝑌𝑒𝑎𝑟

𝑚 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑃𝑒𝑟𝑖𝑜𝑑𝑠 𝑂𝑛𝑒 𝑌𝑒𝑎𝑟

Effective Annual Rate with 𝐸𝐴𝑅 = 𝑒 M − 1

Continuous Compounding 𝑟 = 𝑆𝑡𝑎𝑡𝑒𝑑 𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑎𝑡𝑒 𝑤𝑖𝑡ℎ 𝐶𝑜𝑛𝑡𝑖𝑛𝑢𝑜𝑢𝑠 𝐶𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔

Present Value (PV) of a single 𝐹𝑉

𝑃𝑉 =
cash flow (1 + 𝑟)R

Future Value (FV) of a single 𝐹𝑉 = 𝑃𝑉 ∗ (1 + 𝑟)R

cash flow
Present Value (PV) of a single 𝐹𝑉
𝑃𝑉 =
𝑟 =∗R
cash flow (for multiple T1 + U
𝑚
compounding periods per
year)
Future Value (FV) of a single 𝐹𝑉 = 𝑃𝑉 ∗ (𝑒 M∗R )
cash flow (for continuous
compounding)
Present Value (PV) of a single 𝐹𝑉
𝑃𝑉 =
cash flow (for continuous (𝑒 M∗R )

compounding)
Future Value (FV) of an (1 + 𝑟)R − 1
𝐹𝑉 = 𝐴 ∗ V W
Ordinary Annuity 𝑟

𝐴 = 𝐴𝑛𝑛𝑢𝑖𝑡𝑦 𝑎𝑚𝑜𝑢𝑛𝑡
Present Value (PV) of an 𝑃𝑉(𝐴𝑛𝑛𝑢𝑖𝑡𝑦 𝐷𝑢𝑒) = 𝑃𝑉(𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝐴𝑛𝑛𝑢𝑖𝑡𝑦) ∗ (1 + 𝑟)
Annuity Due
1
1 − (1
+ 𝑟)R
Present Value (PV) of an 𝑃𝑉 = 𝐴 ∗ Z [
𝑟
Ordinary Annuity
𝐴 = 𝐴𝑛𝑛𝑢𝑖𝑡𝑦 𝑎𝑚𝑜𝑢𝑛𝑡

Future Value (FV) of an

Annuity Due 𝐹𝑉(𝐴𝑛𝑛𝑢𝑖𝑡𝑦 𝐷𝑢𝑒) = 𝐹𝑉(𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝐴𝑛𝑛𝑢𝑖𝑡𝑦) ∗ (1 + 𝑟)

Present Value (PV) of 𝐴

𝑃𝑉(𝑃𝑒𝑝𝑒𝑡𝑢𝑖𝑡𝑦) =
Perpetuity 𝑟
𝐴 = 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑎𝑚𝑜𝑢𝑛𝑡

READING 7:
STATISTICAL CONCEPTS AND MARKET RETURNS
Relative Frequency 𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑓𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 𝑜𝑓 𝑒𝑎𝑐ℎ 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙
Relative Frequency =
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠

Cumulative Relative
Frequency Cumulative Relative Frequency = 𝐴𝑑𝑑 𝑡ℎ𝑒 𝑟𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑓𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑖𝑒𝑠 𝑤ℎ𝑖𝑙𝑒 𝑝𝑟𝑜𝑐𝑒𝑒𝑑𝑖𝑛𝑔 𝑓𝑟𝑜𝑚 𝑡ℎ𝑒 𝑓𝑖𝑟𝑠𝑡 𝑡𝑜 𝑡ℎ𝑒 𝑙𝑎𝑠𝑡 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙

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Arithmetic Mean ∑stuv 𝑋
xp =
𝑁
Population Mean ∑R xuv 𝑋x
µ =
N
Sample Mean ∑sxuv 𝑋x
xp =
n
In an ordered sample of n items:
Median 𝑛 𝑛+2 𝑛+1
For even number of observations = Mean of values & For odd number of observations =
2 2 2

Mode 𝑀𝑜𝑑𝑒 = most frequently occurring value in a distribution

s
Weighted Average Mean
… † = ‡ 𝑤x ∗ 𝑋x
X
xuv
Œ
G = ‰(1 + 𝑟v )(1 + 𝑟Š ) … (1 + 𝑟s )
Geometric Mean
with 𝑟x ≥ 0 for i = 1,2, … , n

n
HM = s
1
‡ T U
xuv 𝑋x
Harmonic Mean
with X x > 0 for i = 1,2, … , n

Percentile y
Percentile = Ly = (n + 1) ∗
100

Quartile Distribution
Quartile =
4

Quintile Distribution
Quintile =
5

Decile Distribution
Decile =
10

Range Range = Maximum value – Minimum value

Range = Maximum value – Minimum value

∑sxuv|𝑥x − 𝑥̅ |
Mean Absolute Deviation MAD =
𝑛

R
(𝑥
xuv x
− 𝜇)Š
𝜎Š =
Population Variance 𝑁

Population Standard ∑R
xuv(𝑥x − 𝜇)
Š
Deviation 𝜎=¢
𝑁
s
(𝑥
xuv x
− 𝑥̅ )Š
𝑠Š =
Sample Variance 𝑛−1

∑sxuv(𝑥x − 𝑥̅ )Š
Sample Standard Deviation 𝑠=¢
𝑛−1

Chebyshev’s Inequality 1
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠 𝑡ℎ𝑎𝑡 𝑙𝑖𝑒 𝑤𝑖𝑡ℎ𝑖𝑛 𝑘 𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛𝑠 = 1 −
𝑘Š

Coefficient of Variation 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑥 𝑠¤

𝐶𝑉 = =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑥 𝑥̅

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READING 8:
PROBABILITY CONCEPTS

𝑃(𝐸)
𝑂𝑑𝑑𝑠 𝑓𝑜𝑟 𝑎𝑛 𝐸𝑣𝑒𝑛𝑡 ′𝐸′ =
Probability stated as Odds 1 − 𝑃(𝐸)

1 − 𝑃(𝐸)
𝑂𝑑𝑑𝑠 𝑎𝑔𝑎𝑖𝑛𝑠𝑡 𝑎𝑛 𝐸𝑣𝑒𝑛𝑡 ′𝐸′ =
𝑃(𝐸)
Joint Probability of two Events 𝑃(𝐴𝐵) = 𝑃(𝐴|𝐵) ∗ 𝑃(𝐵)

Conditional Probability of A 𝑃(𝐴𝐵)

𝑃(𝐴|𝐵) =
given B 𝑃(𝐵)

Probability of A or B 𝑃(𝐴 𝑜𝑟 𝐵) = 𝑃(𝐴) + 𝑃(𝐵) − 𝑃(𝐴𝐵)

Joint Probability of any

number of independent 𝑃(𝐴𝐵𝐶𝐷𝐸) = 𝑃(𝐴) ∗ 𝑃(𝐵) ∗ 𝑃(𝐵) ∗ 𝑃(𝐶) ∗ 𝑃(𝐷) ∗ 𝑃(𝐸)
events
Total Probability Rule 𝑃(𝐴) = 𝑃(𝐴|𝐵1) ∗ 𝑃(𝐵1) + 𝑃(𝐴|𝐵2) ∗ 𝑃(𝐵2) + 𝑃(𝐴|𝐵3) ∗ 𝑃(𝐵3) + ⋯ 𝑃(𝐴|𝐵𝑛) ∗ 𝑃(𝐵𝑛)

Covariance 𝑐𝑜𝑣©𝑅v , 𝑅ª « = 𝐸¬(𝑅x − 𝐸(𝑅-̇ )©𝑅ª − 𝐸(𝑅¯̇ «°

Correlation 𝑐𝑜𝑣©𝑅x , 𝑅ª «
𝜌©𝑅x , 𝑅ª « =
𝜎(𝑅𝑖)𝜎(𝑅𝑗)

Expected value of a random 𝐸(𝑤-̇ 𝑅-̇ ) = 𝑤-̇ 𝐸(𝑅-̇ )

variable 𝐸(𝑅³ ) = 𝑃(𝑅1) ∗ 𝐸(𝑅v̇) + 𝑃(𝑅2) ∗ 𝐸(𝑅Ṧ) + 𝑃(𝑅2) ∗ 𝐸(𝑅Ṧ) … 𝑃s 𝐸(𝑅ṡ )

𝜎 Š = ‡[𝑃(𝑅) ∗ (𝐸(𝑅v̇ ) − µ)^2

Variance of a random variable
-̇ uv

Portfolio expected return 𝐸©𝑅¶ « = 𝑤v̇𝐸(𝑅v̇) + 𝑤Ṧ𝐸(𝑅Ṧ ) + 𝑤· 𝐸(𝑅· ) … 𝑤s 𝐸(𝑅ṡ )

s s

σ2(Rp) = ‡. ‡( 𝑤-̇ 𝑤ª 𝑐𝑜𝑣©𝑅v , 𝑅ª «)

Portfolio Variance
¯̇ uv ¯̇ uv

𝑃(𝐼𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛|𝐸𝑣𝑒𝑛𝑡)
𝑃(𝐸𝑣𝑒𝑛𝑡|𝐼𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛) = ∗ 𝑃(𝐸𝑣𝑒𝑛𝑡)
Bayes’ Formula 𝑃(𝐼𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛)

Multiplication rule of counting n! = n(n − 1)(n − 2)(n − 3) … 1

Multinomial Formula for n!

n! =
labeling problems n1! n2! … nk!

Combination Formula n!
nCr =
(n − r)! r!
Permutation Formula n!
nPr =
(n − r)!

READING 9:

COMMON PROBABILITY DISTRIBUTIONS

Probabilities for a random To find F(x), sum up, or cumulate, values of the probability function for all outcomes less than or equal to x.
variable given its cumulative
distribution function
Probabilities given the discrete 𝐶𝑢𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒 𝑑𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑓𝑢𝑛𝑐𝑡𝑖𝑜𝑛 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑛𝑡ℎ 𝑜𝑢𝑡𝑐𝑜𝑚𝑒
uniform function
𝐹(𝑋𝑛) = 𝑛𝑃(𝑋)
Probability function for a n!
𝑃𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓𝑥 𝑠𝑢𝑐𝑐𝑒𝑠𝑠𝑒𝑠 𝑖𝑛 𝑛 𝑡𝑟𝑖𝑎𝑙𝑠 = ∗ 𝑝¤ (1 − 𝑝) s¾¤
binomial random variable (n − x)! x!

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Expected Value and Variance 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑋 = nP
of a binomial random variable
𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒 𝑜𝑓 𝑋 = nP(1 − p)
Continuous Uniform 1
𝑓(𝑥) = ¿ 𝑓𝑜𝑟 𝑎 < 𝑥 < 𝑏 𝑜𝑟 0
Distribution 𝑏−𝑎

𝑥−𝑎
𝐹(𝑥) = 𝑓𝑜𝑟 𝑎 < 𝑥 < 𝑏
𝑏−𝑎

Standardizing a random 𝑋−µ

𝑍=
normal variable 𝜎

[𝐸(𝑅𝑝) − 𝑅𝑙)]
Safety first ratio 𝑆𝐹𝑅𝑎𝑡𝑖𝑜 =
𝜎𝑝

Continuously compounded
rate of return from HPR 𝑅𝑐𝑐 = ln (1 + 𝐻𝑃𝑅)
READING 10:
SAMPLING AND ESTIMATION

Standard error of the sample

mean: Population standard σ
𝜎Ä =
deviation is known √n
Population standard deviation
s
is not known 𝑠¤ =
√n

Degrees of Freedom of
student’s t-distribution 𝑑𝑓 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑎𝑚𝑝𝑙𝑒 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠 − 1 = 𝑛 − 1
Normally Distributed σ
… ± 𝑧È/Š ∗ Ê Ë
𝐶𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙𝑠 = 𝑋
Population with Known √n
Variance
Large sample, Population s
… ± 𝑧È/Š ∗ Ê
𝐶𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙𝑠 = 𝑋 Ë
variance unknown √n

Small sample, Population s

… ± 𝑡È/Š ∗ Ê
𝐶𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙𝑠 = 𝑋 Ë
variance unknown √n

READING 11:
HYPOTHESIS TESTING
Test statistic 𝑋p − 𝜇Ì 𝑋p − 𝜇Ì
𝑧= 𝜎 or 𝑡s¾v = 𝜎
Í√𝑛 Í√𝑛

Test Statistic – difference (𝑋pv − 𝑋pŠ ) − (𝜇v − 𝜇Š ) (𝑛v − 1)𝑠vŠ + (𝑛Š − 1)𝑠ŠŠ
𝑡= 𝑤ℎ𝑒𝑟𝑒 𝑠¶Š =
between 2 population means 𝑠¶Š 𝑠¶Š
v/Š 𝑛v + 𝑛Š − 2
(variances equal) Î + Ï
𝑛v 𝑛Š
Test Statistic – difference Š
𝑠Š 𝑠 Š
(𝑋pv − 𝑋pŠ ) − (𝜇v − 𝜇Š ) Ê𝑛v + 𝑛Š Ë
between 2 population means v Š
𝑡= 𝑤ℎ𝑒𝑟𝑒 𝑑𝑓 =
(variances unequal) 𝑠Š 𝑠 Š
v/Š (𝑠vŠ⁄𝑛v )Š (𝑠ŠŠ⁄𝑛Š )Š
Ê𝑛v + 𝑛Š Ë +
𝑛v 𝑛Š
v Š
s
Test concerning mean 𝑑̅ − 𝜇ÑÌ 1
difference 𝑡= 𝑤ℎ𝑒𝑟𝑒 𝑑̅ = ‡ 𝑑x
𝑠Ñp 𝑛
xuv
Test of a single variance (𝑛 − 1)𝑠 Š
𝜒Š =
𝜎ÌŠ

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F-stat 𝑠vŠ
𝐹 =
𝑠ŠŠ

Test statistic for correlation 𝒓√𝒏 − 𝟐

𝒕=
√𝟏 − 𝒓𝟐

Power of a test 1 − 𝑃(𝑇𝑦𝑝𝑒 𝐼𝐼 𝑒𝑟𝑟𝑜𝑟)

ECONOMICS
READING 12:
TOPICS IN DEMAND AND SUPPLY ANALYSIS
Elasticity of demand:
%∆𝑄 𝑃𝑜 ∆𝑄
= Ê Ë∗Ê Ë
%∆𝑃 𝑄𝑜 ∆𝑃
Price Elasticity of Demand
∆𝑄
Ê Ë 𝑖𝑠 𝑡ℎ𝑒 𝑠𝑙𝑜𝑝𝑒 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡
∆𝑃

Income Elasticity of Demand %∆𝑄 𝐼𝑜 ∆𝑄
= Ê Ë∗Ê Ë
%∆𝐼 𝑄𝑜 ∆𝐼

∆𝑄
Ê Ë 𝑖𝑠 𝑡ℎ𝑒 𝑠𝑙𝑜𝑝𝑒 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡
∆𝐼

%∆𝑄 𝑃𝑐 ∆𝑄
= Ê Ë∗Ê Ë
Cross Elasticity of Demand %∆𝑃𝑐 𝑄𝑜 ∆𝑃𝑐

∆𝑄
Ê Ë 𝑖𝑠 𝑡ℎ𝑒 𝑠𝑙𝑜𝑝𝑒 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡
∆𝑃𝑐

𝑃𝑐 = 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑟𝑒𝑙𝑎𝑡𝑒𝑑 𝑔𝑜𝑜𝑑

READING 14:
AGGREGATE OUTPUT, PRICES, AND ECONOMIC GROWTH
Gross Domestic Product (GDP):
𝐺𝐷𝑃 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋
Expenditure Approach
Income Approach 𝐺𝐷𝑃 = 𝑁𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒 + 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 𝑎𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒 + 𝑆𝑡𝑎𝑡𝑖𝑠𝑡𝑖𝑐𝑎𝑙 𝑑𝑖𝑠𝑐𝑟𝑒𝑝𝑎𝑛𝑐𝑦

Nominal & Real GDP 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 = 𝑃𝑡 × 𝑄𝑡

𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 = 𝑃𝑏 × 𝑄𝑡

GDP Deflator Value of current year output at current year prices

𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = ∗ 100
Value of current year output at base year prices

National income = 𝐶𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 + 𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑎𝑛𝑑 𝑔𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑒𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑝𝑟𝑜𝑓𝑖𝑡𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥𝑒𝑠
+ 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 + 𝑢𝑛𝑖𝑛𝑐𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒𝑑 𝑏𝑢𝑠𝑖𝑛𝑒𝑠𝑠 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 + 𝑟𝑒𝑛𝑡
National income, Personal
+ 𝑖𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑏𝑢𝑠𝑖𝑛𝑒𝑠𝑠 𝑡𝑎𝑥𝑒𝑠 𝑙𝑒𝑠𝑠 𝑠𝑢𝑏𝑠𝑖𝑑𝑖𝑒𝑠
income & Personal disposable
Income Personal Income = 𝑁𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑏𝑢𝑠𝑖𝑛𝑒𝑠𝑠 𝑡𝑎𝑥𝑒𝑠 − 𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥𝑒𝑠
− 𝑈𝑛𝑑𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑒𝑑 𝑐𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑝𝑟𝑜𝑓𝑖𝑡𝑠 + 𝑇𝑟𝑎𝑛𝑠𝑓𝑒𝑟 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠

𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝑑𝑖𝑠𝑝𝑜𝑠𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 = 𝑝𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒 − 𝑝𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝑡𝑎𝑥𝑒𝑠

-7-
Prepared exclusively for Matthew Maselle
© markmeldrum.com. All rights,matthewmaselle@gmail.com
reserved.
Transaction: 0066205454,
 Formula Sheets
READING 15:
UNDERSTANDING BUSINESS CYCLES
Consumer Price Index (CPI) Cost of basket at current prices
𝐶𝑃𝐼 = ∗ 100
Cost of basket at base period prices

READING 18:
CURRENCY EXCHANGE RATES
Real exchange rate (d/f) 𝑑 d 𝐶𝑃𝐼 𝑓𝑜𝑟𝑒𝑖𝑔𝑛
𝑅𝑒𝑎𝑙 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒 Ê Ë = Spot rate Ê Ë ∗
𝑓 f 𝐶𝑃𝐼 𝑑𝑜𝑚𝑒𝑠𝑡𝑖𝑐

Percentage change in a
é
currency relative to another Ñ
% ∆𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒 T U =
âãäå æçåèT U çå åëè èìí äî åëè ãèæïäí
ê
−1
é
currency: á âãäå æçåèT U çå åëè ðèñïììïìñ äî åëè ãèæïäí
ê

Change in nominal exchange

rate

ΔPf
Change in real exchange rate 𝑑 ΔSdf 1+
Pf ô − 1
∆𝑅𝑒𝑎𝑙 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒 Ê Ë = Ê1 + Ë×ó
𝑓 Sdf ΔPd
1+
Pd
𝑑 𝑑 Forward points
𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑅𝑎𝑡𝑒 Ê Ë = 𝑆𝑝𝑜𝑡 𝑟𝑎𝑡𝑒 Ê Ë +
Conversion of forward 𝑓 𝑓 10,000
quotations 𝑑 𝑑
𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑅𝑎𝑡𝑒 Ê Ë = 𝑆𝑝𝑜𝑡 𝑟𝑎𝑡𝑒 Ê Ë ∗ (1 ± % 𝑜𝑓 𝑠𝑝𝑜𝑡 𝑟𝑎𝑡𝑒)
𝑓 𝑓

𝑑
𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑟𝑎𝑡𝑒 Ê Ë
𝑓
Forward discount or premium 𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 𝑜𝑟 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 =
𝑑
−1
𝑆𝑝𝑜𝑡 𝑟𝑎𝑡𝑒 Ê Ë
𝑓

Forward rate consistent with 𝐴𝑐𝑡𝑢𝑎𝑙

𝑑 𝑑 (1 + 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑑𝑜𝑚𝑒𝑠𝑡𝑖𝑐 ∗ 360 )
the spot rate and the interest 𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑅𝑎𝑡𝑒 ( ) = 𝑆𝑝𝑜𝑡 𝑟𝑎𝑡𝑒 Ê Ë ∗
𝑓 𝑓 𝐴𝑐𝑡𝑢𝑎𝑙
(1 + 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑓𝑜𝑟𝑒𝑖𝑔𝑛 ∗ )
rate in each country 360

FINANCIAL REPORTING ANALYSIS

READING 19:
INTRODUCTION TO FINANCIAL STATEMENT ANALYSIS

Accounting Equation 𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝑂𝑤𝑛𝑒𝑟𝑠 ÷𝐸𝑞𝑢𝑖𝑡𝑦

READING 20:
FINANCIAL REPORTING MECHANICS
Expanded accounting 𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝑟𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠
equation
𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 + 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑟𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 + 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 − 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 − 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
READING 21:
UNDERSTANDING INCOME STATEMENTS
Earnings Per share: 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
Basic EPS =
Basic EPS 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

Diluted EPS using if converted Diluted EPS

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
method =
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 + New common shares that would have been issued at conversion)

Diluted EPS When a Company

(Net income + After tax interest on convertible debt − Preferred dividends)
Has Convertible Debt =
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 + Additional common shares that would have been issued at conversion)
Outstanding
-8-
Prepared exclusively for Matthew Maselle
© markmeldrum.com. All rights,matthewmaselle@gmail.com
reserved.
Transaction: 0066205454,

Diluted EPS using treasury
stock method
Income statement ratios
Comprehensive income
Liquidity & Solvency ratios:
Liquidity ratios
Solvency ratios
Free cash flow:
Free cash flow to the firm
Free cash flow to equity
Performance & Coverage
ratios:
Performance ratios
Prepared exclusively for Matthew Maselle
Formula Sheets
(Net income − Preferred dividends)
=
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 + Additional common shares that would have been issued at option exercise −
Shares that could have been purchased with cash received upon exercise ) × ( Proportion of year during which the financial instruments were outstanding)
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝐶𝑜𝑚𝑝𝑟𝑒ℎ𝑒𝑛𝑠𝑖𝑣𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 = 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 + 𝑂𝑡ℎ𝑒𝑟 𝑐𝑜𝑚𝑝𝑟𝑒ℎ𝑒𝑛𝑠𝑖𝑣𝑒 𝑖𝑛𝑐𝑜𝑚𝑒
READING 22:
UNDERSTANDING BALANCE SHEETS
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐶𝑎𝑠ℎ + 𝑆ℎ𝑜𝑟𝑡 𝑡𝑒𝑟𝑚 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 + 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝑄𝑢𝑖𝑐𝑘 𝑟𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐶𝑎𝑠ℎ + 𝑆ℎ𝑜𝑟𝑡 𝑡𝑒𝑟𝑚 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠
𝐶𝑎𝑠ℎ 𝑟𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝑙𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡
𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 =
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
𝐷𝑒𝑏𝑡 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 =
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡 =
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒 = 𝑂𝑅
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦
READING 23:
UNDERSTANDING CASH FLOW STATEMENTS
𝐹𝐶𝐹𝐹 = NI + NCC + Int(1 – Tax rate)– FCInv – WCInv
𝐹𝐶𝐹𝐹 = CFO + Int(1 – Tax rate)– FCInv
𝐹𝐶𝐹𝐸 = 𝐶𝐹𝑂 – 𝐹𝐶𝐼𝑛𝑣 + 𝑁𝑒𝑡 𝑏𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔
𝐶𝐹𝑂
Cash flow to revenue =
𝑁𝑒𝑡 𝑟𝑒𝑣𝑒𝑛𝑢𝑒
𝐶𝐹𝑂
Cash return on assets =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
𝐶𝐹𝑂
Cash return on equity =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦
𝐶𝐹𝑂
Cash to income =
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒
𝐶𝐹𝑂 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
Cash flow per share =
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒𝑠
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𝐶𝐹𝑂
Debt coverage =
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡

𝐶𝐹𝑂 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑖𝑑 + 𝑇𝑎𝑥𝑒𝑠 𝑝𝑎𝑖𝑑

Interest coverage =
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑖𝑑

Coverage ratios 𝐶𝐹𝑂

Reinvestment =
𝐶𝑎𝑠ℎ 𝑝𝑎𝑖𝑑 𝑓𝑜𝑟 𝑙𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑎𝑠𝑠𝑒𝑡𝑠

𝐶𝐹𝑂
Debt payment =
𝐶𝑎𝑠ℎ 𝑝𝑎𝑖𝑑 𝑓𝑜𝑟 𝑙𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡

𝐶𝐹𝑂
Dividend payment =
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑝𝑎𝑖𝑑

𝐶𝐹𝑂
Investing & Financing =
𝐶𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤𝑠 𝑓𝑜𝑟 𝑖𝑛𝑣𝑒𝑠𝑡𝑖𝑛𝑔 𝑎𝑛𝑑 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑛𝑔 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑖𝑒𝑠

READING 24:
FINANCIAL ANALYSIS TECHNIQUES

Revenue
Receivables Turnover =
Average receivables

Number of days in period

Days of sales outstanding =
Receivables turnover

Activity, Liquidity, Solvency, Cost of sales or cost of goods sold

Inventory turnover =
Profitability, and valuation Average inventory
ratios: Number of days in period
Days of inventory on hand =
Inventory turnover
Activity ratios
Purchases
Payables turnover =
Average trade payables

Number of days in period

Number of days of payables =
Payables turnover

Revenue
Working capital turnover =
Average working capital

Revenue
Fixed asset turnover =
Average net fixed assets

Revenue
Total asset turnover =
Average total assets

𝐶𝑎𝑠ℎ + 𝑆ℎ𝑜𝑟𝑡 𝑡𝑒𝑟𝑚 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 + 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠

Defensive interval ratio =
Daily cash expenditures
Liquidity ratios 𝐶𝑎𝑠ℎ 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑐𝑦𝑐𝑙𝑒 = DOH + DSO – Number of days of payables

𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
𝐷𝑒𝑏𝑡 𝑡𝑜 𝐴𝑠𝑠𝑒𝑡𝑠 =
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
Solvency ratios: 𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
𝐷𝑒𝑏𝑡 𝑡𝑜 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡 + 𝑇𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠’ 𝑒𝑞𝑢𝑖𝑡𝑦
Debt
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
𝐷𝑒𝑏𝑡 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠’ 𝑒𝑞𝑢𝑖𝑡𝑦

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦

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𝐸𝐵𝐼𝑇
Interest coverage =
Coverage ratios 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠

𝐸𝐵𝐼𝑇 + 𝐿𝑒𝑎𝑠𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠

Fixed charge coverage =
Interest payments + Lease payments

𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 =
Profitability ratios: 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
Return on Sales 𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒

𝐸𝐵𝑇
𝑃𝑟𝑒𝑡𝑎𝑥 𝑚𝑎𝑟𝑔𝑖𝑛 𝑚𝑎𝑟𝑔𝑖𝑛 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑅𝑂𝐴 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
ROA =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
Return on Investment
EBIT
Return on total capital =
Short and long term debt and equity

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
ROE =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦

Net income – Preferred dividends

Return on common equity =
Average common equity

ROE = ROA × Leverage

Dupont Model
ROE = Net profit margin × Total asset turnover × Leverage

ROE = Tax burden × Interest burden × EBIT margin × Total asset turnover × Leverage

Price per share

P/E =
Ratios in Equity Analysis: Earnings per share

Price per share

P/Cf =
Cash flow per share
Valuation ratios
Price per share
P/S =
Sales per share

P Price per share

=
BV Book value per share

𝐶𝐹𝑂
Cash flow per share =
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒𝑠
Per share ratios 𝐸𝐵𝐼𝑇𝐷𝐴
EBITDA per share =
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒𝑠

Common dividends declared

Dividends per share =
Weighted average number of ordinary shares outstanding

Common share dividends

Dividends payout ratio =
Net income attributable to common shares
Dividend related ratios
Net income attributable to common shares – Common share dividends
Retention rate =
Net income attributable to common shares
Sustainable growth rate = 𝑏 × ROE

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Segment profit (loss)

Segment margin =
Segment revenue

Segment revenue
Segment ratios Segment turnover =
Segment assets

Segment profit (loss)

Segment ROA =
Segment assets

Segment liabilities
Segment debt ratio =
Segment assets

READING 25:
INVENTORIES
Weighted average cost per 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑠𝑎𝑙𝑒
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 =
unit 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑠𝑎𝑙𝑒

Cost of goods sold 𝐶𝑂𝐺𝑆 𝑢𝑠𝑖𝑛𝑔 𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 = 𝑈𝑛𝑖𝑡𝑠 𝑠𝑜𝑙𝑑 ∗ 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

𝐶𝑂𝐺𝑆 𝑢𝑠𝑖𝑛𝑔 𝐿𝐼𝐹𝑂 = 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 − 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑒𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

Conversion from LIFO to FIFO: 𝐹𝐼𝐹𝑂 𝐶𝑂𝐺𝑆 = 𝐿𝐼𝐹𝑂 𝐶𝑂𝐺𝑆 − (𝐸𝑛𝑑𝑖𝑛𝑔 𝐿𝐼𝐹𝑂 𝑟𝑒𝑠𝑒𝑟𝑣𝑒 − 𝐵𝑒𝑔𝑖𝑛𝑖𝑛𝑔 𝐿𝐼𝐹𝑂 𝑟𝑒𝑠𝑒𝑟𝑣𝑒)
COGS under FIFO
Ending Inventory under FIFO 𝐹𝐼𝐹𝑂 𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 𝐿𝐼𝐹𝑂 𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝐿𝐼𝐹𝑂 𝑟𝑒𝑠𝑒𝑟𝑣𝑒

Net Income under FIFO 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒(𝐹𝐼𝐹𝑂) = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒(𝐿𝐼𝐹𝑂) + (𝐸𝑛𝑑𝑖𝑛𝑔 𝐿𝐼𝐹𝑂 𝑟𝑒𝑠𝑒𝑟𝑣𝑒 − 𝐵𝑒𝑔𝑖𝑛𝑖𝑛𝑔 𝐿𝐼𝐹𝑂 𝑟𝑒𝑠𝑒𝑟𝑣𝑒) ∗ (1 − 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒)

Equity under FIFO 𝐸𝑞𝑢𝑖𝑡𝑦(𝐹𝐼𝐹𝑂) = 𝐸𝑞𝑢𝑖𝑡𝑦(𝐿𝐼𝐹𝑂) + (𝐿𝐼𝐹𝑂 𝑟𝑒𝑠𝑒𝑟𝑣𝑒) ∗ (1 − 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒)

Liabilities under FIFO 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠(𝐹𝐼𝐹𝑂) = 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠(𝐿𝐼𝐹𝑂) + (𝐿𝐼𝐹𝑂 𝑟𝑒𝑠𝑒𝑟𝑣𝑒) ∗ (𝑡𝑎𝑥 𝑟𝑎𝑡𝑒)

Measurement of inventory: 𝑁𝑅𝑉 = 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑠𝑎𝑙𝑒𝑠 𝑝𝑟𝑖𝑐𝑒 − 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑠 − 𝐶𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑜𝑛 𝑐𝑜𝑠𝑡𝑠
Net realizable value
READING 26:
LONG-LIVED ASSETS
Depreciation: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 =
Straight Line Depreciation 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑙𝑖𝑓𝑒

Double Declining Balance 2

𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑖𝑛 𝑦𝑒𝑎𝑟 𝑥 = ∗ 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑦𝑒𝑎𝑟 𝑥
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑙𝑖𝑓𝑒 𝑖𝑛 𝑦𝑒𝑎𝑟𝑠

Units of Production Method 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒

𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = ∗ 𝑂𝑢𝑡𝑝𝑢𝑡 𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 𝑢𝑛𝑖𝑡𝑠
Amortization: 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒
𝐴𝑚𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 =
Straight Line Amortization 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑙𝑖𝑓𝑒

Double Declining Balance 2

𝐴𝑚𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑖𝑛 𝑦𝑒𝑎𝑟 𝑥 = ∗ 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑦𝑒𝑎𝑟 𝑥
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑙𝑖𝑓𝑒 𝑖𝑛 𝑦𝑒𝑎𝑟𝑠

Units of Production Method 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒

𝐴𝑚𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 = ∗ 𝑂𝑢𝑡𝑝𝑢𝑡 𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 𝑢𝑛𝑖𝑡𝑠
READING 27:
INCOME TAXES
Income Tax:
Income Tax Expense 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = 𝑇𝑎𝑥𝑒𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 + ∆𝐷𝑇𝐿 − ∆𝐷𝑇𝐴

Income Tax Payable 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 = 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 ∗ 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒

Deferred Tax Asset & Liability: 𝐷𝑇𝐴 = (𝑇𝑎𝑥 𝐵𝑎𝑠𝑒 − 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐴𝑚𝑜𝑢𝑛𝑡) ∗ 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒
Deferred Tax Asset
Deferred Tax Liability 𝐷𝑇𝐿 = (𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐴𝑚𝑜𝑢𝑛𝑡 − 𝑇𝑎𝑥 𝐵𝑎𝑠𝑒) ∗ 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒

Effective Tax Rate 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 𝐸𝑥𝑝𝑒𝑛𝑠𝑒

𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒 =
𝑃𝑟𝑒𝑡𝑎𝑥 𝐼𝑛𝑐𝑜𝑚𝑒

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reserved.
Transaction: 0066205454,
 Formula Sheets
READING 28:
NON-CURRENT (LONG-TERM) LIABILITIES

Interest Expense 𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑜𝑓 𝑎 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑏𝑜𝑢𝑛𝑑 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 + 𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡

𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑜𝑓 𝑎 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝑏𝑜𝑢𝑛𝑑 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 − 𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑝𝑟𝑒𝑚𝑖𝑢𝑚

Effective Interest Method: 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 = 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑏𝑜𝑛𝑑 𝑎𝑡 𝑡ℎ𝑒 𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 ∗ 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
Interest Expense
Interest Payment 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 = 𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑏𝑜𝑛𝑑 ∗ 𝐶𝑜𝑢𝑝𝑜𝑛 𝑅𝑎𝑡𝑒

Amortization of Discount or 𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡(𝑃𝑟𝑒𝑚𝑖𝑢𝑚) = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 − 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡

Premium
Fixed Charge Coverage 𝐸𝐵𝐼𝑇 + 𝐿𝑒𝑎𝑠𝑒 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠
𝐹𝑖𝑥𝑒𝑑 𝐶ℎ𝑎𝑟𝑔𝑒 𝐶𝑜𝑣𝑒𝑟𝑎𝑔𝑒 =
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠 + 𝐿𝑒𝑎𝑠𝑒 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠

CORPORATE FINANCE
READING 32:
CAPITAL BUDGETING
R
CFt
𝑁𝑃𝑉 = 𝑃𝑉 𝑜𝑓 𝑐𝑎𝑠ℎ𝑓𝑙𝑜𝑤𝑠 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑜𝑢𝑡𝑙𝑎𝑦 = ÿ
(1 + r)å
Net Present Value (NPV) tuÌ

𝐶𝐹𝑡 = 𝑡ℎ𝑒 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑎𝑡 𝑡𝑖𝑚𝑒 𝑡

𝑁 = 𝑡ℎ𝑒 𝑝𝑟𝑜𝑗𝑒𝑐𝑡’𝑠 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑙𝑖𝑓𝑒

𝑟 = 𝑡ℎ𝑒 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 𝑓𝑜𝑟 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 𝑜𝑟 𝑜𝑝𝑝𝑜𝑟𝑡𝑢𝑛𝑖𝑡𝑦 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

𝐶𝐹1 𝐶𝐹2 𝐶𝐹𝑁

= −Initial Investment Outlay + + +⋯+ = 0
(1 + IRR)1 (1 + IRR)2 (1 + IRR)N

Internal Rate of Return (IRR) R

CFt
ÿ =0
(1 + IRR) å
tuÌ

Payback Period Cost left at the beginning of last year

𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑝𝑒𝑟𝑖𝑜𝑑 = Full years until recovery +
Cash flow during the last year
𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑒𝑑 𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑝𝑒𝑟𝑖𝑜𝑑
Cost left at the beginning of last year
Discounted Payback Period = Full years until recovery in present value terms +
Present value of the cash flow during the last year

NPV
𝑃𝐼 = 1 +
Profitability Index Initial Investment

READING 33:
COST OF CAPITAL
Weighted Average Cost of 𝑊𝐴𝐶𝐶 = 𝑤𝑑𝑟𝑑 (1 – 𝑡) + 𝑤𝑝𝑟𝑝 + 𝑤𝑒𝑟𝑒

Capital (WACC)
Cost of Debt Capital After tax cost of debt = rd (1 – t)

Cost of noncallable, non- Dp

𝑟𝑝 =
convertible preferred stock Pp

Cost of Equity: Capital Asset

Pricing Model Approach 𝐸(𝑅𝑖) = 𝑅𝐹 + 𝛽𝑖[𝐸(𝑅𝑀) − 𝑅𝐹]
Dividend Discount Model 𝐷1
𝑟𝑒 = +𝑔
𝑃0

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Prepared exclusively for Matthew Maselle
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reserved.
Transaction: 0066205454,
 Formula Sheets
Sustainable growth rate 𝐷
𝑔 = Ê1 − Ë ∗ 𝑅𝑂𝐸
𝐸𝑃𝑆
Bond Yield plus Risk Premium 𝑟𝑒 = 𝑟𝑑 + 𝑅𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚
𝑟𝑑 = 𝐵𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡
Approach
𝑅𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝑎𝑑𝑑𝑒𝑑 𝑖𝑠 𝑖𝑛 𝑡ℎ𝑒 𝑟𝑎𝑛𝑔𝑒 𝑜𝑓 3 𝑡𝑜 5 𝑝𝑒𝑟𝑐𝑒𝑛𝑡
Beta & Cost of capital: (βL, comparable)
βU, comparable =
Unlevered β of Comparable Dcomparable
[1 + ((1 − tcomparable) ∗ )]
Ecomparable
Company
Levered β of Project Dproject
βL, project = βU, comparable[1 + ((1 − tproject) ∗ )]
Eproject

Country risk premium (Annualized standard deviation of equity index)

= Sovereign yield spread ∗ V W
(Annualized s. d. of the sovereign bond market in termsof the developed market currency)

Break Point for the amount of 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑎𝑡 𝑤ℎ𝑖𝑐ℎ 𝑡ℎ𝑒 𝑠𝑜𝑢𝑟𝑐𝑒 ÷ 𝑠 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑐ℎ𝑎𝑛𝑔𝑒𝑠
𝐵𝑟𝑒𝑎𝑘 𝑝𝑜𝑖𝑛𝑡 =
capital 𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝑛𝑒𝑤 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑎𝑖𝑠𝑒𝑑 𝑓𝑟𝑜𝑚 𝑡ℎ𝑒 𝑠𝑜𝑢𝑟𝑐𝑒

Flotation Cost: Correct NPV = 𝑃𝑉 𝑜𝑓 𝐶𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤𝑠 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑂𝑢𝑡𝑙𝑎𝑦 − 𝐹𝑙𝑜𝑡𝑎𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 𝑖𝑛 % ∗ 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑅𝑎𝑖𝑠𝑒𝑑
Treatment of Flotation Cost
READING 34:
MEASURES OF LEVERAGE
Leverage: 𝑄(𝑃 − 𝑉)
𝐷𝑂𝐿 =
Degree of Operating Leverage 𝑄(𝑃 − 𝑉) − 𝐹

Degree of Financial Leverage 𝐸𝐵𝐼𝑇 𝑄(𝑃 − 𝑉) − 𝐹

𝐷𝐹𝐿 = =
𝐸𝐵𝐼𝑇 − 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑄(𝑃 − 𝑉) − 𝐹 − 𝐶

𝑄(𝑃 − 𝑉)
𝐷𝑇𝐿 =
Degree of Total Leverage 𝑄(𝑃 − 𝑉) − 𝐹 − 𝐶

𝐶 = 𝐹𝑖𝑥𝑒𝑑 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑐𝑜𝑠𝑡

𝐹+𝐶
𝑄BE =
Breakeven Quantity of Sales 𝑃−𝑉

𝐶 = 𝐹𝑖𝑥𝑒𝑑 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑐𝑜𝑠𝑡

Operating Breakeven Quantity 𝐹

𝑄𝑂BE =
of Sales 𝑃−𝑉

Operating & Cash Conversion
Cycles:
Operating cycle
Cash conversion cycle
Comparable Yield Measures:
Money market yield
READING 35:
WORKING CAPITAL MANAGEMENT
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑦𝑐𝑙𝑒 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝐶𝑎𝑠ℎ 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑐𝑦𝑐𝑙𝑒 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 − 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠
𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 − 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑟𝑖𝑐𝑒 360
𝑀𝑜𝑛𝑒𝑦 𝑚𝑎𝑟𝑘𝑒𝑡 𝑦𝑖𝑒𝑙𝑑 = ( )∗( )
𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑟𝑖𝑐𝑒 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑡𝑜 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦

Bond equivalent yield 𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 − 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑟𝑖𝑐𝑒 365

𝐵𝑜𝑛𝑑 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑦𝑖𝑒𝑙𝑑 = ( )∗( )
𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑟𝑖𝑐𝑒 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑡𝑜 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦
Discount basis yield 𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 − 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑟𝑖𝑐𝑒 360
𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑏𝑎𝑠𝑖𝑠 𝑦𝑖𝑒𝑙𝑑 = ( )∗( )
𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑡𝑜 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦

Managing Customer Receipts 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑎𝑖𝑙𝑦 𝑓𝑙𝑜𝑎𝑡

𝐹𝑙𝑜𝑎𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 = ( )
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑎𝑖𝑙𝑦 𝑑𝑒𝑝𝑜𝑠𝑖𝑡
·&'
Accounts Payable 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 R(=)*M +á Ñ,-³ )*-+sÑ Ñx³.+(st ¶*Mx+Ñ
Management 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑡𝑟𝑎𝑑𝑒 𝑐𝑟𝑒𝑑𝑖𝑡 = Ê1 + Ë −1
1 − 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡
Short Term Borrowing Costs:
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 + 𝐶𝑜𝑚𝑚𝑖𝑡𝑚𝑒𝑛𝑡 𝑓𝑒𝑒
Line of credit with a 𝐶𝑜𝑠𝑡 =
𝐿𝑜𝑎𝑛 𝑎𝑚𝑜𝑢𝑛𝑡
commitment fee

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Banker’s Acceptance (amount 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝐶𝑜𝑠𝑡 =
borrowed includes the 𝐿𝑜𝑎𝑛 𝑎𝑚𝑜𝑢𝑛𝑡 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡

interest)
Borrowing involves a dealer’s 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 + 𝐷𝑒𝑎𝑙𝑒𝑟′𝑠𝑐𝑜𝑚𝑚𝑖𝑠𝑠𝑖𝑜𝑛 + 𝐵𝑎𝑐𝑘𝑢𝑝𝑐𝑜𝑠𝑡𝑠
𝐶𝑜𝑠𝑡 =
fee and a backup fee and is 𝐿𝑜𝑎𝑛 𝑎𝑚𝑜𝑢𝑛𝑡 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
quoted as all inclusive

Equity
READING 36:
MARKET ORGANIZATION AND STRUCTURE
1
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 % =
𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑜𝑠𝑖𝑡𝑖𝑜𝑛

𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜 =
Leverage 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑒𝑞𝑢𝑖𝑡𝑦 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

1
𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜 =
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑚𝑎𝑟𝑔𝑖𝑛 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 %

1
𝑀𝑎𝑥𝑖𝑚𝑢𝑚 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜 =
𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝑚𝑎𝑟𝑔𝑖𝑛 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡

Rate of return on a margin 𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝐸𝑞𝑢𝑖𝑡𝑦 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑂𝑢𝑡𝑙𝑎𝑦

𝑅𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 =
transaction 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑂𝑢𝑡𝑙𝑎𝑦

1 − 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑚𝑎𝑟𝑔𝑖𝑛
Margin call price 𝑀𝑎𝑟𝑔𝑖𝑛 𝑐𝑎𝑙𝑙 𝑝𝑟𝑖𝑐𝑒 = 𝑃𝑜 ∗ Ê Ë
1 − 𝑚𝑎𝑖𝑛𝑡𝑒𝑛𝑎𝑛𝑐𝑒 𝑚𝑎𝑟𝑔𝑖𝑛

READING 37:
SECURITY MARKET INDEXES
Price Return Index: ∑R
tuv 𝑛𝑖𝑃𝑖
𝑉𝑃𝑅𝐼 =
Value of a price return index 𝐷
Value of a price return index 𝑉𝑃𝑅𝐼𝑇 = 𝑉𝑃𝑅𝐼0 (1 + PR𝐼1)(1 + PR𝐼2) … (1 + PR𝐼𝑇)
over multiple periods
Value of a total return index 𝑉𝑇𝑅𝐼𝑇 = 𝑉𝑇𝑅𝐼0 (1 + TR𝐼1)(1 + TR𝐼2) … (1 + TR𝐼𝑇)
over multiple periods
Price return of an index 𝑉𝑃𝑅𝐼1 − 𝑉𝑃𝑅𝐼0
𝑃𝑅𝐼 =
𝑉𝑃𝑅𝐼0

Total return of an index 𝑉𝑃𝑅𝐼1 − 𝑉𝑃𝑅𝐼0 + 𝐼𝑛𝑐𝐼

𝑇𝑅𝐼 =
𝑉𝑃𝑅𝐼0

Weight of a security under 𝑃𝑖

𝑤𝑖 ¶ =
different index weighting ∑R
tuv 𝑃𝑖
schemes:
Price Weighting
Equal Weighting 1
𝑤𝑖/ =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 𝑖𝑛 𝑡ℎ𝑒 𝑖𝑛𝑑𝑒𝑥

Market capitalization 𝑄𝑖𝑃𝑖

𝑤𝑖0 =
weighting ∑R
ªuv 𝑄𝑗𝑃𝑗

Fundamental weighting 𝐹𝑖
𝑤𝑖1 =
∑R
ªuv 𝐹𝑗

Float adjusted market 𝑓𝑖𝑄𝑖𝑃𝑖

𝑤𝑖0 =
capitalization weighting ∑R
ªuv 𝑓𝑖𝑄𝑗𝑃𝑗
𝑓𝑖 = 𝑓𝑟𝑎𝑐𝑡𝑖𝑜𝑛 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑖𝑛 𝑡ℎ𝑒 𝑚𝑎𝑟𝑘𝑒𝑡 𝑓𝑙𝑜𝑎𝑡

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Index value: 𝑆𝑢𝑚 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒𝑠
𝑃𝑟𝑖𝑐𝑒 𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑖𝑛𝑑𝑒𝑥 𝑣𝑎𝑙𝑢𝑒 =
Price weighted index 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘𝑠 𝑖𝑛 𝑖𝑛𝑑𝑒𝑥 𝑎𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝑓𝑜𝑟 𝑠𝑝𝑙𝑖𝑡𝑠
Market capitalization weighted 𝑀𝑎𝑟𝑘𝑒𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑖𝑛𝑑𝑒𝑥 𝑣𝑎𝑙𝑢𝑒
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑡𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑛𝑑𝑒𝑥 𝑠𝑡𝑜𝑐𝑘𝑠
index = ∗ 𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑖𝑛𝑑𝑒𝑥 𝑣𝑎𝑙𝑢𝑒
𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑡𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑛𝑑𝑒𝑥 𝑠𝑡𝑜𝑐𝑘𝑠

Equal weighted index 𝐸𝑞𝑢𝑎𝑙 𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑖𝑛𝑑𝑒𝑥 𝑣𝑎𝑙𝑢𝑒 = 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑑𝑒𝑥 𝑣𝑎𝑙𝑢𝑒 ∗ (1 + %𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑑𝑒𝑥 𝑣𝑎𝑙𝑢𝑒)

READING 41: EQUITY VALUATION: CONCEPTS AND BASIC TOOLS

Value of noncallable, non- 𝐷𝑜

𝑉𝑜 =
convertible preferred stock 𝑟

Value of an equity security:

𝐷𝑜 ∗ (1 + 𝑔)
𝑉𝑜 =
Gordon Growth model 𝑟−𝑔

s
Two stage dividend discount 𝐷𝑜 ∗ (1 + 𝑔𝑠)t 𝑉𝑛
model 𝑉𝑜 = ÿ +
(1 + 𝑟)t (1 + 𝑟)s
tuv

Sustainable growth rate 𝑆𝑢𝑠𝑡𝑎𝑖𝑛𝑎𝑏𝑙𝑒 𝑔𝑟𝑜𝑤𝑡ℎ = (1 − 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜) ∗ 𝑅𝑂𝐸

𝐷1
𝑃 𝑝
𝐽𝑢𝑠𝑡𝑖𝑓𝑖𝑒𝑑 = 𝐸1 =
𝐸 𝑟−𝑔 𝑟−𝑔

𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

𝑃/𝐸 =
Multiples: 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Justified P/E 𝑃/𝐶𝑓 =
𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

𝑃/𝑆 =
𝑆𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

𝑃 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

=
𝐵𝑉 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Enterprise value multiple: 𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑣𝑎𝑙𝑢𝑒 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑎𝑛𝑑 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠𝑡𝑜𝑐𝑘 + 𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡
Enterprise value − 𝐶𝑎𝑠ℎ 𝑎𝑛𝑑 𝑠ℎ𝑜𝑟𝑡 𝑡𝑒𝑟𝑚 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠

EV/EBITDA 𝐸𝑉 𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑣𝑎𝑙𝑢𝑒

=
𝐸𝐵𝐼𝑇𝐷𝐴 𝐸𝐵𝐼𝑇𝐷𝐴

Asset Based Model 𝐸𝑞𝑢𝑖𝑡𝑦 𝑣𝑎𝑙𝑢𝑒 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑜𝑟 𝑓𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑐𝑜𝑚𝑝𝑎𝑛𝑦 ÷𝑠 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑀𝑎𝑟𝑘𝑒𝑡 𝑜𝑟 𝑓𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑐𝑜𝑚𝑝𝑎𝑛𝑦 ÷ 𝑠 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Fixed Income
READING 44:
INTRODUCTION TO FIXED-INCOME VALUATION
Bond Price: 𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 + 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙
𝑃𝑉 = + + +. . +
Annual Coupon Bond (1 + 𝑌𝑇𝑀) (1 + 𝑌𝑇𝑀)Š (1 + 𝑌𝑇𝑀)· (1 + 𝑌𝑇𝑀)R

𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 + 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙

𝑃𝑉 = + Š + · +. . +
𝑌𝑇𝑀 𝑌𝑇𝑀 𝑌𝑇𝑀 𝑌𝑇𝑀 R∗Š
Semi-annual Coupon Bond (1 +
2
) T1 + U T1 + U T1 + U
2 2 2

No Arbitrage Price of a Bond 𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 + 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙

𝑁𝑜 𝑎𝑟𝑏𝑖𝑡𝑟𝑎𝑔𝑒 𝑝𝑟𝑖𝑐𝑒 = + + +. . +
(1 + 𝑆1) (1 + 𝑆2) Š (1 + 𝑆3)· (1 + 𝑆𝑛)R

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Transaction: 0066205454,

Flat price of a bond
Accrued Interest
Full Price of a Bond
Yield Measures:
Current Yield
Effective Annual Yield
Conversion for periodicity
Spot rate & Forward rate
calculation
Price of a Bond using forward
rates
Yield Spread Measures:
G Spread
I Spread
OAS
Pass through rate
Single Monthly Mortality Rate
Two key ratios to assess credit
risk:
Debt to service coverage ratio
Loan to value ratio
Return on a fixed rate bond
Duration:
Macaulay duration
Modified duration
Effective duration
Portfolio duration
Money duration
Prepared exclusively for Matthew Maselle
Formula Sheets
𝐹𝑙𝑎𝑡 𝑝𝑟𝑖𝑐𝑒 = 𝐷𝑖𝑟𝑡𝑦 𝑝𝑟𝑖𝑐𝑒(𝐹𝑢𝑙𝑙 𝑝𝑟𝑖𝑐𝑒) − 𝑎𝑐𝑐𝑟𝑢𝑒𝑑 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
(𝐷𝑎𝑦𝑠 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑡ℎ𝑒 𝑙𝑎𝑠𝑡 𝑐𝑜𝑢𝑝𝑜𝑛 𝑑𝑎𝑡𝑒 𝑎𝑛𝑑 𝑠𝑒𝑡𝑡𝑙𝑒𝑚𝑒𝑛𝑡 𝑑𝑎𝑡𝑒)
𝐴𝑐𝑐𝑟𝑢𝑒𝑑 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 𝐶𝑜𝑢𝑝𝑜𝑛 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 ∗
(𝐷𝑎𝑦𝑠 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑡ℎ𝑒 𝑡𝑤𝑜 𝑐𝑜𝑢𝑝𝑜𝑛 𝑑𝑎𝑡𝑒𝑠)
4,-³ )*t†**s t5* .+(¶+s Ñ,t* ,sÑ ³*tt6*=*st Ñ,t*
𝐹𝑢𝑙𝑙 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑏𝑜𝑛𝑑 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑛 𝑡ℎ𝑒 𝑐𝑜𝑢𝑝𝑜𝑛 𝑑𝑎𝑡𝑒 ∗ (1 + 𝑌𝑖𝑒𝑙𝑑 𝑡𝑜 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦)
3
4,-³ )*t†**s t5* t†+ .+(¶+s Ñ,t*³
7
𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ 𝑐𝑜𝑢𝑝𝑜𝑛 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑖𝑒𝑙𝑑 =
𝑏𝑜𝑛𝑑 𝑝𝑟𝑖𝑐𝑒
𝐸𝐴𝑌 = (1 + 𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑟𝑎𝑡𝑒) = − 1
𝑆𝑡𝑎𝑡𝑒𝑑 𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑎𝑡𝑒
𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑟𝑎𝑡𝑒 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑃𝑒𝑟𝑖𝑜𝑑𝑠 𝑂𝑛𝑒 𝑌𝑒𝑎𝑟
𝑚 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑃𝑒𝑟𝑖𝑜𝑑𝑠 𝑂𝑛𝑒 𝑌𝑒𝑎𝑟
𝐴𝑃𝑅𝑚 = 𝐴𝑃𝑅𝑛 s
Ê1 + Ë = Ê1 + Ë
𝑚 𝑛
(1 + 𝑆2)Š = (1 + 𝑆1)v ∗ (1 + 1𝑦1𝑦)
𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛
𝐵𝑜𝑛𝑑 𝑣𝑎𝑙𝑢𝑒 = + +
1 + 𝑆1 (1 + 𝑆1) ∗ (1 + 1𝑦1𝑦) (1 + 𝑆1) ∗ (1 + 1𝑦1𝑦) ∗ (1 + 2𝑦1𝑦)
𝐺 𝑠𝑝𝑟𝑒𝑎𝑑 = 𝑌𝑖𝑒𝑙𝑑 𝑡𝑜 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦 𝑜𝑛 𝑡ℎ𝑒 𝑐𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑏𝑜𝑛𝑑 − 𝑌𝑖𝑒𝑙𝑑 𝑡𝑜 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦 𝑜𝑛 𝑡ℎ𝑒 𝑏𝑒𝑛𝑐ℎ𝑚𝑎𝑟𝑘 𝑏𝑜𝑛𝑑
𝐼 𝑠𝑝𝑟𝑒𝑎𝑑 = 𝑌𝑖𝑒𝑙𝑑 𝑡𝑜 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦 𝑜𝑛 𝑡ℎ𝑒 𝑐𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑏𝑜𝑛𝑑 − 𝑆𝑤𝑎𝑝 𝑟𝑎𝑡𝑒
𝑂𝐴𝑆 = 𝑍 𝑠𝑝𝑟𝑒𝑎𝑑 − 𝑂𝑝𝑡𝑖𝑜𝑛 𝑣𝑎𝑙𝑢𝑒
READING 45:
INTRODUCTION TO ASSET-BACKED SECURITIES
𝑃𝑎𝑠𝑠 𝑡ℎ𝑟𝑜𝑢𝑔ℎ 𝑟𝑎𝑡𝑒 = 𝑀𝑜𝑟𝑡𝑔𝑎𝑔𝑒 𝑟𝑎𝑡𝑒 𝑜𝑛 𝑡ℎ𝑒 𝑢𝑛𝑑𝑒𝑟𝑙𝑖𝑛𝑔 𝑝𝑜𝑜𝑙 𝑜𝑓 𝑚𝑜𝑟𝑡𝑔𝑎𝑔𝑒𝑠 − 𝑆𝑒𝑟𝑣𝑖𝑐𝑖𝑛𝑔 𝑓𝑒𝑒 − 𝑂𝑡ℎ𝑒𝑟 𝑓𝑒𝑒
𝑃𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑚𝑜𝑛𝑡ℎ
𝑆𝑀𝑀 =
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑚𝑜𝑟𝑡𝑔𝑎𝑔𝑒 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 𝑓𝑜𝑟 𝑚𝑜𝑛𝑡ℎ − 𝑆𝑐ℎ𝑒𝑑𝑢𝑙𝑒𝑑 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑓𝑜𝑟 𝑚𝑜𝑛𝑡ℎ
𝑁𝑒𝑡 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒
𝐷𝑒𝑏𝑡 𝑡𝑜 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜 =
𝐷𝑒𝑏𝑡 𝑠𝑒𝑟𝑣𝑖𝑐𝑒
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑚𝑜𝑟𝑡𝑔𝑎𝑔𝑒 𝑎𝑚𝑜𝑢𝑛𝑡
𝐿𝑜𝑎𝑛 𝑡𝑜 𝑣𝑎𝑙𝑢𝑒 𝑟𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑝𝑝𝑟𝑎𝑖𝑠𝑒𝑑 𝑣𝑎𝑙𝑢𝑒
READING 46:
UNDERSTANDING FIXED-INCOME RISK AND RETURN
v
𝑆𝑢𝑚 𝑜𝑓 𝑐𝑜𝑢𝑝𝑜𝑛𝑠 𝑎𝑛𝑑 𝑟𝑒𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 + 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑜𝑟 𝑟𝑒𝑑𝑒𝑚𝑝𝑡𝑖𝑜𝑛 𝑜𝑓 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑎𝑡 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦 s
𝑅𝑒𝑡𝑢𝑟𝑛 = Ê Ë −1
𝐵𝑜𝑛𝑑 𝑝𝑟𝑖𝑐𝑒
1+𝑟 1 + 𝑟 + [𝑁 ∗ (𝑐 − 𝑟)] 𝑡
𝑀𝑎𝑐𝐷𝑢𝑟 = 8 − :−( )
𝑟 (𝑐 ∗ [(1 + 𝑟)R − 1] + 𝑟} 𝑇
𝑀𝑎𝑐𝐷𝑢𝑟
𝑀𝑜𝑑𝐷𝑢𝑟 =
1 + 𝑌𝑇𝑀
𝑉¾ − 𝑉;
𝐴𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝑀𝑜𝑑𝐷𝑢𝑟 =
(2 ∗ 𝑉Ì ∗ ∆𝑌𝑇𝑀)
𝑉¾ − 𝑉;
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 =
(2 ∗ 𝑉Ì ∗ ∆𝐶𝑢𝑟𝑣𝑒)
𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 = 𝑤v̇ (𝐷v̇ ) + 𝑤Ṧ(𝐷Ṧ ) + 𝑤· (𝐷·) … 𝑤s (𝐷ṡ )
𝑀𝑜𝑛𝑒𝑦 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 = 𝐴𝑛𝑛𝑢𝑎𝑙 𝑚𝑜𝑑𝑖𝑓𝑖𝑒𝑑 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 ∗ 𝐹𝑢𝑙𝑙 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑏𝑜𝑛𝑑 𝑝𝑜𝑠𝑖𝑡𝑖𝑜𝑛
𝑀𝑜𝑛𝑒𝑦 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 100 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑝𝑎𝑟 𝑣𝑎𝑙𝑢𝑒 = 𝐴𝑛𝑛𝑢𝑎𝑙 𝑚𝑜𝑑𝑖𝑓𝑖𝑒𝑑 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 ∗ 𝐹𝑢𝑙𝑙 𝑏𝑜𝑛𝑑 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 100 𝑜𝑓 𝑝𝑎𝑟 𝑣𝑎𝑙𝑢𝑒
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 Formula Sheets
Price value of a basis point 𝑉¾ − 𝑉;
𝑃𝑉𝐵𝑃 =
2

Convexity: 𝑉¾ + 𝑉; − 2 ∗ 𝑉Ì
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐶𝑜𝑛𝑣𝑒𝑥𝑖𝑡𝑦 =
Approximate convexity (∆𝑌𝑇𝑀)Š ∗ 𝑉Ì

Effective convexity 𝑉¾ + 𝑉; − 2 ∗ 𝑉Ì
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐶𝑜𝑛𝑣𝑒𝑥𝑖𝑡𝑦 =
(∆𝑐𝑢𝑟𝑣𝑒)Š ∗ 𝑉Ì

Change in price of a bond:

Percentage change in full price 1
= −𝑎𝑛𝑛𝑢𝑎𝑙 𝑀𝑜𝑑𝐷𝑢𝑟 ∗ (∆𝑌𝑖𝑒𝑙𝑑) + ∗ 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑜𝑛𝑣𝑒𝑥𝑖𝑡𝑦 ∗ (∆𝑌𝑖𝑒𝑙𝑑) Š
of the bond 2

Duration Gap 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 𝑔𝑎𝑝 = 𝑀𝑎𝑐𝑎𝑢𝑙𝑎𝑦 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 − 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 ℎ𝑜𝑟𝑖𝑧𝑜𝑛

READING 47:
FUNDAMENTALS OF CREDIT ANALYSIS
Expected Loss & Loss Given 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑙𝑜𝑠𝑠 = 𝐷𝑒𝑓𝑎𝑢𝑙𝑡 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 × (1 − 𝑟𝑒𝑐𝑜𝑣𝑒𝑟𝑦 𝑟𝑎𝑡𝑒)
Default
Loss Given Default 𝐿𝐺𝐷 = (1 − 𝑟𝑒𝑐𝑜𝑣𝑒𝑟𝑦 𝑟𝑎𝑡𝑒)
Ratios in Credit Analysis: 𝐸𝐵𝐼𝑇𝐷𝐴 = 𝐸𝐵𝐼𝑇 + 𝐷𝑒𝑝 + 𝐴𝑚𝑜𝑟𝑡
EBITDA
𝐹𝐹𝑂 = 𝑁𝐼 + 𝐷𝑒𝑝 + 𝐴𝑚𝑜𝑟𝑡 + 𝑁𝐶𝐶
FFO
𝑁𝐶𝐶 = 𝑁𝑜𝑛 𝑐𝑎𝑠ℎ 𝑐ℎ𝑎𝑟𝑔𝑒𝑠
FCF after dividends 𝐹𝐶𝐹 = 𝐶𝐹𝑂 − 𝐶𝐴𝑃𝐸𝑋 − 𝐷𝑖𝑣

Leverage ratios: 𝐷𝑒𝑏𝑡

𝐷𝑒𝑏𝑡 𝑡𝑜 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 =
Debt to Capital 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
Debt to EBITDA 𝐷𝑒𝑏𝑡
𝐷𝑒𝑏𝑡 𝑡𝑜 𝐸𝐵𝐼𝑇𝐷𝐴 =
𝐸𝐵𝐼𝑇𝐷𝐴
Debt to FFO 𝐷𝑒𝑏𝑡
𝐷𝑒𝑏𝑡 𝑡𝑜 𝐹𝐹𝑂 =
𝐹𝐹𝑂
FCF after dividends/Debt 𝐹𝐶𝐹 𝑎𝑓𝑡𝑒𝑟 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
𝐹𝐶𝐹 𝑎𝑓𝑡𝑒𝑟 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑡𝑜 𝑑𝑒𝑏𝑡 =
𝐷𝑒𝑏𝑡

Coverage ratios: 𝐸𝐵𝐼𝑇𝐷𝐴

𝐸𝐵𝐼𝑇𝐷𝐴 𝑡𝑜 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 =
EBITDA to Interest expense 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒

EBIT to Interest expense 𝐸𝐵𝐼𝑇

𝐸𝐵𝐼𝑇 𝑡𝑜 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 =
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒

Alternative Investments
READING 50:
INTRODUCTION TO ALTERNATIVE INVESTMENTS
Hedge funds fee:
Management Fee 𝑀𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡 𝐹𝑒𝑒 = 𝐴𝑠𝑠𝑒𝑡𝑠 𝑢𝑛𝑑𝑒𝑟 𝑚𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡 ∗ % 𝑀𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡 𝑓𝑒𝑒

Incentive Fee
𝐼𝑛𝑐𝑒𝑛𝑡𝑖𝑣𝑒 𝐹𝑒𝑒 = 𝐺𝑎𝑖𝑛𝑠 𝑛𝑒𝑡 𝑜𝑓 𝑚𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡 𝑓𝑒𝑒 ∗ % 𝐼𝑛𝑐𝑒𝑛𝑡𝑖𝑣𝑒 𝑓𝑒𝑒

Return to investors 𝐸𝑛𝑑𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑛𝑒𝑡 𝑜𝑓 𝐹𝑒𝑒𝑠

𝑅𝑒𝑡𝑢𝑟𝑛 𝑡𝑜 𝑖𝑛𝑣𝑒𝑠𝑡𝑜𝑟𝑠 = −1
𝐴𝑠𝑠𝑒𝑡𝑠 𝑢𝑛𝑑𝑒𝑟 𝑚𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡 𝑎𝑡 𝑡ℎ𝑒 𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟

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 Formula Sheets
Portfolio Management
READING 52:
PORTFOLIO RISK AND RETURN - PART I
Major Return Measures: 𝑃1 − 𝑃0 + 𝐷1
HPR =
𝑃0

𝑃1 = Price received at the end of the holding

Holding Period Return
𝑃0 = 𝑃0 is the initial investment

𝐷1 = cash paid by the investment at the end of the holding period

Arithmetic Return 𝑅1 + 𝑅2 + 𝑅3 + 𝑅4 + ⋯ 𝑅𝑛
𝐴𝑟𝑖𝑡ℎ𝑚𝑒𝑡𝑖𝑐 𝑟𝑒𝑡𝑢𝑟𝑛 =
𝑛
v
Geometric Mean Return 𝐺𝑒𝑜𝑚𝑒𝑡𝑟𝑖𝑐 𝑚𝑒𝑎𝑛 𝑟𝑒𝑡𝑢𝑟𝑛 = [(1 + R1) × (1 + R2) × … × (1 + Rn)]ì − 1

PV (outflows) = PV (inflows)
Money Weighted Rate of
R
Return CFt
ÿ =0
(1 + MWRR) å
tuÌ
Use IRR function on a financial Calculator or spreadsheet to find money weighted rate of return.
𝐴𝑛𝑛𝑢𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 = (1 + Weekly R) 'Š − 1

Annualized Return 𝐴𝑛𝑛𝑢𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 = (1 + Monthly R)vŠ − 1

𝐴𝑛𝑛𝑢𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 = (1 + Daily R)·&' − 1

Nominal return 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 = ©1 + ræ< « ∗ (1 + π) − 1

>
Variance, Covariance & (𝑅 − 𝜇)Š
tuv t
Correlation of Asset Returns: 𝜎Š =
𝑇
Population Variance
𝑻
Sample Variance (𝑹𝒕 … )𝟐
−𝑹
𝒕u𝟏
𝒔𝟐 =
𝑻−𝟏

𝒏
Covariance 𝒕u𝟏
¬(𝑅x − 𝐸(𝑅-̇ )©𝑅ª − 𝐸(𝑅¯̇ «°
𝑐𝑜𝑣©𝑅v , 𝑅ª « =
𝑛−1

Correlation 𝑐𝑜𝑣©𝑅v , 𝑅ª «
𝜌©𝑅v , 𝑅ª « =
𝜎(𝑅𝑖)𝜎(𝑅𝑗)

1
𝑈𝑡𝑖𝑙𝑖𝑡𝑦 = 𝐸(𝑟) − 𝐴𝜎 Š
Utility of An Investment 2

𝐴 = 𝑚𝑒𝑎𝑠𝑢𝑟𝑒 𝑜𝑓 𝑟𝑖𝑠𝑘 𝑎𝑣𝑒𝑟𝑠𝑖𝑜𝑛

Portfolio Return & Standard 𝑅¶ = 𝑤v̇ (𝑅v̇ ) + 𝑤Ṧ (𝑅Ṧ) + 𝑤· (𝑅· ) … 𝑤s (𝑅ṡ )
Deviation: Portfolio Return
Portfolio Standard Deviation
𝜎¶ = B(𝑤vṦ 𝜎vṦ + 𝑤ŠṦ 𝜎ŠṦ + 2𝑤v̇ 𝑤Ṧ 𝜌v,Š 𝜎v 𝜎Š )

READING 53:
PORTFOLIO RISK AND RETURN - PART II
Beta 𝐶𝑜𝑣(𝑅𝑖, 𝑅𝑚) 𝜌𝑖, 𝑚 𝜎𝑖
𝛽𝑖 = =
𝜎Š𝑚 𝜎𝑚

Expected Return of An Asset: 𝐸(𝑅𝑖) = 𝑅𝐹 + 𝛽𝑖[𝐸(𝑅𝑀) − 𝑅𝐹]

Capital Asset Pricing Model
Risk Adjusted Return 𝑅¶ − 𝑅á
𝑆ℎ𝑎𝑟𝑝𝑒 𝑅𝑎𝑡𝑖𝑜 =
Measures: Sharpe ratio 𝜎¶

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 Formula Sheets
M-squared 𝜎0
𝑀Š = ©𝑅¶ − 𝑅á « ∗ − ©𝑅0 − 𝑅á «
𝜎¶
Treynor measure 𝑅¶ − 𝑅á
𝑇𝑟𝑒𝑦𝑛𝑜𝑟 𝑚𝑒𝑎𝑠𝑢𝑟𝑒 =
𝛽¶

Jensen’s alpha 𝛼¶ = 𝑅¶ − [𝑅𝐹 + 𝛽𝑝(𝑅𝑀 − 𝑅𝐹 )]

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