VARIOUS FORMULAS

Sr. No. Formula For Formula Where Example Solution

1 Present Value of Perpetual Bond V = A/R V = Value of Security Bond pays Coupon of 90/10% = 900
A – Instalment per Rs. 90 Per Year. If
year or Interest Per Market Rate of Return
Year is 10% what is the
R – Expected Rate of value of Bond
Return
2 Formula for Growing Perpetuity V = A1/(R-G) V = Value of Security Company paid Equity Step 1
(It is assumed that Growth in A1 – Interest in Year 1 Dividend of Rs. 5 per 5 x 6% = 5.30
Dividend will be Constant till R – Expected Return share in current year Step 2
perpetuity). G – Growth in which is expected to 5.30/(15%-6%) = 58.88
If Questions gives Dividend of Dividend grow at 6% for ever. If
Current Year (that is Year 0) then expected rate of
FIRST calculate A1 (Dividend in return is 15% what is
Year 1) and then apply the the Current Value of
Formula. Equity Share
3 Weighted Average Cost of
Capital
(a) Cost of Debt R-(R*T) R – Rate of Interest on Rate of Interest is 18% 18%-(18% x
Debt Tax Rate is 30% 30%)=12.60%
T – Tax Rate
(b) Cost of Equity Rf+(Rp*B) Rf – Risk Free Rate Rate of 10 Yr. Govt. Step 1
Rp – Risk Premium Bond is 6% Risk Premium = (15%-
B – Beta Nifty Rate of Return is 6%) x 1.5 = 13.5%
(Risk Premium = 15% Step 2
Expected Rate of Beta of Company is Cost of Equity = 6%
Return – Risk Free 1.5 +13.5% = 19.5%
Rate)
(c) WACC Cost of Eq * Weight + Weight of Equity and Debt Equity Ratio is WACC = (12.6 X 2 +
Cost of Debt * Weight Debt will correspond 2:3 19.5 X 3)/5 = 16.74%
to the respective

(d) Cost of Redeemable
Preference Shares
(e) Cost of Redeemable
Debentures
Fair Value of Firm for Specific
4 Year
5 Growth Rate of Equity
6 Growth Rate of Firm
Normally Reinvestment Ratio is
to be calculated as
share in total Capital +
Debt
PD + (RV – NP)/n PD – Preference
(RV + NP)/2 Dividend
RV – Redemption
OR Value
NP – Issue Price
N – Number of Years
Instead of PD it will be
Interest x (1 – T)
Fair Value = Growth refers to the If FCFF of a Firm in Fair Value = 200/18%-
FCFF/(WACC-Growth) expected growth in year 2020 is Rs. 200 5%) = 1538.46
FCFF Crore.
Growth in FCFF is
expected to be 5%
WACC = 18%
ROE * Retention Ratio Retention Ratio means PAT is Rs. 100 Growth Rate of Equity
Ratio of Profits Retain Dividend Paid is Rs. 40 = 18% x (100-40)%
after Declaring Return on Equity is = 18% x 60%
Dividend 18% = 10.80%
ROI * Reinvestment PAT is Rs. 100 Growth Rate of Firm
Ratio Dividend Paid is Rs. 40 = 20% x (100-40)%
Return on Investment = 20% x 60%
is 20% = 12%
Net Income (after Reinvestment Ratio of
adjustment of Non > 1 indicates that
Cash Exp and Non Company is inducting
Cash Income, if any - more funds in the
 Dividend) - + business apart from its
Depreciation + Capital Profits.
Expenditure + Change
in Working Capital +
Increase in Net Debt
Divided by Net
Income (after
adjustments )
NOTE:
If NO information is
given then Retention
Ratio is to be
considered as
Reinvestment Ratio.
7 Value Performance / Performance means Company pays Value = 5/10%
Expectation Actual Rate of Return dividend of Rs. 5 per = Rs. 50/-
Expectation means share.
Expected Rate of Market Expectation is
Return 10% p.a.
8 Terminal Value FCF*(1+G)/(WACC-G) FCF – Free cash Flow FCF 2020 = Rs. 100 Terminal Value
of last year of Crore = 100 (1+2%)/18%-2%)
forecasting period. Terminal Growth Rate = 637.50
G – Terminal Growth = 2%
Rate WACC = 18%
WACC- Weighted
Average Cost of
Capital
Present Value of Terminal Value TV * Discount Factor If TV = 637.50 Discount Factor =
of the last year of Discount Rate = 18% 1/(1+.18)^5 = 0.44
explicit period (Say 5th Explicit Period = 5 PV of TV =
Year) Years 637.50 * 0.44 = 280.50
9 YTM C+(R-P)/N C- Coupon Amount (Not Bond Face Value Rs. 1000 YTM
R+P/2 Rate) Rate of Interest 9% pa. Step 1
R – Redemption Price Redemption at Par = 90+(1000-1020)/5
In Excel Formula is P – Initial Investment Purchase Price Rs. 1020 = 86
=Rate(nper,pmt, pv, fv) N – Number of periods till Maturity 5 Years Step 2
Maturity = 86/(1000+1020)/2
nper = period = 8.51%
pmt = Coupon Amt. NOTE: In Excel Market
pv = Purchase Value i.e. Price should be entered
Market Price (figure to as (-) i.e. Negative since it
be entered in negative) is an outflow. Also
fv = Final Value i.e. COUPON AMOUNT is to
Redemption Price be entered and NOT
COUPON RATE.
TO CALCULATE AFTER TAX
YTM CONSIDER AFTER TAX
COUPON AMOUNT AND AFTER
TAX REDEMPTION AMOUNT
10 YTC (Yield to Call) Same Formula as above R – Call Price
– But N – Period to Call

11 Current Yield C/P C – Coupon Amount Face Value Rs. 1000 Current yield
P – Price Rate of Interest 9% = 90/1020
Price Rs. 1020 = 8.82%
12 Capital Gain Yield YTM – Current Yield Capital Gain Yield
= 8.51 – 8.82
= - 0.31%
Thumb Rule For Par Bonds YTM = Current Yield =
Coupon
For Discount Bonds YTM > Current Yield >
Coupon
13 Value of Share as per DDM D1/(R-G) D – Dividend Amount Company paid dividend of Current Value of Share
(Dividend Discount Model) R – Expected Rate of Rs. 4 per share in current = 4/(20%-10%)
(Applicable when Dividend is Return or Cost of Capital year. Dividend is expected = 40
expected to grow at Constant G – Constant Growth in to grow at 10% for ever
Rate) Dividend Expected Market rate of Return is
(Also this method can be used 20%
ONLY when Dividend Growth
Rate is LESS Than Required
Rate)
14 Macaulay’s Duration In Excel
Duration of Perpetual Bond
Modified Duration
Sensitivity of Duration to
Change in Interest Rate
15 Annuity Calculation in Excel
16 Nominal Rate TO Effective
Rate
17 Effective Rate to Nominal Rate
18 Conversion of Levered Beta to
In Excel:
=Duration(Issue Date,
Maturity Date, Coupon
%, YTM%, Period,
Interest Frequency)
1 + YTM/YTM If YTM is 6% = 1+0.06/0.06
Coupon is 8% = 1.06/0.06
Period – Perpetual = 17.67%
What is the Duration
Duration / (1+YTM) If Duration of Bond is 4.24 Step 1
Modified Duration * (1+ YTM is 17% Modified Duration
% Change in Interest What is its modified = 4.24/(1+17%)
Rate) duration 3.62
What will be Change in Step 2
price if Interest Rate Sensitivity (Price Change
increases by 1% pa. %)
3.62 (1+1%)
= 3.66%
=PMT(Rate, Period, FV) Rate – Coupon Rate
Period – Maturity Period of
Bond
FV - Face Value
ER = (1+NR/n)n – 1 ER – Effective Rate If NR = 20% = (1+ .20/4)^4 – 1
NR – Nominal Rate Compounding – Quarterly = 1+.05)^4 -1
n – Number of Times = 0.2155 Or 21.55%
Compounding
NR = [(1+ER)^1/n-1)] x n ER – Effective Rate If Effective Rate is 21.55% = [(1+.2155)^1/4-1] x 4
NR – Nominal Rate = [(1.2144)^.25-1] x4
n – Number of Times = (1.05-1) x 4
Compounding = 0.05 x 4
= 0.20 or 20%
Bl = Bu ((1+(D/E*(1-T)) Bl = Levered Beta If Levered Beta of a Unlevered Beta
Unlevered Beta Bu = Unlevered Beta Company is 1.5 Steps
D = Debt Debt Equity Ratio 2:1 1.5 = Bu((1+(2/1*(1-.30))
E = Equity Tax Rate 30% 1.5 = Bu(1+(2*.70)
T = Tax Rate Calculate Unlevered Beta 1.5 = Bu(1+1.40)
1.5 = Bu (2.40)
Bu = 1.5/2.40
Bu = 0.625
19 Conversion of Unlevered Beta Bu = Bl ((1+D/E*1-T)) Bl = Levered Beta If unlevered Beta is 0.625 Levered Beta
to Levered Beta Bu = Unlevered Beta Debt Equity Ratio is 2:3 Steps
D = Debt Tax Rate is 30% Bl = 0.625 ((1+(2/3*1-.30))
E = Equity Calculate Levered Beta Bl = 0.625(1+(.67*.70)
T = Tax Rate Bl = 0.625 (1+.469)
Bl = 0.625 *1.469
Bl = 0.918
20 Earning Per Share (EPS) DPS/Pay Out Ratio DPS = Dividend Per Share If Dividend Per Share is Rs. EPS = 5/50% = 10
Pay Out Ratio = % of Net 5
Profit Distributed as Pay Out Ratio is 50%
Dividend
21 Discount for Lack of Control 1-(1/(1+Control If Control Premium is 25% DLOC = 1-(1/(1+.25))
(DLOC) Premium)) then DLOC will be = 1-(1/1.25)
= 1-0.80
DLOC = 0.20 OR 20%
22 Discount for Lack of
Marketabillity (DLOM)
23 Total Discount = 1-[1-DLOC) * (1- IF Total Discount
(This is not sum of two DLOM)] DLOC = 25% = [1-(1-0.25)*(1-0.10)
discounts but Multiplicating DLOM = 10% = 1- [0.75]*(0.90)
Discount – Apply One Discount = 1-67.50
and then on the Net Apply = 32.50%
Second Discount and Add the OR
two discount) First Discount = 25%
Second Discount
= 100 X 25% = 75
75 X 10% = 7.5%
TOTAL = 25 + 7.5 = 32.50%
24 Growth Rate Return on Equity x If Return on Equity is 15% 15% x 60% = 9%
Retention Ratio Retention Ratio is 60%
Then Growth Rate will be
25 Return on Equity Earning available to Earning available to Equity If Earning Available to 1.50 / 10 = 15%
Equity Shareholders / Shareholders = PAT – Equity Shareholders is

26 Retention Ratio
27 Valuation of Company having
Declining Dividend Growth
Rate ( In case of ONLY LINEAR
Decline) Linear Decline means
Growth Rate is declining at
same rate over a specified
period.
28 Operating Leverage
(High Operating Leverage
means Company has high
Fixed Cost and therefore it can
earn more profits by
increasing sales volume)
29 Degree of Operating Leverage
30 PEG Ratio (Price to Earning
Growth Ratio)
Equity Shareholders Preference Dividend 1.50 Cr
Fund (Equity Capital) Equity Capital is Rs. 10 Cr
Then ROE will be
EPS – DPS / EPS EPS – Earning Per Share If EPS is Rs. 5 5-2/5 = 60%
DPS – Dividend Per Share DPS is Rs. 2
Retention Ratio will be
H – MODEL D0 = Most Recent Dividend If: = (3(1+.02) + 3 x 6(0.10-
Stock Value = Payment -Dividend Paid is Rs. 3/- 0.02) / (0.11-0.02)
D0 (1+G2) + D0 *H(G1-G2)/(R- G1 = Initial Growth Rate -Expected Growth is 10% = (3.06) + (18 x
G2) G2 = Terminal Growth Rate -Decline over next 12 0.08)/(0.09)
R = Discount Rate years to 2% stable growth = 3.06 + 1.44/0.09
H = Half of Linear Declining rate. = 4.50 / 0.09
Period ( if period given is 8 - Required Rate of Return = 50
Years then H will be 4) is 11% Then Stock Value
will be
= Q X (P – VC)/Q X (P – Q – Quantity If: = 1,00,000 x
VC) – FOC P – Selling Price per Unit Quantity is 1,00,000 (10-5)/1,00,000 x(10-5)-
VC – Variable Cost per Unit Price is Rs. 10 per unit 4,00,000
FOC – Fixed Operating Cost VC – Rs. 5 Per Unit = 5,00,000/ 4,00,000
FOC – 4,00,000 = 1.25
Sales – VC / Profit Sales Rs. 5 Lac = (5-1)/2
VC Rs. 1 Lac = 4/2
Profit Rs. 2 Lac = 0.50 or 50%
(MPS/EPS)/Growth Rate MPS – Market Price Per If: =(10/8)/2.5%
in EPS Share MPS – Rs. 10 = 1.25/2.5
Or EPS – Earning Per Share EPS – Rs. 8 =0.50
PE Ratio / Growth Rate Growth in EPS expected Interpretation
in EPS 2.5% If PEG Ratio is above 1
then the Stock Price is
OR Overvalued
If PE Ratio is 10 If PEG Ratio is below 1
Growth Rate in EPS is 8 then the Stock Price is

31 Economic Profit = IC * (ROC – WACC) IC – Invested Capital
OR ROC – Return on Capital
= NOPAT – Capital Employed
Charge NOPAT – Net Operating
Profit After Tax
Capital Charge = IC * WACC
32 Enterprise Value (EV) = NOPAT * Where
(1-g)/ROCI/(WACC-g) NOPAT – Net Operating
Profit (PAT + Interest)
g – Growth Rate
WACC – Weighted Avg.
Cost of Capital
ROCI – Return on Capital
Invested
33 Altman’s Z Score Z = 1.2A + 1.4B + 3.3C + A – Working Capital / Total
0.6D + 1.0 E Assets Ratio
B – Retained Earnings /
Total Assets Ratio
C – EBIT / Total Assets
Ratio
Then PEG Ratio 10/8 =
1.25 – Stock is Overvalued
by 0.25
If PE Ratio is 10
Growth in EPS is 15
Then PEG Ratio = 10/15 =
0.67 – Stock is
undervalued by 0.33
If
Invested Capital – 20 Lac
NOPAT – 1.40 Lac (This
means ROC is 7%)
WACC is 6.5%
1. Positive A means
Company can meet its
short term liabilities and
has surplus funds to invest
and grow.
2. A high B means that
Undervalued.
Method 1
= 20,00,000 * (7%-6.5%)
= 20,00,000 * 0.5%
= 10,000
Method 2
= 1,40,000 –
(20,00,000*6.5%)
= 1,40,000-1,30,000
= 10,000
If EBIDTA is given and Tax
Rate and Depn is given
then
First Work Out NOPAT &
then Calculate EV with
the help of this Formula
Interpretation of Z Score
Z Score of 0 to 1.8 means
Company is heading for
Bankruptcy.
1.8 to 3 means it is in
 D – Market Value of
Equity / Total Liability Ratio
E – Total Sales / Total
Assets Ratio
34 TOBIN’S Q Total Market Value of This ratio is about
Firm / Total Asset Value Relationship between
of Firm Market Value of the Firm
and Replacement Value of
Or its Assets.
Company does not need Gray Area
to borrow to fund its
growth. A positive sign. 3.00 and above means
3. High C means Company Strong Financials.
is making good use of its
Assets to generate profits.
4. A high D means
investors have confidence
in financial strength of the
Company.
5. A high E means that
Company is utilising its
Assets efficiently. This
means that a small
investment can generate
High Profit.
A Q Ratio of 0 to 1 means
that Cost to Replace its
Assets is greater than its
Market Value and so the
Stock is UNDERPRICED

Equity Market Value + A Q Ratio of Greater Than

Liability Market Value/ 1 means that the firm’s
Equity Book Value + Stock Value is more than
Liability Book Value the Replacement Cost of
its Assets and so the Firm
Or is OVERVALUED.
(It is presumed that
Liability Book Value and
Market Value is same)

Equity Market Value/

Equity Book Value