Some Useful Formulas

1 Present Value
The discounted value of T future cash flows
T
C1 C2 CT Ct
PV  
1  r (1  r ) 2
    
(1  r )T t 1 (1  r )t

2 Net Present Value

Present value minus initial costs
NPV = PV  Cost
C0 =  Cost
T
Ct
NPV  C0  
t 1 (1  r )t

3 Perpetuity
The value of C received each year, forever
C
PV 
r

4 Annuity
The value of C received each year for T years
C
PV = [1  1 (1  r )t ]
r

5 Growing Perpetuity
The value of a perpetuity that grows at rate g, where the first payment is C
C
PV 
rg

6 Growing Annuity
The value of a T-period annuity that grows at the rate g, where the first payment is C
 1 1 1  g  
T
PV  C     
 r  g r  g  1  r  
 
7 Measures of Risk for Individual Assets

Var (RA) =  2A = Expected value of ( RA  RA ) 2

SD (RA) = A = Var ( RA )

Cov (RA, RB) = AB = Expected value of [( RA  R ) A ) ( RB  RB )]

Corr(RA, RB) = AB = Cov (RARB)/AB

8 Expected Return on a Portfolio of Two Assets

RP  X A RA  X B RB

9 Variance of a Portfolio of Two Assets

 P  X A2  2A  2 X A X B   AB  X B2  2B

10 Beta of a Security
Cov( RA , RM )
A 
 2 ( RM )

11 Capital Asset Pricing Model

RA  RF   A  ( RM  RF )

12 k-Factor Model
Ri = Ri + i1F1 + i2F2 +  + ikFk + i

13 Leverage and the Cost of Equity

Before tax:

rs  ro 
B
ro  rB 
S
After tax:
B
rs    (1  TC )(  rB )
S

14 Value of the Firm under Corporate Taxes

VL = VU + TCB
15 Weighted Average Cost of Capital
 S   B 
 rs   rB 1  TC 
S  B S  B

16 Equity Beta
Equity
No-tax case: Unleveredfirm   Equity
Debt  Equity
Equity
Corporate tax case: Unleveredfirm   Equity
Equity  1  TC Debt

17 Black-Scholes Model
C = SN(d1)  Eert N(d2)

where d1 = [1n (S/E) + (r + 1

2
2
)t]/  2t

d 2  d1   2 t

18 Sustainable Growth
P  (1  d )  (1  L)
Growth 
T  [ P  (1  d )  (1  L)]