FORMULA

SECURITY VALUATION:
Valuing Bond : Vb =

PV = PMT (PVIFA k, n ) + FV (PVIF k, n )

M Bo
n

M Bo
2
I

Yield to Maturity =

Valuing Preferred Stock: Vps = D

kps
Valuing Common Stock:
Vs =

D0 (1+g)
ks g

D1
ks g

COST OF CAPITAL:
Cost of Common Equity
The CAPM Approach:

ks = D1 + g
P0
ks = krf + (km-krf)

After-tax cost of debt = kd(1-Tax rate).

Cost of New Common Equity ks =

D1
+g
P0 - flotation cost

Cost of Retained Earning, ks = (D1 /P0) + g

Weighted Average Cost of Capital (WACC)
k wacc wd k d (1 Tc ) w ps k ps wcs k cs wncs k ncs

CAPITAL BUDGETING:
Payback Period = BY
BY
UC
CF

UC
CF
= the year before full recovery
= the unrecovered cost at start of year
= the cash flow during the year

Net Present Value (NPV) = Annual Cash Flow - Initial Investment

(1+k)t
Profitability Index (PI) = Present value of Future Net Cash Inflows
Initial Outlays
Internal Rate of Return: IRR
Initial Investments - Annual Cash Flows = 0
(1+IRR)t