Formula sheet

Present value calculations:

Single cash flow:

𝐶
𝑃𝑉 =
(1 + 𝑟)𝑁

Annuity:

1 1
𝑃𝑉 = 𝐶 ∙ ∙ (1 − )
𝑟 (1 + 𝑟)𝑁

Annuity with constant growth rate:

1 1+𝑔 𝑁
𝑃𝑉 = 𝐶 ∙ ∙ (1 − ( ) )
𝑟−𝑔 1+𝑟

Perpetuity:

𝐶
𝑃𝑉 =
𝑟

Perpetuity with constant growth rate:

𝐶
𝑃𝑉 =
𝑟−𝑔

Notations: C – cash flow, r – discount rate, N – number of periods, g – growth rate

Capital budgeting:

NPV formula:

CF1 CF2 CFN

NPV  CF0    ... 
(1  r ) (1  r ) 2
(1  r ) N

Value Created NPV

Profitability Index  
Resource Consumed Resource Consumed
Bond valuation:

Price of N-period zero-coupon bond:

𝐹𝑉
𝑃=
(1 + 𝑌𝑇𝑀)𝑁

Price of a coupon bond:

1 1 𝐹𝑉
𝑃 = 𝐶𝑃𝑁 ∙ ∙ (1 − ) +
𝑌𝑇𝑀 (1 + 𝑌𝑇𝑀)𝑁 (1 + 𝑌𝑇𝑀)𝑁

Notations: FV – face value, YTM – yield to maturity, CPN – coupon

Stock valuation:

Total return of a stock:

Div1  P1 Div1 P1  P0
rE   1  
P0 P0 P0
Dividend Yield Capital Gain Rate

Stock price from DDM:

Div1 Div2 DivN PN
P0     
1  rE (1  rE ) 2 (1  rE ) N
(1  rE ) N

Constant dividend growth:

Div1
P0 
rE  g

DDM with constant long-term growth:

Div1 Div2 DivN 1  DivN  1 
P0      N  
1  rE (1  rE )2 (1  rE ) N
(1  rE )  rE  g 

Total payout model:

PV (Future Total Dividends and Repurchases)

PV0 
Shares Outstanding 0
Discounted free cash flow model:

V0  PV (Future Free Cash Flow of Firm)

Stock price from discounted free cash flow model:

V0  Cash 0  Debt 0
P0 
Shares Outstanding 0

Risk and Return:

Average annual return:

1 1 T
R 
T
 R1  R2   RT    Rt
T t 1

Variance of realized return:

 R  R
1 2
Var (R) 
T  1
t
t 1

Correlation among two stocks i and j:

Cov(Ri ,R j )
Corr (Ri ,R j ) 
SD(Ri ) SD(R j )

Variance of 2 stocks portfolio:

Var (RP )  xi2Var (Ri )  x 2jVar (R j )  2 xi x j Cov(Ri ,R j )

CAPM:
E[RPortfolio ]  rf   Portfolio
Mkt
(E[RMkt ]  rf )

Modigliani-Miller:

MM Proposition 1 (PCM, incl. no tax):

E+D=U=A

VL = V U
MM Proposition 2 (PCM, incl. no tax):

rWACC  rU  rA

D
rE  rU  (rU  rD )
E

E D
U  E  D
ED ED

D
 E  U  ( U   D )
E

MM Proposition 1 (with tax):

VL = VU + PV(Interest tax shield)

After-tax WACC (see above in Capital Budgeting)

After-tax WACC with perpetual debt:

rwacc  ru  d c rD

Trade-off model of capital structure with taxes, financial distress costs (FDCs), and
agency costs:

VL = VU + PV(Interest tax shield) – PV(FDCs) +PV(Agency benefits of debt) –

PV(Agency costs of debt)

Option Pricing:

Payoffs:

Payoff = Max [0, ST – K]

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Payoff = Max [0, K – ST ]

Put-call parity:

Without dividends: C = S + P – PV(K)

With dividends: C = S + P – PV(K) – PV(div)

Time value (without dividends):

C = S – K + dis(K) + P
S – K = intrinsic value
dis(K) + P = time value

Replicating portfolio for the Binomial model:

∆=(Cu–Cd)/(Su–Sd) and B=(Cd–Sd∆)/(1+Rf)

Black-Scholes Model:
C  S * N (d1 )  X * N (d 2 ) * e  rt
d1 and d2 values:

S 2
ln( )  (r  )t
d1  X 2 & d 2  d1   t
 t