Formula Sheet Version 1.

Quantitative Methods

• Future Value: FV = PV (1 + i) n
• Present Value: PV = FV (1 + i )n
• PV perpetuity = PMT i
• Required rate of return, E ( R) = (1 + R f )(1 + IP)(1 + RP) − 1
* R f = Real risk-free rate
* IP = Expected inflation rate premium
* RP = Risk premium
m
 r
• Effective annual rate =  1 +  − 1 (m compounding periods)
 m
• E ( R) ≈ R f + IP + RP
D 360
• Bank discount yield, rBD = ⋅
F t
D 360
• Money market yield, rMM = ⋅
P t
D 365
• Bond-equivalent yield, rBE = ⋅
P t
r + r + ... + rn
• Arithmetic mean return: rA = 1 2
n
• Geometric mean return: rG = [(1 + r1 ) × ... × (1 + rn )]1 n − 1
n
• Harmonic mean =
1 1 1
+ + ... +
x1 x2 xn
y
• y percentile, Ly = (n + 1)
100
n
∑ xi − x
i =1
• Mean Absolute Deviation, MAD =
n
N
∑ ( xi − µ )2
• Population variance, σ 2 = i =1
N
n
∑ ( xi − x )2
i =1
• Sample variance, s 2 =
n −1
• Standard deviation = Variance
Pt − Pt −1 + Dt
• Holding Period Return, HPRt =
Pt −1

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 Formula Sheet Version 1.1

s
• Coefficient of Variation, CV =
x
rp − r f
• Sharpe ratio =
σp
rp − rtarget
• Roy’s safety-first ratio =
σp

• P( AB) = P( A | B) × P( B) Multiplication rule

• P ( A or B ) = P ( A) + P ( B ) − P ( AB ) Addition rule
• P( A) = P ( A | B1 ) P ( B1 ) + P( A | B2 ) P( B2 ) + ... + P ( A | BN ) P( BN )
P ( AB )
• P( A | B) =
P( B )
• Bayes’ formula:
Probability of new info
for a given event
Updated probability = × Prior probability of event
Unconditional probability
of new info
P( B | A)
P( A | B) = × P( A)
P(B)

• Expected return, E ( X ) = ∑ xi P( xi )
E ( X ) = x1 P ( x1 ) + x2 P ( x2 ) + ... + xn P ( xn )
• Variance, σ 2 ( X ) = ∑ [ xi − E ( X )]2 P ( xi )
σ 2 ( X ) = [ x1 − E ( X )]2 P( x1 ) + [ x2 − E ( X )]2 P( x2 ) + ... + [ xn − E ( X )]2 P( xn )
• Standard deviation = Variance
Cov(ri , r j )
• Correlation, ρ =
σ (ri )σ (r j )
• Normal Distributions:
x−µ
z=
σ
1
• Chebyshev’s Inequality: P ( | X − µ |≤ kσ ) ≥ 1 −
k2
• Binomial distribution:
n
Probability of exactly x successes in n trials, p ( x) =   p x (1 − p ) x
 x
Expected value of X = np
Variance of X = np (1 − p ) Standard deviation of X = np(1 − p )

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 Formula Sheet Version 1.1

• Continuous uniform distribution:

x2 − x1
P( x1 ≤ X ≤ x2 ) = for the range of (a,b)
b−a

Sampling and Estimation

σ
• Standard error of the mean =
n
• Confidence interval for the population mean:
σ
x±z (Normal distribution)
n
s
x ±t (t-distribution) – degrees of freedom, df = n – 1
n

Hypothesis Testing

x − µ0
• Z-test statistic, z =
σ n
x − µ0
• t-test statistic, t =
s n
(n − 1) s 2
• Chi-square test statistic, χ 2 , with n – 1 degrees of freedom =
σ2
s12
• F-test statistic = ( s12 > s22 )
s22

ECONOMICS

% change in quantity demanded

• Price elasticity of demand = (Use average)
% change in price
• Four firm concentration ratio = % of total industry sales made by the four largest firm in an industry
• Herfindahl-Hirschman Index (HHI) = Sum of squared % of market shares of the 50 largest firms in
an industry
change in total cost
• Marginal cost, MC =
change in output
• Total cost, TC = TFC + TVC
TFC TVC
• Average Total Cost, ATC = +
Q Q
Number of unemployed
• Unemployment rate = ×100
labor force
labor force
• Labor force participation rate = ×100
working-age population

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 Formula Sheet Version 1.1

number of employed
• Employment-to-population ratio = ×100
working-age population
cost of basket at current prices
• CPI = ×100
cost of basket at base period prices
current CPI − year-ago CPI
• Inflation rate = × 100
year-ago CPI
• Aggregate demand = C + I + G + (X – M)
1+ c
• Money multiplier =
r+c
* c = currency as a percentage of deposits
* r = required reserve ratio
• Change in quantity of money = Change in monetary base × Money multiplier
• Money supply × Velocity = GDP = Price × Real output
MV = PT

FINANCIAL REPORTING AND ANALYSIS

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
Cash + Short-term marketable securities + Receivables
• Defensive interval =
Daily cash expenditures
Credit sales
• Accounts receivable turnover =
Average receivables
Cost of goods sold
• Inventory turnover =
Average inventory
Accounts receivable
• Number of days of receivables = × 365
Credit sales
Inventory
• Number of days of inventory = × 365
Cost of goods sold
Accounts payable
• Number of days of payables = × 365
Purchases
Number of days Number of days
• Operating cycle = +
of inventory of receivables
Number of days Number of days Number of days
• Net Operating cycle = + −
of inventory of receivables of payables
[Note: Net Operating cycle also known as Cash Conversion Cycle]
Sales
• Total Asset Turnover =
Total Assets

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 Formula Sheet Version 1.1

Sales
• Working Capital Turnover =
Average working capital
Gross profit
• Gross profit margin =
Sales
Operating profit
• Operating profit margin =
Sales
Net profit
• Net profit margin =
Sales
Total debt
• Debt-to-equity ratio =
Total equity
Total debt
• Total debt ratio =
Total assets
EBIT
• Interest coverage =
Interest
EBIT + lease payments
• Fixed charge coverage =
Interest + lease payments
• ROE = Tax burden × Interest burden × EBIT margin × Asset Turnover × Leverage
NI EBT EBIT Sales Total Assets
= × × × ×
EBT EBIT Sales Total Assets Shareholders' Equity
NI − Preferred dividends
• Basic EPS =
Weighted average no. of common shares outstanding
• Diluted
EPS
Preferred Convertible Preferred  Convertible debt 
NI − + +  (1 − t )
=
dividends dividends  interest 
Weighted Shares from Shares from Shares from
average + conversion of + conversion of + exercise of
shares outstanding convertible preferred shares convertible debt stock options/warrants

Cost − Salvage value

• Straight line depreciation =
Useful life
2
• Double-declining balance: Depreciation = × (Cost − Accumulated depreciation)
Useful life
Cost − Salvage value
• Units of production: Depreciation = × Output units
Useful life in UNITS

CORPORATE FINANCE

n
CFt
• NPV = ∑ − Outlay
t =1 (1 + r )
t

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 Formula Sheet Version 1.1

Average net income

• Average Accounting Rate of Return, AAR =
Average book value
NPV
• Profitability Index, PI = 1 +
Initial investment
• WACC = wd rd (1 − T ) + wps rps + we re
D ps
• Cost of preferred stock =
Pps
• Cost of common equity:
* CAPM approach: re = r f + β (rM − r f )
D1
* Dividend discount model approach: re = +g
P0
* Bond Yield plus Risk Premium approach: re = rd + Risk premium
 D
• β equity = βasset 1 + (1 − T )
 E 
 σ equity index 
• Country equity premium = Sovereign Yield Spread  
 σ sovereign bond market 
Amount of capital at which the source's cost of capital changes
• Break point =
Proportion of new capital raised from the source
D1
• Cost of external equity, re = +g
P0 (1 − f )
 Number of   Price Variable cost   Fixed operating 
• Operating Income =   − −
 units sold   per unit per unit   costs 

% change in operating income
• Degree of Operating Leverage, DOL =
% change in units sold
Q( P − V )
=
Q( P − V ) − F
% change in net income
• Degree of Financial Leverage, DFL =
% change in operating income
Q( P − V ) − F
=
Q( P − V ) − F − I
% change in net income
• Degree of Total Leverage, DTL =
% change in number of units sold
Q( P − V )
=
Q ( P − V ) − F − Int
F + Int
• Breakeven point, QBE =
P −V
F
• Operating breakeven point, QBE =
P −V

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 Formula Sheet Version 1.1

Earnings − After-tax cost of funds

• EPS after buyback =
Shares outstanding after buyback
Average daily float Average daily float
• Float factor = = × Number of days
Average daily deposit Total amount of checks deposited
Number of days
365
 Discount  beyond discount period
• Cost of trade credit =  1 +  −1
 1 − Discount 
Interest + Commitment fee
• Line of credit cost = ×12
Usable loan amount
Interest
• BA cost = ×12
Net proceeds
Interest + Dealer's commissions + Backup costs
• CP cost = ×12
Net proceeds
NI NI Sales
• Return on Assets, ROA = = ×
TA Sales TA
Net profit Total asset
= ×
margin turnover
NI NI Sales TA
• Return on Equity, ROE = = × ×
SE Sales TA SE
Income  
Operating Income before taxes  Taxes  Sales TA
= × × 1 − × ×
Sales Operating  Income  TA SE
 before taxes 
income  
• Financing surplus/deficit = Projected (TL + SE – TA)

PORTFOLIO MANAGEMENT

• For a 2-asset portfolio:

Expected return, E ( R p ) = wA RA + wB RB
Variance, σ 2 ( R p ) = wA2 σ A2 + wB2 σ B2 + 2 wA wB ρσ Aσ B
E ( Ri ) − R f
• Capital Allocation Line: E(Rp ) = R f + ×σ p
σi
E ( Rm ) − R f
• Capital Market Line: E(Rp ) = R f + ×σ p
σm
• Total variance = Systematic variance + Nonsystematic variance
σ i = βi2σ m2 + σ e2
Cov( Ri , Rm ) ρi ,mσ i
• Beta, βi = =
σ m2 σm
• Portfolio beta, = w1β1 + w2 β 2 + ... + wn β n

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 Formula Sheet Version 1.1

• CAPM: E ( R p ) = R f + β p [ E ( Rm ) − R f ]
Rp − R f
• Sharpe ratio =
σp
Rp − R f
• Treynor ratio =
βp
• Jensen’s alpha, α = R p −  R f + β p ( Rm − R f ) 
σm
• M 2 = (Rp − R f ) − ( Rm − R f )
σp
α
• Information ratio =
σe

EQUITY

1
• Maximum leverage ratio =
Minimum margin requirement
P (1 − initial margin)
• Margin call price, Pcall = 0
1 − maintenance margin
P0 (1 + initial margin)
• Short margin call price, Pcall =
(1 + maintenance margin)
N
∑ ni Pi
i =1
• Price return index, VPRI =
D
Pi
• Price weighting, wi =
P
N
∑ Pi
i =1
1
• Equal weighting, wiE =
N
Qi Pi
Market-Capitalization weighting, wi =
M
• N
∑ Qi Pi
i =1
f ⋅ Qi Pi
• Float-adjusted market-capitalization weighting, wi =
FM
N
∑ Qi Pi
i =1
* f is the fraction of shares outstanding in the market float
Fi
• Fundamental weighting, wi =
F
N
∑ Fi
i =1

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 Formula Sheet Version 1.1

NI t
• Return on equity, ROEt =
Average Book Value of Equity t
∞
D
• Dividend Discount Model: Intrinsic value of a share, V0 = ∑ (1 + tr )t
t =1
n
Dt Pn
For n-holding period, intrinsic value, V0 = ∑ +
t =1 (1 + r ) (1 + r )n
t

• Free-cash-flow-to-equity, FCFE = CFO – Fixed Capital Investments + Net borrowing

∞
FCFEt
• V0 = ∑
t =1 (1 + re )
t

D
• Value of a non-callable, non-convertible perpetual preferred share, V0 =
rps
D1 D (1 + g )
• Gordon Growth Model: V0 = = 0
r−g r−g
• Sustainable growth rate, g = (1 − Dividend payout ratio) × ROE
• Multistage Dividend Discount Models:
n
D0 (1 + g s )t Vn
V0 = ∑ +
t =1 (1 + r ) t
(1 + r )n
D
* Vn = n+1
r − gL
* Dn+1 = D0 (1 + g s )n (1 + g L )
P0 D1 E1 Expected Dividend payout ratio
• = =
E1 r − g r−g
• Enterprise value, EV = Market cap + MV(preferred stock) + MV(debt) – Cash and investments

FIXED INCOME

• Price of callable bond = Price of option-free bond – Price of embedded call option
• Price of putable bond = Price of option-free bond – Price of embedded put option
Price if yields decline − Price if yields rise
• Effective duration =
2 × Initial price × Change in yield in decimal
• Yield spread = Yield on bond A – Yield on bond B
Yield on bond A − Yield n bond B
• Relative yield spread =
Yield on bond B
Yield on bond A
• Yield ratio =
Yield on bond B

Days in accrued interest period

• Accrued Interest, AI = Semiannual coupon payment ×
Days in coupon period
• Clean price = Full price – Accrued Interest

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 Formula Sheet Version 1.1

Annual dollar coupon interest

• Current Yield =
Price of bond
• Bond-equivalent yield of an annual-pay bond = 2[(1 + Yield on annual-pay bond)0.5 − 1]
 Yield on a bond-equivalent basis 2 
• Yield of an annual-pay bond = 2 1 +  − 1
 2  
Cash flow yield = 2 (1 + Monthly yield ) − 1
6
•
 
100(100 − Price)  100
• Spread for life =  + Quoted margin  ×
 Maturity  Price
• Yield on a Treasury bills (discount basis)
360
= (1 − price of a bill)
Days between settlement date and maturity date
• Option Cost = Z-spread – OAS
(1 + zm+1 )m +1
• 6-month forward rate, 1 f m = −1
(1 + zm )m
• Approximate % price change = – Duration × Yield change (decimal) × 100
Macaulay duration
• Modified duration =
 Yield 
1 + 
 k 
• Portfolio duration = w1 D1 + w2 D2 + ... + wn Dn (assuming n bonds in portfolio)
• Convexity adjustment to the % price change = C × (Yield change)2 × 100
V+ + V− − 2V0
*C=
2V0 × (Yield change)2
• Total estimated % price change = Estimated % price change using duration + Convexity adjustment
• Price Value of a Basis Point = |Initial price – Price if yield changes by 1 basis point|
• PVBP = –Duration × 0.0001 × Initial price
* Note: 1 basis point (bps) = 0.01% = 0.0001

DERIVATIVES

• FRA payoff formula (from long position)

  Underlying rate Forward   Days in underlying rate  
 −  
Notional   at expiration contract rate   360 
=
Principal  Underlying rate  Days in underlying rate  
 1+   
 at expiration  360  
• IMM Index = 100 – Rate
 Rate  90  
• Price of 90-day T-bill = 100 1 −  
 100  360  

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 Formula Sheet Version 1.1

• Payoff of an interest rate call

Notional  Underlying rate Exercise   Days in underlying rate 
= × Max  0, −  
Principal  at expiration rate   360 
• Payoff of an interest rate put
Notional  Exercise Underlying rate   Days in underlying rate 
= × Max  0, −  
Principal  rate at expiration   360 
• At expiration, payoff of call options
cT = Max(0, ST − X ) CT = Max(0, ST − X )
• At expiration, payoff of put options
pT = Max(0, X − ST ) PT = Max(0, X − ST )
• Lower bound of call options:
 X   X 
c0 ≥ Max  0, S0 −  C0 ≥ Max  0, S0 − 
 (1 + r )T   (1 + r )T 
• Lower bound of put options
 X 
p0 ≥ Max  0, − S 0  P0 ≥ Max ( 0, X − S0 )
 (1 + r )
T

X
• Put-call parity: c0 − p0 = S0 −
(1 + r )T

• Long Call option: c0 = max(0, ST − X )

Value at expiration = cT
Profit, = cT − c0
Maximum profit = ∞
Maximum loss = c0
Breakeven, ST* = X + c0
• Long Put option: p0 = max(0, X − ST )
Value at expiration = pT
Profit, = pT − p0
Maximum profit = X − p0
Maximum loss = p0
Breakeven, ST* = X − p0
• Covered Call (Buy underlying, Sell Call option)
Value at expiration = VT = ST − max(0, ST − X )
Profit, = VT − S0 + c0
Maximum profit = X − S0 + c0
Maximum loss = S0 − c0
Breakeven, ST* = S0 − c0

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 Formula Sheet Version 1.1

• Protective Put (Buy underlying, Buy Put option)

Value at expiration = VT = ST + max(0, X − ST )
Profit, = VT − S0 − p0
Maximum profit = ∞
Maximum loss = S0 + p0 − X
Breakeven, ST* = S0 + p0

ALTERNATIVE INVESTMENTS

• The Income Approach

NOI
Appraisal price =
Market cap rate
Benchmark NOI
Market cap rate =
Benchmark transaction price

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