Formula sheet

Finance I
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Present Value calculation

Present value of single cash flow (N periods

Discount factor Interest Rate Factor
from the future)

1 𝐶
(1 + 𝑟)
(1 + 𝑟) (1 + 𝑟)'

Present value of an annuity

1 1
𝐶∙ ∙ )1 − +
𝑟 (1 + 𝑟)'

Present value of a growing annuity with growth rate g

1 1+𝑔 '
𝐶∙ ∙ .1 − / 0 1
(𝑟 − 𝑔) 1+𝑟

Present value of a growing perpetuity with growth rate g

1
𝐶∙
(𝑟 − 𝑔)
The Equivalent Annual Annuity

𝑁𝑃𝑉
𝐸𝐴𝐴 =
1 1
∙ )1 − +
𝑟 (1 + 𝑟)'
One-period dividend model Constant dividend growth model

𝐷𝑖𝑣< + 𝑃< 𝐷𝑖𝑣<

𝑃8 = 𝑃8 =
(1 + 𝑟= ) (𝑟= − 𝑔)
Dividend yield Capital gain rate

𝐷𝑖𝑣< (𝑃< − 𝑃8)

𝑃8 𝑃8
Free Cash Flow Firm’s Enterprise Value

EBIT´(1-t)+Depreciation
Market Value of Equity + Debt - Cash
– Capital Expenditure – Increases in NWC
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Future Value calculations (N periods into the future)

Future value Future value of Annuity

1
𝑃𝑉 ∙ (1 + 𝑟)' 𝐶∙ ∙ [(1 + 𝑟)' − 1]
𝑟

Conversion of interest rates

Nominal and real rates Nominal rate after taxes

(𝑟 − 𝑖)
𝑟@ = 𝑟 ∙ (1 − 𝜏)
(1 + 𝑖)

Effective annual rate to annual percentage

Effective annual rate to effective period rate
rate

J 𝐴𝑃𝑅 J
1 + 𝐸𝐴𝑅 = C1 + 𝑟DE@FGH I 1 + 𝐸𝐴𝑅 = /1 + 0
𝑛

Bonds

Coupon bonds Zero-coupon bond

1 1 𝐹𝑉 𝐹𝑉
𝑃 = 𝐶𝑃𝑁 ∙ ∙ )1 − + + 𝑃=
𝑦 (1 + 𝑦)' (1 + 𝑦)' (1 + 𝑌𝑇𝑀)'

Options Payoff

Buy call option Sell call option

max (𝑆 − 𝐾, 0) −max (𝑆 − 𝐾, 0)

Buy put option Sell put option

max (𝐾 − 𝑆, 0) −max (𝐾 − 𝑆, 0)
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Statistics

Expected return Variance

[ [

𝐸 [𝑟] = 𝜇 = Y 𝑝F ∙ 𝑟F 𝑉𝑎𝑟[𝑟] = 𝜎 = Y 𝑝F ∙ (𝑟 − 𝐸[𝑟])_

_

F\< F\<

= 𝑝< ∙ 𝑟< + 𝑝_ ∙ 𝑟_ + ⋯ + 𝑝[ ∙ 𝑟[ = 𝑝< ∙ (𝑟< − 𝐸[𝑟])_ + 𝑝_ ∙ (𝑟_ − 𝐸[𝑟])_ + ⋯ + 𝑝[ ∙ (𝑟[ − 𝐸[𝑟])_

Variance estimation

c
1 1
𝑉𝑎𝑟 (𝑟) = 𝜎 _ = Y(𝑟a − 𝑟̅ )_ = [(𝑟 − 𝑟̅ )_ + (𝑟_ − 𝑟̅ )_ + ⋯ + (𝑟c − 𝑟̅ )_ ]
(𝑇 − 1) (𝑇 − 1) <
a\<

Average return Standard deviation

c
1 𝑟< + 𝑟_ + ⋯ + 𝑟c
𝑟̅ = Y 𝑟a = 𝜎 = d𝑉𝑎𝑟(𝑟) = d𝜎 _
𝑇 𝑇
a\<

Covariance
[

𝜎F,e = 𝐶𝑂𝑉(𝑟F , 𝑟e ) = Y 𝑝𝑘 (𝑟F,h − 𝜇𝑖 )(𝑟e,h − 𝜇𝑗 )

h\<

= 𝑝1 C𝑟F,< − 𝜇𝑖 I j𝑟e,< − 𝜇𝑗 k + 𝑝2 C𝑟F,_ − 𝜇𝑖 I j𝑟e,_ − 𝜇𝑗 k + ⋯ + 𝑝𝑠 C𝑟F,[ − 𝜇𝑖 I j𝑟e,[ − 𝜇𝑗 k

Covariance estimation
𝑇
1
𝜎F,e = 𝐶𝑂𝑉(𝑟F , 𝑟e ) = Y (𝑟𝑖,𝑡 − 𝑟o 𝑖 )(𝑟𝑗,𝑡 − 𝑟o 𝑗 )
(𝑇 − 1)
𝑡=1
1
= pC𝑟 − 𝑟rI
q ∙ C𝑟e,< − 𝑟
rI
s + C𝑟F,_ − 𝑟
rI
q ∙ C𝑟e,_ − 𝑟
rI
s + ⋯ + C𝑟F,c − 𝑟
rIC𝑟e,c − 𝑟
rIt
(𝑇 − 1) F,< q s

Correlation

𝜎𝑖,𝑗
𝜌𝑖,𝑗 =
𝜎𝑖 ∙ 𝜎𝑗
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Portfolio theory

Return of a portfolio of l assets Expected Return of a portfolio of l assets

𝑟D = 𝑥< 𝑟< + 𝑥_ 𝑟_ + ⋯ + 𝑥w 𝑟w 𝐸C𝑟D I = 𝑥< 𝐸 (𝑟<) + 𝑥_ 𝐸 (𝑟_) + ⋯ + 𝑥w 𝐸 (𝑟w )

Variance of a portfolio with two assets

𝜎x_ = 𝑥<_ 𝜎<_ + 𝑥__ 𝜎__ + 2𝑥<𝜎<,_𝑥_

𝜎x_ = 𝑥<_ 𝜎<_ + 𝑥__𝜎__ + 2𝑥< 𝜎<𝜌<,_𝜎_ 𝑥_

Minimum variance portfolio of two assets

𝜎__ − 𝜎<,_ 𝜎__ − 𝜎<𝜌<,_𝜎_

𝑥<∗ = _ =
𝜎< − 2𝜎<,_ + 𝜎__ 𝜎<_ − 2𝜎< 𝜌<,_𝜎_ + 𝜎__

Sharpe Ratio

𝐸 (𝑟F ) − 𝑟z
𝑆F =
𝜎F

CAPM (Capital Asset Pricing Model)

Security Market Line Beta

𝜎F,|
𝐸(𝑟F ) − 𝑟z = 𝛽F C𝐸(𝑟| ) − 𝑟z I 𝛽F = _
𝜎|

Beta of a portfolio of l assets

𝛽D = 𝑥< 𝛽< + 𝑥_ 𝛽_ + ⋯ + 𝑥w 𝛽w