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Finance - Formula Sheet

The document outlines formulas for calculating present values of annuities and perpetuities with growth, as well as changing rate frequencies and stock-related formulas. It also includes bond-related formulas, portfolio return expectations, variance, and basic statistics for sample moments. Key concepts such as return on equity, dividend yield, and asset beta are discussed in the context of financial analysis.

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Sofia Garcia
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29 views2 pages

Finance - Formula Sheet

The document outlines formulas for calculating present values of annuities and perpetuities with growth, as well as changing rate frequencies and stock-related formulas. It also includes bond-related formulas, portfolio return expectations, variance, and basic statistics for sample moments. Key concepts such as return on equity, dividend yield, and asset beta are discussed in the context of financial analysis.

Uploaded by

Sofia Garcia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Annuity and perpetuity with growth:

Annuity with growth:


  n 
CFt+1 1+g
P Vt = 1−
r−g 1+r
Perpetuity with growth:
CFt+1
P Vt =
r−g
where P Vt represents the present value at time t, r is the discount rate, g is the
rate of growth, n is the number of periods for the annuity, and CFt is the cash
flow at time t.
Changing rate frequencies:
 
AP R
1 + P Rn = 1 +
n
1
1 + rn = (1 + EAR) n
where P Rn is the proportional rate with a frequency implying n periods within
a year, EAR is the effective annual rate, rn is the effective rate at a frequency
higher than annual, n is the times a year we observe the new frequency, and
AP R is the annual proportional rate.
Stock-related formulas:
N etIncomet
ROEt =
BVt−1
BVt = BVt−1 + Invt
Divt = p × EP St
Invt = (1 − p) × EP St
g = (1 − p) × ROEt
Pt+1 + Divt
Pt =
1+r
Divt+1
Pt = (Gordon Growth Model)
r−g
Divt+1 Pt+1 − Pt
r = DividendY ield + CapitalGains = +
Pt Pt
EP St
Present value of growth opportunities (PVGO) = Pt −
r
where ROEt is the return on equity from t − 1 to t, r is the discount rate, BVt is
the book value of equity at time t, Invt is investment at time t, p is the payout
ratio, g is the rate of growth of earnings per share or dividends, Pt is the price at
N etIncome
time t, Divt is the amount of dividends paid at time t, EP St = N umberof share
is earnings per share.
Bond-related formulas:
T
X c × FV
P =
t=1
(1 + y)t

1
T
X c × FV
D= t×
t=1
(1 + y)t
D
M odif iedDuration =
1+y
∆P D
≈ ∆y
Pt 1+y
where c is the coupon rate, F V is the face value, y is the yield, and T is the
maturity. D is Macaulay duration and ∆ represents an increment.
Portfolios: Consider N assets indexed by i, then the expected return of
the portfolio with a weight wi in asset i is:
N
X
E(rp ) = wi E(ri )
i=1

The variance of the portfolio return is


N
X N X
X
V (rp ) = wi2 V (ri ) + 2 wi wj cov(ri , rj )
i=1 i=1 i<j

The asset beta is given by:


cov(ri , rm )
βi =
V (rm )
and the beta of the portfolio is
N
X
βp = wi β i
i=1

The correlation of assets i and j is given by:

cov(ri , rj )
ρij = p
V (ri )V (rj )
E indicates the expectation operator, V the variance operator, and cov the
covariance. βi corresponds to the CAPM β of asset i. rm is the market portfolio
return.
Basic statistics: If we have a sample {x1 , ..., xN }, we can define the fol-
lowing sample moments:
N
1 X
Sample Mean ≡ x = xi
N i=1
N
1 X
Sample Variance ≡ σ̂ 2 = (xi − x)2
N − 1 i=1
√
Sample Standard Deviation = σ̂ 2
If we have a sample {(x1 , y1 ), ..., (xN , yN )}, we can define the following sample
moments:
N
1 X
Sample Covariance ≡ cov(x, y) = (xi − x)(yi − y)
N − 1 i=1

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