FORMULA SHEET

Assets = Liabilities + Shareholders’ equity [2.1]

Revenues − Expenses = Income [2.2]

Cash flow from assets = Cash flow to bondholders + Cash flow to shareholders [2.3]

Current ratio = Current assets∕Current liabilities [3.1]

Current assets − Inventory
_____
Quick ratio =    
​      ​ [3.2]
Current liabilities
Cash ratio = (Cash + Cash equivalents)∕Current liabilities [3.3]

Net working capital to total assets = Net working capital∕Total assets [3.4]

Interval measure = Current assets∕Average daily operating costs [3.5]

Total debt ratio = [Total assets − Total equity]∕Total assets [3.6]

Debt∕equity ratio = Total debt∕Total equity [3.7]

Equity multiplier = Total assets∕Total equity [3.8]

Long-term debt
Long-term debt ratio = ______
  
​      ​ [3.9]
Long-term debt + Total equity
Times interest earned ratio = EBIT∕Interest [3.10]

Cash coverage ratio = [EBIT + Depreciation]∕Interest [3.11]

Inventory turnover = Cost of goods sold∕Inventory [3.12]

Days’ sales in inventory = 365 days∕Inventory turnover [3.13]

Receivables turnover = Sales∕Accounts receivable [3.14]

Days’ sales in receivables = 365 days∕Receivables turnover [3.15]

NWC turnover = Sales∕NWC [3.16]

Fixed asset turnover = Sales∕Net fixed assets [3.17]

Total asset turnover = Sales∕Total assets [3.18]

Profit margin = Net income∕Sales [3.19]

Return on assets = Net income∕Total assets [3.20]

Return on equity = Net income∕Total equity [3.21]

P∕E ratio = Price per share∕Earnings per share [3.22]

Market-to-book ratio = Market value per share∕Book value per share [3.23]

F-1
Formula Sheet  

Dividend payout ratio = Cash dividends∕Net income [4.1]

EFN = Increase in total assets − Addition to retained earnings [4.2]

= A(g) − p(S)R × (1 + g)

EFN = −p(S)R + [A − p(S)R] × g [4.3]

g = pS(R)∕[A − pS(R)] [4.4]

Internal growth rate = ___

​    ROA × R   ​ [4.5]
1 − ROA × R
EFN* = Increase in total assets − Addition to retained earnings − New borrowing [4.6]
     = A(g) − p(S)R × (1 + g) − p(S)R × (1 + g)[D∕E]
EFN* = 0

g* = ROE × R∕[1 − ROE × R] [4.7]

p(S∕A) (1 + D∕E) × R
g* = _____
​      ​ [4.8]
   
1 − p(S∕A) (1 + D ∕ E) × R
Future value = $1 × (1 + r)t [5.1]

PV = $1 × [1∕(1 + r)t] = $1∕(1 + r)t [5.2]

PV × (1 + r)t = FVt [5.3]

PV = FVt ∕(1 + r)t
= FVt × [1∕(1 + r)t]

Annuity present value = ( 

​  1 − Present r  
_____
 C × ​     value
 ​  )
factor ​ [6.1]

{  1 − 1∕(1 + r)
= C × ​ ___
​    r ​  
t
​ }
Annuity FV factor =
 (Future value factor − 1)∕r [6.2]
= ((1 + r)t − 1)∕r

Annuity due value = Ordinary annuity value × (1 + r) [6.3]

Perpetuity present value × Rate = Cash flow [6.4]

PV × r = C

Annuity present value factor = (1 − Present value factor)∕r [6.5]

= (1∕r) × (1 − Present value factor)

PV = _ C   ​
​  r − g  [6.6]

PV = _
​  r −[  (  ) ]
C   ​​ 1 − ​​ _
g ​ 
1+g t
1+r
 ​  ​​  ​ [6.7]

EAR = [1 + (Quoted rate∕m)]m − 1 [6.8]

EAR = eq − 1 [6.9]

F-2
 Formula Sheet 

Bond value = C × (1 − 1∕(1 + r)t)∕r + F∕(1 + r)t [7.1]

1 + R = (1 + r) × (1 + h) [7.2]

R = r + h + r × h [7.3]

R ≈ r + h [7.4]

P0 = (D1 + P1)∕(1 + r) [8.1]

P0 = D∕r [8.2]
D × (1 + g) _ D
P0 = ___
​  0 r − g ​ = ​  r −1 g ​
 
    [8.3]

D  × (1 + g) _ D
Pt = ___
​  t r − g ​ = ​  r −t+1g  ​
 
    [8.4]

(r − g) = D1∕P0 [8.5]
     r = D1∕P0 + g

OCF = EBIT + D − Taxes [10.1]

= (S − C − D) + D − (S − C − D) × TC

OCF = (S − C − D) + D − (S − C − D) × TC [10.2]
= (S − C − D) × (1 − TC) + D
= Project net income + Depreciation

OCF = (S − C − D) + D − (S − C − D) × TC [10.3]
= (S − C) − (S − C − D) × TC
= Sales − Costs − Taxes

OCF = (S − C − D) + D − (S − C − D) × TC [10.4]
= (S − C) × (1 − TC) + D × TC
[IdTc] __ [1 + .5r] _ S dT __
PV tax shield on CCA = __
​  × ​ 
 ​   ​ 
  × ​  1   ​
− ​  n c ​ 
    [10.5]
d+r 1+r d + r (1 + r)n

S − VC = FC + D [11.1]
P × Q − v × Q = FC + D
(P − v) × Q = FC + D
Q = (FC + D)∕(P − v)

OCF = [(P − v) × Q − FC − D] + D [11.2]

= (P − v) × Q − FC

Q = (FC + OCF)∕(P − v) [11.3]

Total dollar return = Dividend income + Capital gain (or loss) [12.1]

Total cash if stock is sold = Initial investment + Total return [12.2]

__ __
[(R − R​
_____ ​  )2 + … + (RT − R​
​  )2]
Var(R) =    
​  1     ​ [12.3]
T−1
Geometric average return = [(1 + R1) × (1 + R2) × … × (1 + RT)]1∕T − 1 [12.4]

F-3
Formula Sheet  

Risk premium =
 Expected return − Risk-free rate [13.1]
= E(RU) − Rf

E(R) = ​∑  ​ ​Rj × Pj [13.2]

j
where
  Rj = value of the jth outcome
  Pj = associated probability of occurrence
∑  ​ ​ = the sum over all j
 ​
j

σ2 = ​∑  ​[​  Rj − E(R)]2 × Pj [13.3]

j
__
   σ = ​  σ2 ​ 
√

E(RP) = x1 × E(R1) + x2 × E(R2) + … + xn × E(Rn) [13.4]

σ2P = x2Lσ2L + x2Uσ2U + 2xLxUCORRL,UσLσU [13.5]

___
  σP = √
​  ​​σ2​ ​​P​ ​ 

Total return = Expected return + Unexpected return [13.6]

R = E(R) + U

Announcement = Expected part + Surprise [13.7]

R = E(R) + Systematic portion + Unsystematic portion [13.8]

Total risk = Systematic risk + Unsystematic risk [13.9]

E(Ri) = Rf + [E(RM) − Rf] × βi [13.10]

R = E(R) + βIFI + βGNP FGNP + βrFr + ε [13.11]

E(R) = RF + E[(R1) − RF]β1 + E[(R2) − RF]β2 + E[(R3) − RF]β3 + … + E[(RK) − RF]βK [13.12]

σ2P = x2Lσ2L + x2Uσ2U + 2xLxUCORRL,UσLσU [13A.1]

N N

σP=​
2
∑​​∑
​   ​​x
   ​   ​​​σ​ ​​​ [13A.2]
  
j ij
i=1 j=1

N
δ​​σ2​ p​​ ​
δ​x​2​
∑ 
 ​ _ ​ = 2​    ​​x ​  j​​​σi2
​ ​​ = 2[x1COV(R1,R2) + x2σ22 + x3COV(R3,R2) + … + xNCOV(RN,R2)] [13A.3]
j=1

COV(​R2​ ​,​RM​ ​)
β2 = ​ ___  ​  
  [13A.4]
​σ2​ ​(​RM​ ​)
RE = (D1∕P0) + g [14.1]

RE = Rf + βE × [RM − Rf] [14.2]

RP = D∕P0 [14.3]

V = E + D [14.4]

F-4
 Formula Sheet 

100% = E∕V + D∕V [14.5]

WACC = (E∕V) × RE + (P∕V) × RP + (D∕V) × RD × (1 − TC) [14.6]

Taxes* = EBIT × TC [14.7]

CFA* = EBIT + Depreciation − Taxes* − Change in NWC − Capital spending [14.8]

= EBIT + Depreciation − EBIT × TC − Change in NWC − Capital spending

CFA* = EBIT × (1 − TC) + Depreciation − Change in NWC − Capital spending [14.9]

CF​A​  *1 ​​  CF​A​  *2 ​​  CF​A​  *3 ​​  FC​A​  *t​  ​ + Vt
V0 = __
​  + ___
  ​    
​   2 ​ + ___
  
​   3 ​ + ⋯ + ___
​     ​ [14.10]
 
1 + WACC (1 + WACC) (1 + WACC) (1 + WACC)t
  ​ 
CF​A​  *t+1
Vt = __
​    ​
  [14.11]
WACC − g
fA = (E∕V) × fE + (D∕V) × fD [14.12]

Debt   ​ × β Equity
βPortfolio = βLevered firm = ___
​     + ___
​        ​ × βEquity [14A.1]
Debt + Equity Debt Debt + Equity
Equity
βUnlevered firm = ___
​        ​ × βEquity [14A.2]
Debt + Equity
Equity
βUnlevered firm = _____
​      ​ × βEquity [14A.3]
  
Equity + (1 − TC) × Debt
Number of new shares = Funds to be raised∕Subscription price [15.1]

Number of rights needed to buy a share of stock = Old shares∕New shares [15.2]

Ro = (Mo − S)∕(N + 1) [15.3]

where
  Mo = common share price during the rights-on period
  S = subscription price
  N = number of rights required to buy one new share

Me = Mo − Ro [15.4]

Re = (Me − S)∕N [15.5]

Percentage change in EPS
Degree of financial leverage = _____
   
​      ​ [16.1]
Percentage change in EBIT

DFL = ​ ___
   EBIT   ​ [16.2]
EBIT − Interest
Vu = EBIT∕REu = VL = EL + DL [16.3]
where
 Vu = Value of the unlevered firm
 VL = Value of the levered firm
 EBIT = Perpetual operating income
  REu = Equity required return for the unlevered firm
  EL = Market value of equity
  DL = Market value of debt

F-5
Formula Sheet  

RE = RA + (RA − RD) × (D∕E) [16.4]

βE = βA × (1 + D∕E) [16.5]

Value of the interest tax shield =

 (TC × RD × D)∕RD [16.6]
= TC × D

VL = VU + TC × D [16.7]

RE = RU + (RU − RD) × (D∕E) × (1 − TC) [16.8]

[ 
VL = VU + ​ 1 −   
​    
1 − Tb ]
(1 − TC) × (1 − TS)
____  ​  ​× D [16A.1]

Net working capital + Fixed assets = Long-term debt + Equity [18.1]

Net working capital = (Cash + Other current assets) − Current liabilities [18.2]

​  Current 
Cash = Long-term debt + Equity +      −   
 ​  Current assets  ​ −    
       
​     ​  Fixed 
 ​   [18.3]
liabilities (other than cash) assets

Operating cycle = Inventory period + Accounts receivable period [18.4]

Cash cycle = Operating cycle − Accounts payable period [18.5]

Cash collections = Beginning accounts receivable + 1∕2 × Sales [18.6]

Accounts receivable = Average daily sales × ACP [20.1]

Cash flow (old policy) = (P − v)Q [20.2]

Cash flow (new policy) = (P − v)Q′ [20.3]

PV = [(P − v)(Q′ − Q)]∕R [20.4]

Cost of switching = PQ + v(Q′ − Q) [20.5]

where
  PQ = present value in perpetuity of a one-month delay in receiving the
monthly revenue of PQ

NPV of switching = −Cost of switching + PV of future incremental cash inflows [20.6]

= −[PQ + v(Q′ − Q)] + (P − v)(Q′ − Q)∕R

NPV = 0 = −[PQ + v(Q′ − Q)] + (P − v)(Q′ − Q)∕R [20.7]

NPV = −v + (1 − π)P′∕(1 + R) [20.8]

NPV = −v + (1 − π)(P − v)∕R [20.9]

Score = Z = 0.4 × [Sales∕Total assets] + 3.0 × EBIT∕Total assets [20.10]

Total carrying costs = Average inventory × Carrying costs per unit [20.11]
= (Q∕2) × CC

Total restocking cost =

 Fixed cost per order × Number of orders [20.12]
= F × (T∕Q)

F-6
 Formula Sheet 

Total costs = Carrying costs + Restocking costs [20.13]

= (Q∕2) × CC + F × (T∕Q)

Carrying costs = Restocking costs [20.14]

(Q*∕2) × CC = F × (T∕Q*)

2T × F
Q∗2 = ​ __  ​  
[20.15]
CC
_______

√ ​  2T × F
Q = ​  __
∗
CC
  
 ​ ​ [20.16]
 

(E[S1] − S0)∕S0 = hFC − hCDN [21.1]

E[S1] = S0 × [1 + (hFC − hCDN)] [21.2]

E[St] = S0 × [1 + (hFC − hCDN)]t [21.3]

F1∕S0 = (1 + RFC)∕(1 + RCDN) [21.4]

(F1 − S0)∕S0 = RFC − RCDN [21.5]

F1 = S0 × [1 + (RFC − RCDN)] [21.6]

Ft = S0 × [1 + (RFC − RCDN)]t [21.7]

E[S1] = S0 × [1 + (RFC − RCDN)] [21.8]

E[St] = S0 × [1 + (RFC − RCDN)]t [21.9]

RCDN − hCDN = RFC − hFC [21.10]

NPV = VB* − Cost to Firm A of the acquisition [23.1]

C1 = 0 if (S1 − E) ≤ 0 [25.1]

C1 = S1 − E if (S1 − E) > 0 [25.2]

C0 ≤ S0 [25.3]

C0 ≥ 0 if S0 − E < 0 [25.4]
C0 ≥ S0 − E if S0 − E ≥ 0

S0 = C0 + E∕(1 + Rf) [25.5]

C0 = S0 − E∕(1 + Rf)

Call option value = Stock value − Present value of the exercise price [25.6]
C0 = S0 − E∕(1 + Rf)t

C0 = S0 × N(d1) − E∕(1 + Rf)t × N(d2) [25A.1]

_
d1 = [ln(S0∕E) + (Rf + 1∕2 × σ2) × t]∕[σ × √
​  t ​ ] [25A.2]
_
d2 = d1 − σ × √
​  t ​ 

F-7
Formula Sheet  

ONLINE
Appendix 4A

EFN = Increase in total assets − Addition to retained earnings − New borrowing [4B.1]
= A(g) − p(S)R × (1 + g) − pS(R) × (1 + g)[D∕E]

ROE = p(S∕A)(1 + D∕E) [4B.2]

Appendix 7B

NPV = (co − cN)∕cN × $1,000 − CP [7B.1]

Appendix 19A

Opportunity costs = (C∕2) × R [19A.1]

Trading costs = (T∕C) × F [19A.2]

Total cost = Opportunity costs + Trading costs = (C∕2) × R + (T∕C) × F [19A.3]

__________
C* = √ ⋅
​  (2T × F)∕R ​  [19A.4]

C* = L + (3∕4 × F × σ2∕R)1∕3 [19A.5]

U* = 3 × C* − 2 × L [19A.6]

Average cash balance = (4 × C* − L)∕3 [19A.7]

Appendix 20A

Net incremental cash flow = P′Q × (d − π) [20A.1]

NPV = −PQ + P′Q × (d − π)∕R [20A.2]

F-8