2024

Level 1 - Formula Sheet

This document should be used in conjunction with the corresponding readings in the 2024 Level 1 CFA® Program curriculum. Some of the graphs, charts, tables, examples, and figures
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Quantitative Methods Effective Annual Rate (EAR)
Other Helpful Keys
Financial Calculator Keys STO = allows you to store values. 𝐸𝐴𝑅 = (1 + 𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑟𝑎𝑡𝑒)𝑚 − 1
N = Number of Compounding Periods RCL = allows you to recall stored values.
I/Y = Interest Rate per Year 𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑟𝑎𝑡𝑒
*In whole numbers (i.e. 5% is entered as 5) 𝑆𝑡𝑎𝑡𝑒𝑑 𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑎𝑡𝑒
FORMAT =
PV = Present Value 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑃𝑒𝑟𝑖𝑜𝑑𝑠 𝑂𝑛𝑒 𝑌𝑒𝑎𝑟
2nd + FORMAT allows you to change the number of
PMT = Payment decimal places displayed on the calculator. 𝑚 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑃𝑒𝑟𝑖𝑜𝑑𝑠 𝑂𝑛𝑒 𝑌𝑒𝑎𝑟
FV = Future Value
DATA & STAT EAR with continuous compounding
End-of-period payments Computes multiple values (mean, standard
*Used for regular annuity deviation, etc...) 𝐸𝐴𝑅 = 𝑒 𝑟𝑠 − 1
2nd [BGN]
2nd Enter 2nd + DATA allows you to your input variables. Once
Display END inputted, exit the page, and click 2nd + STAT to find Relative Frequency
Relative Frequency
the computed outputs. Use the down arrow keys 𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑓𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 𝑜𝑓 𝑒𝑎𝑐ℎ 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙
Beginning-of-period payments scroll through the various outputs. =
*Used for annuity due 𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠
2nd [BGN]
2nd Enter
Future Value (FV) of a single cash flow Cumulative Relative Frequency
Display BGN Cumulative Relative Frequency
𝐹𝑉 = 𝑃𝑉 × (1 + 𝑟)𝑁 = 𝐴𝑑𝑑 𝑡ℎ𝑒 𝑟𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑓𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑖𝑒𝑠 𝑤ℎ𝑖𝑙𝑒 𝑝𝑟𝑜𝑐𝑒𝑒𝑑𝑖𝑛𝑔
𝑓𝑟𝑜𝑚 𝑡ℎ𝑒 𝑓𝑖𝑟𝑠𝑡 𝑡𝑜 𝑡ℎ𝑒 𝑙𝑎𝑠𝑡 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙
Cash Flow Worksheet
CFn = cash flow at time period n Present Value (PV) of a single cash flow
Using the arrow keys and the ENTER key to input Arithmetic Mean
cash flow amounts and their frequencies. 𝐹𝑉
𝑃𝑉 =
Solving for net present value: the NPV key will (1 + 𝑟)𝑁 ∑𝑛𝑡=1 𝑋
x̅ =
prompt you to input a discount rate (I). Then 𝑁
pressing the down key and CPT to find the NPV.
Solving for the internal rate of return: use the IRR
Present Value (PV) of Perpetuity Median
𝐴
key and press CPT. 𝑃𝑉(𝑝𝑒𝑟𝑝𝑒𝑡𝑢𝑖𝑡𝑦) = In an ordered sample of n items:
𝑟
For even number of observations
𝐴 = 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑎𝑚𝑜𝑢𝑛𝑡 𝑛 𝑛+2
ICONV = Mean of values &
Used to calculate effective rates 2 2
Nom = Nominal Rate Future Value (FV) with continuous 𝑛+1
C/Y = Compounding Frequency For odd number of observations =
compounding 2
EFF-> CPT = outputs effective rate Mode
𝐹𝑉𝑁 = 𝑃𝑉𝑒 𝑟 𝑠𝑁 the most frequently occurring value in a distribution

QM (1/14) QM (2/14) QM (3/14)

Weighted Average Mean Population Variance Probability of A or B
𝑛 𝑁 𝑃(𝐴 𝑜𝑟 𝐵) = 𝑃(𝐴) + 𝑃(𝐵) − 𝑃(𝐴𝐵)
∑𝑖=1(𝑥𝑖 − 𝜇)2
̅ 𝑤 = ∑ 𝑤𝑖 × 𝑋𝑖
X 𝜎2 =
𝑁
𝑖=1 Joint Probability of Two Events
Geometric Mean Sample Variance
𝑃(𝐴𝐵) = 𝑃(𝐴|𝐵) × 𝑃(𝐵)
𝑛
𝑛 ∑𝑖=1(𝑥𝑖 − 𝑥̅ )2
G = √(1 + 𝑟1 )(1 + 𝑟2 ) … (1 + 𝑟𝑛 ) 𝑠2 =
𝑛−1
Conditional Probability of A given B
with 𝑟𝑖 ≥ 0 for i = 1,2, … , n
Standard Deviation
Square root of the variance value 𝑃(𝐴𝐵)
Harmonic Mean 𝑃(𝐴|𝐵) =
n 𝑃(𝐵)
HM = 𝑛 Sample Target Semi-Deviation
1
∑ ( )
𝑖=1 𝑋𝑖 Joint Probability of any number of
𝑛 independent events
with X𝑖 > 0 for i = 1,2, … , n (𝑋𝑖 − 𝐵)2
𝑠Target = √ ∑
𝑛−1 𝑃(𝐴𝐵𝐶𝐷𝐸) = 𝑃(𝐴) × 𝑃(𝐵) × 𝑃(𝐶) × 𝑃(𝐷)
Mean Absolute Deviation 𝑓𝑜𝑟 𝑎𝑙𝑙 𝑋𝑖 ≤ 𝐵
× 𝑃(𝐸)

∑𝑛𝑖=1|𝑥𝑖 − 𝑥̅ | where B is the target and n is the total number of

MAD =
𝑛 sample observations. Total Probability Rule
Percentile Coefficient of Variation 𝑃(𝐴) = 𝑃(𝐴|𝐵1 ) × 𝑃(𝐵1 ) + 𝑃(𝐴|𝐵2 ) × 𝑃(𝐵2 )
y
Percentile = Ly = (n + 1) × + 𝑃(𝐴|𝐵3 ) × 𝑃(𝐵3 )
100
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑥 𝑠𝑥 + ⋯ 𝑃(𝐴|𝐵𝑛 ) × 𝑃(𝐵𝑛 )
𝐶𝑉 = =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑥 𝑥̅
Distribution
Quartile =
4
Skewness
Distribution Positive Skew; Mean > Median > Mode Expected Value of a Random Variable
Quintile =
5 Negative Skew; Mean < Median < Mode
𝑛
Distribution 𝐸(𝑋) = 𝑃(𝑋1 )𝑋1 + 𝑃(𝑋2 )𝑋2 +. . . 𝑃(𝑋𝑛 )𝑋𝑛 = ∑ 𝑃(𝑋𝐼 )𝑋𝑖
Decile = Probability Stated as Odds
10 𝑖=1
𝑃(𝐸)
𝑂𝑑𝑑𝑠 𝑓𝑜𝑟 𝑎𝑛 𝐸𝑣𝑒𝑛𝑡 ′𝐸′ =
Range 1 − 𝑃(𝐸)
Variance of a Random Variable
1 − 𝑃(𝐸)
Range = Maximum value – Minimum value 𝑂𝑑𝑑𝑠 𝑎𝑔𝑎𝑖𝑛𝑠𝑡 𝑎𝑛 𝐸𝑣𝑒𝑛𝑡 ′𝐸′ = 𝑛
𝑃(𝐸)
𝜎 2 (𝑋) = ∑ 𝑃(𝑋𝑖 ) [𝑋𝑖 − 𝐸(𝑋)]2
𝑖=1

QM (4/14) QM (5/14) QM (6/14)

Portfolio Expected Return Permutation Formula Standardizing a Random Normal Variable
# of ways that we can choose r objects from a total of n 𝑋−µ
𝑍=
objects, when order does matter. 𝜎
𝐸(𝑅𝑝 ) = 𝑤1̇ 𝐸(𝑅1̇ ) + 𝑤2̇ 𝐸(𝑅2̇ ) + 𝑤3 𝐸(𝑅3 ) … 𝑤𝑛 𝐸(𝑅𝑛̇ )
n!
nPr = approximately…
(n − r)!
Portfolio Variance 50% 𝑜𝑓 𝑎𝑙𝑙 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠 𝑓𝑎𝑙𝑙 𝑤𝑖𝑡ℎ𝑖𝑛 𝜇 ± (2 ∕ 3)𝜎
68% 𝑜𝑓 𝑎𝑙𝑙 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠 𝑓𝑎𝑙𝑙 𝑤𝑖𝑡ℎ𝑖𝑛 𝜇 ± 1𝜎
Probabilities for a Random Variable given 95% 𝑜𝑓 𝑎𝑙𝑙 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠 𝑓𝑎𝑙𝑙 𝑤𝑖𝑡ℎ𝑖𝑛 𝜇 ± 2𝜎
𝑣𝑎𝑟(𝑅𝑃 ) = 𝑤𝐴2 𝜎 2 (𝑅𝐴 ) + 𝑤𝐵2 𝜎 2 (𝑅𝐵 ) 99% 𝑜𝑓 𝑎𝑙𝑙 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠 𝑓𝑎𝑙𝑙 𝑤𝑖𝑡ℎ𝑖𝑛 𝜇 ± 3𝜎
+ 2𝑤𝐴 𝑤𝐵 𝜎(𝑅𝐴 )𝜎(𝑅𝐵 )𝜌(𝑅𝐴 , 𝑅𝐵 )
its Cumulative Distribution Function
To find F(x), sum up, or cumulate, values of the
Covariance probability function for all outcomes less than or Safety-First Ratio
equal to x.
𝑐𝑜𝑣(𝑅1 , 𝑅𝑗 ) = 𝐸[(𝑅𝑖 − 𝐸(𝑅𝑖̇ )(𝑅𝑗 − 𝐸(𝑅𝑗̇ )] [𝐸(𝑅𝑝 ) − 𝑅𝑙 )]
𝑆𝐹𝑅𝑎𝑡𝑖𝑜 =
𝜎𝑝
Probabilities given the Discrete Uniform
Correlation Portfolio with the highest ratio is preferred
Function
𝑐𝑜𝑣(𝑅𝑖 , 𝑅𝑗 ) 𝐶𝑢𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒 𝑑𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑓𝑢𝑛𝑐𝑡𝑖𝑜𝑛 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑛𝑡ℎ 𝑜𝑢𝑡𝑐𝑜𝑚𝑒
Continuously Compounded Return
𝜌(𝑅𝑖 , 𝑅𝑗 ) =
𝜎(𝑅𝑖 )𝜎(𝑅𝑗 ) 𝐹(𝑋𝑛) = 𝑛𝑃(𝑋)
from t = 0 to t = 1
𝑆1
Bayes’ Formula Probability function for a Binomial 𝑟0,1 = ln( )
𝑆0
Random Variable
𝑃(𝐸𝑣𝑒𝑛𝑡|𝐼𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛) 𝑃𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓𝑥 𝑠𝑢𝑐𝑐𝑒𝑠𝑠𝑒𝑠 𝑖𝑛 𝑛 𝑡𝑟𝑖𝑎𝑙𝑠
n! Degrees of Freedom of Student’s
= × 𝑝 𝑥 (1 − 𝑝)𝑛−𝑥
𝑃(𝐼𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛|𝐸𝑣𝑒𝑛𝑡) (n − x)! x! T-distribution
= × 𝑃(𝐸𝑣𝑒𝑛𝑡)
𝑃(𝐼𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛)
Expected Value and Variance of a 𝑑𝑓 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑎𝑚𝑝𝑙𝑒 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠 − 1 = 𝑛 − 1
Binomial Random Variable
Multiplication Rule of Counting Standard Error of the Sample Mean
n! = n(n − 1)(n − 2)(n − 3) … 1 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑋 = nP (σ known)
𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒 𝑜𝑓 𝑋 = nP(1 − p)

Multinomial Formula for Labeling σ

𝜎𝑋 =
Problems Continuous Uniform Distribution √n
n!
n! = 1 (σ unknown)
n1! n2! … nk! 𝑓(𝑥) = { 𝑓𝑜𝑟 𝑎 < 𝑥 < 𝑏 𝑜𝑟 0
𝑏−𝑎
s
Combination Formula 𝑥−𝑎 𝑠𝑥 =
# of ways we can choose r objects from a total of n objects, 𝐹(𝑥) = 𝑓𝑜𝑟 𝑎 < 𝑥 < 𝑏 √n
𝑏−𝑎
when order does not matter.
n!
nCr =
(n − r)! r!

QM (7/14) QM (8/14) QM (9/14)

Normally Distributed Population with Test of the Difference in Means Test of a Correlation
Known Variance (Equal Variances)
σ (𝑋̅1 − 𝑋̅2 ) − (𝜇1 − 𝜇2 )
𝐶𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙𝑠 = 𝑋̅ ± 𝑧𝜎/2 × ( ) 𝑟√𝑛 − 2
√n 𝑡= 1 𝑡=
𝑧𝜎/2 𝑠𝑝2 𝑠𝑝2 2 √1 − 𝑟 2
≅ 1.65 𝑓𝑜𝑟 90% 𝐶𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝐼𝑛𝑡𝑒𝑟𝑣𝑎𝑙, 5% 𝑖𝑛 𝑒𝑎𝑐ℎ 𝑡𝑎𝑖𝑙 ( + )
𝑛1 𝑛2
𝑧𝜎/2 Regression Coefficient
= 1.96 𝑓𝑜𝑟 95% 𝐶𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝐼𝑛𝑡𝑒𝑟𝑣𝑎𝑙, 2.5% 𝑖𝑛 𝑒𝑎𝑐ℎ 𝑡𝑎𝑖𝑙
𝑧𝜎/2 (𝑛1 − 1)𝑠12+ (𝑛2 − 1)𝑠22
𝑤ℎ𝑒𝑟𝑒 𝑠𝑝2 = 𝑌 = 𝑏0 + 𝑏1 𝑋𝑖 + 𝜀𝑖
≅ 2.58 𝑓𝑜𝑟 99% 𝐶𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝐼𝑛𝑡𝑒𝑟𝑣𝑎𝑙, 0.5% 𝑖𝑛 𝑒𝑎𝑐ℎ 𝑡𝑎𝑖𝑙 𝑛1 + 𝑛2 − 2

Large sample, Population Variance Test of the Difference in Means Assumptions of Simple Linear Regression
Linearity: a linear relation exists between the
Unknown (Unequal Variances)
s dependent variable and the independent variable.
𝐶𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙𝑠 = 𝑋̅ ± 𝑧𝛼/2 × ( ) Homoscedasticity: variance of the error term is the
√n (𝑋̅1 − 𝑋̅2 ) − (𝜇1 − 𝜇2 )
𝑡= same for all observations.
1
𝑠2 𝑠2 2 Independence: the error term is uncorrelated
Small sample, Population Variance ( 1 + 2) across observations
𝑛1 𝑛2
Unknown Normality: the error term is normally distributed
s 2
𝐶𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙𝑠 = 𝑋̅ ± 𝑡𝛼/2 × ( ) 𝑠12 𝑠22
√n (
+ ) TSS = SSE + RSS
𝑛1 𝑛2
𝑤ℎ𝑒𝑟𝑒 𝑑𝑓 = 2
(𝑠1 ⁄𝑛1 )2 (𝑠22 ⁄𝑛2 )2
Type I and II Errors 𝑛1
+
𝑛2
𝑛 𝑛 𝑛

Type I – Reject H0 when true ∑(𝑌𝑖 − 𝑌̅)2 = ∑(𝑌𝑖 − 𝑌̂𝑖 )2 + ∑(𝑌̂𝑖 − 𝑌̅)2
𝑖=1 𝑖=1 𝑖=1
Type II – Accept H0 when false
Test of Mean of Differences
where;
Power of a Test 𝑛
1 − 𝑃(𝑇𝑦𝑝𝑒 𝐼𝐼 𝑒𝑟𝑟𝑜𝑟) 𝑑̅ − 𝜇𝑑0 1
𝑡= 𝑤ℎ𝑒𝑟𝑒 𝑑̅ = ∑ 𝑑𝑖 TSS: total sum of squares (total variance)
𝑠𝑑̅ 𝑛 𝑛
𝑖=1
∑ (𝑌𝑖 − 𝑌̅ )2
Test of a Single Mean 𝑖=1
Test of a Single Variance SSE: sum of the squares errors (unexplained
𝑋̅ − 𝜇0 𝑋̅ − 𝜇0 variance)
𝑧= 𝜎 or 𝑡𝑛−1 = 𝑠 𝑛
⁄ 𝑛 ⁄ 𝑛 (𝑛 − 1)𝑠 2 ∑ (𝑌𝑖 − 𝑌 ̂ 𝑖 )2
√ √ 𝜒2 =
𝜎02 𝑖=1
Test of the differences in Variances RSS: regression sum of squares (explained
variance)
𝑛
𝑠12 ∑ (𝑌 ̅ )2
̂𝑖 − 𝑌
𝐹=
𝑠22 𝑖=1

QM (10/14) QM (11/14) QM (12/14)

Coefficient of Determination Test of the Intercept Coefficient
𝑏̂0 −𝐵0 Breakeven and Shutdown Points
𝑡𝑖𝑛𝑡𝑒𝑟𝑐𝑒𝑝𝑡 =
𝑒𝑥𝑝𝑙𝑎𝑖𝑛𝑒𝑑 𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 𝑠𝑏̂
0 Breakeven Point: Total Revenue = Total Cost
𝑅2 = Shutdown Point (Short-Run): Total Revenue < Total
𝑡𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 1 𝑋̅ 2
𝑠𝑏̂0 = √𝑛 + ∑𝑛 ̅ 2 Variable Cost
𝑖=1 𝑖 −𝑋)
(𝑋
Shutdown Point (Long-Run): Total Revenue < Total
𝑇𝑆𝑆 − 𝑆𝑆𝐸
𝑅2 = Prediction Interval
Cost
𝑇𝑆𝑆
Firm Structures
Standard Error of Estimate 𝑌̂ ± 𝑡𝑐𝑟𝑖𝑡𝑖𝑐𝑎𝑙 ∙ 𝑠𝑓 Perfect Competition: Numerous firms; low barriers
to entry; homogenous products; no pricing power;
Monopolistic Competition: Numerous firms; low
∑𝑛 (𝑌𝑖 − 𝑌̂𝑖 )2 1 (𝑋𝑓 − 𝑋̅)2 barriers to entry; differentiated products; some
𝑠𝑒 = √ 𝑖=1 𝑠𝑓 = 𝑠𝑒 √1 + + 𝑛
𝑛−2 𝑛 ∑𝑖=1(𝑋𝑖 − 𝑋̅)2 pricing power
Oligopoly: Few firms; high barriers to entry;
products can be homogeneous or differentiated;
F-Statistic
Economics significant pricing power
Monopoly: Single firm; high barriers to entry; high
𝑅𝑆𝑆⁄ Price Elasticity of Demand pricing power
𝑘 𝑀𝑆𝑅 %∆𝑄 𝑃𝑜
=( )×( )
∆𝑄
𝐹= = %∆𝑃 𝑄𝑜 ∆𝑃
𝑆𝑆𝐸⁄ 𝑀𝑆𝐸 ∆𝑄 Profit Maximization Point (All Firms)
𝑛 − (𝑘 + 1) ( ) 𝑖𝑠 𝑡ℎ𝑒 𝑠𝑙𝑜𝑝𝑒 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡
∆𝑃 Marginal Revenue = Marginal Cost
Demand Elastic if absolute value > 1
a significant F-statistic implies the Demand Inelastic if absolute value < 1
Gross Domestic Product (GDP)
regression as a whole is significant. GDP (Expenditure Approach) = Consumption +
Income Elasticity of Demand Investment + Government Spending + Net Exports
%∆𝑄 𝐼𝑜 ∆𝑄
where; %∆𝐼
=( )×( )
𝑄𝑜 ∆𝐼
K is the number of slope coefficients ∆𝑄 GDP (Income Approach) = Household Income +
( ) 𝑖𝑠 𝑡ℎ𝑒 𝑠𝑙𝑜𝑝𝑒 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 Business Income + Government Income
∆𝐼
Normal good if positive
Test of the Slope Coefficient Inferior good if negative GDP (Value-Added Approach): Sum Incremental
Value-Added at each Stage of Production
𝑏̂1 − 𝑏1 Cross Elasticity of Demand Nominal and Real GDP
𝑡= %∆𝑄 𝑃𝑐 ∆𝑄 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 = 𝑃𝑡 × 𝑄𝑡
𝑠𝑏̂1 %∆𝑃𝑐
=( )×(
𝑄𝑜 ∆𝑃𝑐
)
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 = 𝑃𝑏 × 𝑄𝑡
𝑆𝑒 ∆𝑄 b = base year price
( ) 𝑖𝑠 𝑡ℎ𝑒 𝑠𝑙𝑜𝑝𝑒 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡
𝑠𝑏̂1 = ∆𝑃𝑐
𝑃𝑐 = 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑟𝑒𝑙𝑎𝑡𝑒𝑑 𝑔𝑜𝑜𝑑
√∑𝑛𝑖=1(𝑋𝑖 − 𝑋̅)2 Substitute good if positive
Complementary good if negative

QM (13/14) QM (14/14) ECON (1/7) ECON (2/7)

GDP Deflator Growth Accounting Equation Monetary Policy
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 𝐺𝑟𝑜𝑤𝑡ℎ 𝑖𝑛 𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐺𝐷𝑃 Monetary Policy: central bank activities that
Value of current year output at current year prices = 𝐺𝑟𝑜𝑤𝑡ℎ 𝑖𝑛 𝑡𝑒𝑐ℎ𝑛𝑜𝑙𝑜𝑔𝑦 influence the supply of money and credit;
=
Value of current year output at base year prices + 𝑤𝐿 (𝐺𝑟𝑜𝑤𝑡ℎ 𝑖𝑛 𝑙𝑎𝑏𝑜𝑟)
expansionary when policy rate < neutral interest
× 100 + 𝑤𝑐 (𝐺𝑟𝑜𝑤𝑡ℎ 𝑖𝑛 𝑐𝑎𝑝𝑖𝑡𝑎𝑙)
rate; contractionary when policy rate > neutral
interest rate
National income, Personal income & Business Cycle Phases
Personal disposable Income Trough (Lowest Point); Expansion; Peak (Highest
Central Bank Objectives: Full Employment and Price
National income Stability
Point); Contraction 1
= 𝐶𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠
𝑀𝑜𝑛𝑒𝑦 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 =
+ 𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑎𝑛𝑑 𝑔𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑒𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑝𝑟𝑜𝑓𝑖𝑡𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥𝑒𝑠 Reserve Requirement
+ 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 Economic Indicators
+ 𝑢𝑛𝑖𝑛𝑐𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒𝑑 𝑏𝑢𝑠𝑖𝑛𝑒𝑠𝑠 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 + 𝑟𝑒𝑛𝑡 Leading: Turn ahead of peaks and troughs of
+ 𝑖𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑏𝑢𝑠𝑖𝑛𝑒𝑠𝑠 𝑡𝑎𝑥𝑒𝑠 𝑙𝑒𝑠𝑠 𝑠𝑢𝑏𝑠𝑖𝑑𝑖𝑒𝑠
business cycle (S&P500, manufacturing new orders, Fiscal Policy
Personal Income building permits) Fiscal Policy: government decisions about taxation
= 𝑁𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑏𝑢𝑠𝑖𝑛𝑒𝑠𝑠 𝑡𝑎𝑥𝑒𝑠 Coincidental: Turns coincide with phase of business and spending; expansionary when government
− 𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥𝑒𝑠 cycle (Employee Payrolls, Manufacturing Sales, budget balance decreasing; contractionary when
− 𝑈𝑛𝑑𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑒𝑑 𝑐𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑝𝑟𝑜𝑓𝑖𝑡 Personal Income) government budget balance increasing
+ 𝑇𝑟𝑎𝑛𝑠𝑓𝑒𝑟 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 Lagging: Turns after the business cycle movements 1
𝐹𝑖𝑠𝑐𝑎𝑙 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 =
(Average Prime Rate, Inventory-Sales Ratio, 1 − MPC(1 − t)
𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝑑𝑖𝑠𝑝𝑜𝑠𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 = 𝑝𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒 − Duration of Unemployment)
𝑝𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝑡𝑎𝑥𝑒𝑠 Equation of Exchange
Types of Unemployment MxV=PxY
Aggregate Demand Frictional: Unemployment from time lag to find new
Shifts due to changes in household wealth, job Gross Domestic Product vs Gross National
consumer and business expectations, capacity Cyclical: Unemployment due to business cycle
utilization, monetary policy, fiscal policy, exchange fluctuations
Product
Structural: Unemployment due to lack of skills for GDP: Final value of goods and services produced
rates and foreign GDP
job openings or distance factors within a country/economy
GNP: Final value of goods and services produced by
Aggregate Supply citizens of a country/economy
Short-Run Shifts: changes in changes in potential Consumer Price Index (CPI)
GDP, nominal wages, input prices, future price Cost of basket at current prices
𝐶𝑃𝐼 = × 100
expectations, business taxes and subsidies and Cost of basket at base period prices
exchange rate

Long-Run Shifts: changes in labor supply, supply of

physical and human capital and productivity and
technology

ECON (3/7) ECON (4/7) ECON (5/7)

Regional Trading Agreements (RTA) Change in Real Exchange Rate Financial Statement
Free trade areas (FTA): Trade barriers removed 𝑑
∆𝑅𝑒𝑎𝑙 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒 ( )
among members; Countries still have own policies 𝑓
ΔP𝑓
Analysis
against non-members ΔS𝑑 1+ Accounting Equation (Balance Sheet)
𝑓 P𝑓
Customs Union: FTA with common policy against = (1 + )× −1 Assets = Liabilities + Owners’ Equity
S𝑑 ΔP𝑑
non-members 1+
𝑓
( P𝑑 ) Assets = Liabilities + Contributed Capital + Ending
Common Market: Customs union with free Retained Earnings
movement of factors of production among Assets = Liabilities + Contributed Capital + Beginning
members Retained Earnings + Revenues – Expenses -
Economic Union: All aspects of common market Dividends
with common economic institutions and economic Forward Discount/Premium Income Statement Equation
policy 𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 𝑜𝑟 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡
𝑑 Revenues + Other Income – Expenses = Net Income
Monetary Union: If members of economic union 𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑟𝑎𝑡𝑒 ( )
adopt a common currency 𝑓
= −1
𝑑
𝑆𝑝𝑜𝑡 𝑟𝑎𝑡𝑒 ( ) Financial Statement Analysis Framework
𝑓
1) Articulate the purpose and context of the
Balance of Payments analysis.
Current Account: measures flow of goods and No-Arbitrage Forward Exchange Rate 2) Collect input data.
services (Merchandise Trade, Services, Income 𝑑 3) Process data.
Receipts, Unilateral Transfers) 𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑅𝑎𝑡𝑒 ( )
𝑓 4) Analyze/interpret the processed data
Capital Account: measures transfers of capital 𝑑
= 𝑆𝑝𝑜𝑡 𝑟𝑎𝑡𝑒 ( ) 5) Develop and communicate conclusions and
(Capital Transfers, Sales and Purchases of Non- 𝑓 recommendations
Produced, Non-Financial Assets) 𝐴𝑐𝑡𝑢𝑎𝑙
(1 + 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑑𝑜𝑚𝑒𝑠𝑡𝑖𝑐 × ) 6) Follow-Up
× 360
Financial Account: records investment flows 𝐴𝑐𝑡𝑢𝑎𝑙
(Financial Assets Abroad, Foreign-Owned Financial (1 + 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑓𝑜𝑟𝑒𝑖𝑔𝑛 × )
360
Assets) Revenue Recognition Principles
Requirements: 1) Risk and reward of ownership is
transferred 2) Collectability is probable
Real Exchange Rate Exchange Rate Regimes
𝑑 Monetary Union: Members adopt common
𝑅𝑒𝑎𝑙 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒 ( ) Five-Step Revenue Recognition Model
𝑓 currency
d 𝐶𝑃𝐼 𝑓𝑜𝑟𝑒𝑖𝑔𝑛 1. Identify the contract(s) with a customer
= Spot rate ( ) × Dollarization: Members adopt foreign currency 2. Identify the separate or distinct performance
f 𝐶𝑃𝐼 𝑑𝑜𝑚𝑒𝑠𝑡𝑖𝑐
Fixed Parity: ±1 percent around the parity level obligations in the contract
Target Zone: up to ±2 percent around the parity 3. Determine and allocate the transaction price to
Change in Nominal Exchange Rate level the performance obligations in the contract
𝑑 Crawling Peg: Pegged exchange rate periodically
∆𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒 ( ) 4. Recognize revenue when (or as) the entity
𝑓 adjusted
d satisfies a performance obligation
Spot rate ( ) at the end of the period Managed Float: Central Bank acts to influence
= f −1
d exchange rate without a specific target Expense Recognition Principles
Spot rate ( ) at the beginning of the period
f Independent Float: Exchange rate freely
Matching principle – match expenses with the
determinedly by the market
revenues they help generate

ECON (6/7) ECON (7/7) FSA (1/10)

Basic Earnings Per Share Financial Asset Measurement Activity Ratios
Held-for-trading: measured at fair value on B/S, Revenue
Receivables Turnover =
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 Dividends/Interest and Unrealized/Realized PnL on Average receivables
Basic EPS =
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 I/S
Number of days in period
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 Available-for-sale: measured at fair value on B/S; Days of sales outstanding =
Receivables turnover
realized PnL I/S; unrealized PnL OCI
Diluted Earnings Per Share Held-to-maturity: Amortized cost on B/S; Cost of sales or cost of goods sold
Inventory turnover =
Coupons/Dividends through I/S; realized Pnl I/S Average inventory
𝐷𝑖𝑙𝑢𝑡𝑒𝑑 𝐸𝑃𝑆 Number of days in period
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 IFRS vs US GAAP Days of inventory on hand =
= Inventory turnover
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 IFRS
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
Interest Received: Operating or Investing Purchases
+ 𝑁𝑒𝑤 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆ℎ𝑎𝑟𝑒𝑠 𝐼𝑠𝑠𝑢𝑒𝑑 𝑎𝑡 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 Payables turnover =
Interest Paid: Operating or Financing Average trade payables
*if-converted method Dividends Received: Operating or Investing
Dividends Paid: Operating or Financing Number of days in period
Number of days of payables =
Payables turnover
𝐷𝑖𝑙𝑢𝑡𝑒𝑑 𝐸𝑃𝑆 US GAAP Revenue
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 + 𝐶𝑜𝑛𝑣𝑒𝑟𝑡𝑖𝑏𝑙𝑒 𝐷𝑒𝑏𝑡 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 (1 − 𝑡) Interest Received: Operating Fixed asset turnover =
Average net fixed assets
−𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 Interest Paid: Operating
=
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 Dividends Received: Operating Revenue
+𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆ℎ𝑎𝑟𝑒𝑠 𝑡ℎ𝑎𝑡 𝑤𝑜𝑢𝑙𝑑 Total asset turnover =
Dividends Paid: Financing Average total assets
ℎ𝑎𝑣𝑒 𝑏𝑒𝑒𝑛 𝑖𝑠𝑠𝑢𝑒𝑑 𝑎𝑡 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛

*if-converted method with convertible debt Direct Method vs Indirect Method

Direct Method: disclose cash inflows by source and Liquidity Ratios
𝐷𝑖𝑙𝑢𝑡𝑒𝑑 𝐸𝑃𝑆 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
cash outflows by use 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 =
(𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠) 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
=
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 Indirect Method: reconcile change in cash from net
+ income with non-cash items and net changes in 𝑄𝑢𝑖𝑐𝑘 𝑟𝑎𝑡𝑖𝑜
𝑁𝑒𝑤 𝑠ℎ𝑎𝑟𝑒𝑠 𝑡ℎ𝑎𝑡 𝑤𝑜𝑢𝑙𝑑 𝑏𝑒 𝑖𝑠𝑠𝑢𝑒𝑑 𝑓𝑟𝑜𝑚 𝑂𝑝𝑡𝑖𝑜𝑛 𝐸𝑥𝑒𝑟𝑐𝑖𝑠𝑒 −
( ) working capital 𝐶𝑎𝑠ℎ + 𝑆ℎ𝑜𝑟𝑡 𝑡𝑒𝑟𝑚 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 + 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝑆ℎ𝑎𝑟𝑒𝑠 𝑡ℎ𝑎𝑡 𝑐𝑜𝑢𝑙𝑑 𝑏𝑒 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑑 𝑤𝑖𝑡ℎ 𝑐𝑎𝑠ℎ 𝑝𝑟𝑜𝑐𝑒𝑒𝑑𝑠 𝑓𝑟𝑜𝑚 𝑒𝑥𝑒𝑟𝑐𝑖𝑠𝑒 =
[ × (𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝑌𝑒𝑎𝑟 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐼𝑛𝑠𝑡𝑟𝑢𝑚𝑒𝑛𝑡𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔) ] 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Free Cash Flow to the Firm (FCFF)
*Treasury stock method 𝐹𝐶𝐹𝐹 𝐶𝑎𝑠ℎ 𝑟𝑎𝑡𝑖𝑜
= NI + NCC + Int(1 – Tax rate)– FCInv – WCInv 𝐶𝑎𝑠ℎ + 𝑆ℎ𝑜𝑟𝑡 𝑡𝑒𝑟𝑚 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠
=
Comprehensive Income 𝐹𝐶𝐹𝐹 = CFO + Int(1 – Tax rate)– FCInv 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Comprehensive Income = Net Income + Other Defensive interval ratio
Comprehensive Income Free Cash Flow to Equity (FCFE) 𝐶𝑎𝑠ℎ + 𝑆ℎ𝑜𝑟𝑡 𝑡𝑒𝑟𝑚 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 + 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝐹𝐶𝐹𝐸 = 𝐶𝐹𝑂 – 𝐹𝐶𝐼𝑛𝑣 + 𝑁𝑒𝑡 𝑏𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔 =
Daily cash expenditures
𝐹𝐶𝐹𝐸 = 𝑁𝐼 + 𝑁𝐶𝐶 – 𝐶𝑎𝑝𝐸𝑥 – 𝛥𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
+ 𝑁𝑒𝑡 𝐵𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔 𝐶𝑎𝑠ℎ 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑐𝑦𝑐𝑙𝑒
= Days of Inventory on hand
+ Day Sales Outstanding – Number of days of payables

FSA (2/10) FSA (3/10) FSA (4/10)

Solvency Ratios Du Pont Analysis LIFO to FIFO Conversion
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡 ROE = ROA × Leverage 𝐹𝐼𝐹𝑂 𝐶𝑂𝐺𝑆 = 𝐿𝐼𝐹𝑂 𝐶𝑂𝐺𝑆 − (𝐸𝑛𝑑𝑖𝑛𝑔 𝐿𝐼𝐹𝑂 𝑟𝑒𝑠𝑒𝑟𝑣𝑒
𝐷𝑒𝑏𝑡 𝑡𝑜 𝐴𝑠𝑠𝑒𝑡𝑠 =
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐿𝐼𝐹𝑂 𝑟𝑒𝑠𝑒𝑟𝑣𝑒)
Traditional Dupont
ROE = Net profit margin × Total asset turnover 𝐹𝐼𝐹𝑂 𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡 × Leverage = 𝐿𝐼𝐹𝑂 𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐷𝑒𝑏𝑡 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 =
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 + 𝐿𝐼𝐹𝑂 𝑟𝑒𝑠𝑒𝑟𝑣𝑒
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑆𝑎𝑙𝑒𝑠 𝐴𝑠𝑠𝑒𝑡𝑠
ROE = × ×
𝑆𝑎𝑙𝑒𝑠 𝐴𝑠𝑠𝑒𝑡𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒(𝐹𝐼𝐹𝑂) = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒(𝐿𝐼𝐹𝑂)
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒 = + (𝐸𝑛𝑑𝑖𝑛𝑔 𝐿𝐼𝐹𝑂 𝑟𝑒𝑠𝑒𝑟𝑣𝑒
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 Extended Dupont − 𝐵𝑒𝑔𝑖𝑛𝑖𝑛𝑔 𝐿𝐼𝐹𝑂 𝑟𝑒𝑠𝑒𝑟𝑣𝑒) × (1
ROE = Tax burden × Interest burden × EBIT margin − 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒)
Coverage Ratios × Total asset turnover × Leverage
𝐸𝐵𝐼𝑇 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝐸𝐵𝑇 𝐸𝐵𝐼𝑇
Interest coverage = LIFO liquidation occurs when older LIFO inventory is
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 ROE = × ×
𝐸𝐵𝑇 𝐸𝐵𝐼𝑇 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 sold (Ending LIFO reserve < Beginning LIFO reserve)
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝐴𝑠𝑠𝑒𝑡𝑠
× ×
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝐸𝑞𝑢𝑖𝑡𝑦
Fixed charge coverage LIFO vs FIFO
𝐸𝐵𝐼𝑇 + 𝐿𝑒𝑎𝑠𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠
= LIFO is only allowed under US GAAP
Interest payments + Lease payments Dividend Related Ratios Under a period of rising prices and stable or
Dividends payout ratio
Common share dividends increasing inventory:
= LIFO leads to:
Net income attributable to common shares
Profitability Ratios Higher COGS
Retention rate Lower Gross Profit
Net income attributable to common shares Lower Ending Inventory
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 – Common share dividends
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = = Higher CFO from tax savings
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 Net income attributable to common shares
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 FIFO leads to:
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 Sustainable growth rate (g) = 𝑏 × ROE
Lower COGS
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒 Higher Gross Profit
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = Weighted Average Cost per Unit Higher Ending Inventory
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 Lower CFO higher relative taxes
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑠𝑎𝑙𝑒
ROA = =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑠𝑎𝑙𝑒
Inventory Measure
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝐶𝑂𝐺𝑆 𝑢𝑠𝑖𝑛𝑔 𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 IFRS: Lower of Cost and Net Realisable Value (NRV)
ROE =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝑈𝑛𝑖𝑡𝑠 𝑠𝑜𝑙𝑑 × 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Cost of Goods Sold (FIFO/LIFO) US GAAP: Lower of Cost, Market Value or Net
𝐶𝑂𝐺𝑆 = 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 Realisable Value (NRV)
− 𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

FSA (5/10) FSA (6/10) FSA (7/10)

𝑁𝑅𝑉 = 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑠𝑎𝑙𝑒𝑠 𝑝𝑟𝑖𝑐𝑒 Deferred Tax Asset (DTA) Leasing vs Purchasing
− 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑠
− 𝐶𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑜𝑛 𝑐𝑜𝑠𝑡𝑠
Arise when excess amount paid for income taxes Tax incentives (if lessee is in a low tax bracket and
(taxable income > pre-tax income) lessor in a high tax bracket)
Depreciation Methods 𝐷𝑇𝐴 = (𝑇𝑎𝑥 𝐵𝑎𝑠𝑒 − 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐴𝑚𝑜𝑢𝑛𝑡) × 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒 Usually less costly for lessee
Straight-Line
Lessor better able to bear risk associated with
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑒𝑥𝑝𝑒𝑛𝑠𝑒
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒 Deferred Tax Liabilities (DTL) ownership
= Economies of scale for lessor
𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒 Appear when a deficit amount exists for income tax
payment (taxable income < pre-tax income)
Double Declining Balance 𝐷𝑇𝐿 = (𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐴𝑚𝑜𝑢𝑛𝑡 − 𝑇𝑎𝑥 𝐵𝑎𝑠𝑒) × 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒 Finance Lease vs Operating Lease
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 Operating Lease; more similar to renting an asset,
2
= Permanent Differences leasee records lease payable and a “right-of-use”
𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒
× 𝑁𝑒𝑡 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑎𝑡 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑌𝑒𝑎𝑟 𝑋 Permanent Differences asset on B/S, all risks and ownership remain with
Units of Production Method Income or expense items not allowed by tax lessor.
𝐴𝑚𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 legislation
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒 Tax credits for some expenditures that directly Finance Lease; more similar to owning an asset,
=
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 𝑢𝑛𝑖𝑡𝑠 reduce taxes leasee records lease payable and a “right-of-use”
× 𝑂𝑢𝑡𝑝𝑢𝑡 𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 asset on B/S, risks of ownership are transferred to
the leasee.
Temporary Differences
Revaluation of Long-Lived Assets
Asset; Carrying Amount > Tax Base; DTL
US GAAP: Revaluation Prohibited Pension Plans
Asset; Carrying Amount < Tax Base; DTA
IFRS: Revaluation recognized in net income to the Defined Contribution Plan: Amount of contribution
Liability; Carrying Amount > Tax Base; DTA
point it reverses previous impairment losses; is expensed.
Liability; Carrying Amount < Tax Base; DTL
additional gains go into revaluation surplus Defined Benefit Plan: Contributions also expensed.
Underfunded/Overfunded status appears on B/S as
Interest Expense an A or L.
Capitalizing vs. Expensing 𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑜𝑓 𝑎 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑏𝑜𝑢𝑛𝑑
Capitalizing: smooths net income impact; higher = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
ROE and ROA initially; lower ROE and ROA later on; + 𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 Corporate Issuers
Expensing: short-term net income decline; lower Net Present Value (NPV)
𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑜𝑓 𝑎 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝑏𝑜𝑢𝑛𝑑
ROE and ROA initially; higher ROE and ROA later on; 𝑁𝑃𝑉 = 𝑃𝑉 𝑜𝑓 𝑐𝑎𝑠ℎ𝑓𝑙𝑜𝑤𝑠 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑜𝑢𝑡𝑙𝑎𝑦
= 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
𝑁
− 𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑝𝑟𝑒𝑚𝑖𝑢𝑚
CFt
Income Tax Expense Effective Interest Method =∑
(1 + r)t
𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑡=0
= 𝑇𝑎𝑥𝑒𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 + ∆𝐷𝑇𝐿 − ∆𝐷𝑇𝐴 = 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑏𝑜𝑛𝑑 𝑎𝑡 𝑡ℎ𝑒 𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 𝐶𝐹𝑡 = 𝑡ℎ𝑒 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑎𝑡 𝑡𝑖𝑚𝑒 𝑡
× 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑁 = 𝑡ℎ𝑒 𝑝𝑟𝑜𝑗𝑒𝑐𝑡’𝑠 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑙𝑖𝑓𝑒
Effective Tax Rate 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 = 𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑏𝑜𝑛𝑑 𝑟 = 𝑡ℎ𝑒 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 𝑓𝑜𝑟 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 𝑜𝑟
𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 × 𝐶𝑜𝑢𝑝𝑜𝑛 𝑅𝑎𝑡𝑒 𝑜𝑝𝑝𝑜𝑟𝑡𝑢𝑛𝑖𝑡𝑦 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒 =
𝑃𝑟𝑒𝑡𝑎𝑥 𝐼𝑛𝑐𝑜𝑚𝑒 *Refer to Cash Flow Worksheet under TVM section
𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡(𝑃𝑟𝑒𝑚𝑖𝑢𝑚)
= 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒
− 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡

FSA (8/10) FSA (9/10) FSA (10/10) CORP (1/3)

Internal Rate of Return (IRR) Operating & Cash Conversion Cycle
𝑁
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑦𝑐𝑙𝑒
CFt = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 Equal Weighted Index
∑ =0
(1 + IRR)t + 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑉𝑎𝑙𝑢𝑒𝐸𝑊 = 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑑𝑒𝑥 𝑣𝑎𝑙𝑢𝑒
𝑡=0 × (1 + % 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐼𝑛𝑑𝑒𝑥 𝑉𝑎𝑙𝑢𝑒)
𝐶𝑎𝑠ℎ 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑐𝑦𝑐𝑙𝑒 𝐸
1
IRR is the discount rate that sets NPV to zero = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑤𝑖 =
𝑁
*Refer to Cash Flow Worksheet under TVM section + 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 Price and Total Return of an Index
− 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝐼𝑛𝑑𝑒𝑥 𝑉𝑎𝑙𝑢𝑒1 − 𝐼𝑛𝑑𝑒𝑥 𝑉𝑎𝑙𝑢𝑒0
𝑃𝑟𝑖𝑐𝑒 𝑅𝑒𝑡𝑢𝑟𝑛𝑖𝑛𝑑𝑒𝑥 =
Weighted Average Cost of Capital (WACC) 𝐼𝑛𝑑𝑒𝑥 𝑉𝑎𝑙𝑢𝑒0
𝑊𝐴𝐶𝐶 = 𝑤𝑑 𝑟𝑑 (1 – 𝑡) + 𝑤𝑝 𝑟𝑝 + 𝑤𝑒 𝑟𝑒 Accounts Payable Management
365
%𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑑𝑎𝑦𝑠 𝑝𝑎𝑠𝑡 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑡𝑢𝑟𝑛𝑖𝑛𝑑𝑒𝑥
Cost of trade credit = (1 + ) −1
1−%𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝐼𝑛𝑑𝑒𝑥 𝑉𝑎𝑙𝑢𝑒1 − 𝐼𝑛𝑑𝑒𝑥 𝑉𝑎𝑙𝑢𝑒0 + 𝐼𝑛𝑐𝑜𝑚𝑒
Cost of Equity using CAPM =
𝐼𝑛𝑑𝑒𝑥 𝑉𝑎𝑙𝑢𝑒0
𝐸(𝑅𝑖 ) = 𝑅𝐹 + 𝛽𝑖 [𝐸(𝑅𝑀 ) − 𝑅𝐹 ]
Equity
Margin Call Price Forms of Market Efficiency
Cost of Debt Capital Weak Form; security prices fully reflect all past
1 − 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑚𝑎𝑟𝑔𝑖𝑛
After tax cost of debt = r𝑑 (1 – t) 𝑀𝑎𝑟𝑔𝑖𝑛 𝑐𝑎𝑙𝑙 𝑝𝑟𝑖𝑐𝑒 = 𝑃0 × ( ) market data; past trading data is already reflected in
1 − 𝑚𝑎𝑖𝑛𝑡𝑒𝑛𝑎𝑛𝑐𝑒 𝑚𝑎𝑟𝑔𝑖𝑛
Cost of Preferred Stock prices; technical analysis won’t lead to superior risk-
D𝑝 Leverage
𝑟𝑝 = 1 adjusted performance
P𝑝 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 % = Semi-Strong Form; prices reflect all publicly known
𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜
Cost of Equity using DDM Approach and available information; new information is
𝐷1 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑜𝑠𝑖𝑡𝑖𝑜𝑛 rapidly reflected in prices; fundamental and
𝑟𝑒 = +𝑔 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜 =
𝑃0 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑒𝑞𝑢𝑖𝑡𝑦 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 technical analysis can’t achieve excess returns
Strong Form; security prices fully reflect both public
Sustainable Growth Rate and private information; technical analysis,
𝐷 Rate of Return on Margin Transaction fundamental analysis and private information can’t
𝑔 = (1 − ) × 𝑅𝑂𝐸 𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝐸𝑞𝑢𝑖𝑡𝑦 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑂𝑢𝑡𝑙𝑎𝑦
𝐸𝑃𝑆 be used to achieve excess returns
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 =
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑂𝑢𝑡𝑙𝑎𝑦
Porter’s Five Forces and Competitive
Estimating Beta Strategies
Unlevering the peer company’s beta Price Weighted Index
∑𝑁
𝑡=1 𝑛𝑖 𝑃𝑖
Threat of Entry
1 𝑉𝑎𝑙𝑢𝑒𝑃𝑅𝐼 = Power of Suppliers
β𝑈𝑛𝑙𝑒𝑣𝑒𝑟𝑒𝑑 = β𝐸𝑞𝑢𝑖𝑡𝑦 [ ] 𝐷𝑖𝑣𝑖𝑠𝑜𝑟
D 𝑃𝑖 Power of Buyers
[1 + ((1 − t) × )]
E 𝑤 𝑃𝑖 = 𝑁
∑𝑡=1 𝑃𝑖 Threat of Substitutes
Relever using capital structure of the estimated company. Rivalry among existing Competitors
D Market-Value Weighted Index
β𝐸𝑞𝑢𝑖𝑡𝑦 = β𝑢𝑛𝑙𝑒𝑣𝑒𝑟𝑒𝑑 [1 + ((1 − t) × )] 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑡𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 Two Competitive Strategies: Product Differentiation
E 𝑉𝑎𝑙𝑢𝑒𝑀𝑉𝑊 =
𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑡𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 and Cost Leadership
× 𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑖𝑛𝑑𝑒𝑥 𝑣𝑎𝑙𝑢𝑒
𝑄𝑖 𝑃𝑖
𝑤𝑖𝑀 = 𝑁
∑𝑗=1 𝑄𝑗 𝑃𝑗

EQ
CORP
(2/4)
(2/3) CORP
EQ (3/3)
(3/4) EQ (1/4) EQ (4/4)
(2/4) PM (1/4)
Value of Common Stock Asset Based Model Standard Deviation
Dividend Discount Model 𝐸𝑞𝑢𝑖𝑡𝑦 𝑣𝑎𝑙𝑢𝑒 Square root of variance
𝑛 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑜𝑟 𝑓𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑐𝑜𝑚𝑝𝑎𝑛𝑦 ′ 𝑠 𝑎𝑠𝑠𝑒𝑡𝑠
𝐷0 × (1 + 𝑔𝑠 )𝑡 𝑉𝑛 − 𝑀𝑎𝑟𝑘𝑒𝑡 𝑜𝑟 𝑓𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑐𝑜𝑚𝑝𝑎𝑛𝑦 ′ 𝑠 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑉𝑜 = ∑
(1 + 𝑟)𝑡
+
(1 + 𝑟)𝑛
Covariance (Asset Returns)
𝒏
𝑡=1 ∑𝒕=𝟏 [(𝑅𝑖 − 𝐸(𝑅𝑖̇ )(𝑅𝑗 − 𝐸(𝑅𝑗̇ )]
Portfolio Management 𝑐𝑜𝑣(𝑅𝑖 , 𝑅𝑗 ) =
𝑛−1
Gordon Growth Model Return Measures
𝐷0 × (1 + 𝑔) Correlation (Asset Returns)
𝑉0 =
𝑟−𝑔 Holding Period Return 𝑐𝑜𝑣(𝑅𝑖 , 𝑅𝑗 )
𝑆𝑢𝑠𝑡𝑎𝑖𝑛𝑎𝑏𝑙𝑒 𝑔𝑟𝑜𝑤𝑡ℎ = (1 − 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜) 𝑃1 − 𝑃0 + 𝐷1 𝜌(𝑅𝑖 , 𝑅𝑗 ) =
HPR = 𝜎(𝑅𝑖 )𝜎(𝑅𝑗 )
× 𝑅𝑂𝐸 𝑃0
𝑔 = 𝑏 × 𝑅𝑂𝐸
Arithmetic Return
𝑅1 + 𝑅2 + 𝑅3 + 𝑅4 + ⋯ 𝑅𝑛 Investment Utility
Value of Preferred Stock 𝐴𝑟𝑖𝑡ℎ𝑚𝑒𝑡𝑖𝑐 𝑟𝑒𝑡𝑢𝑟𝑛 = 1
𝑛 𝑈𝑡𝑖𝑙𝑖𝑡𝑦 = 𝐸(𝑟) − 𝐴𝜎 2
𝐷0 2
𝑉0 = 𝐴 = 𝑚𝑒𝑎𝑠𝑢𝑟𝑒 𝑜𝑓 𝑟𝑖𝑠𝑘 𝑎𝑣𝑒𝑟𝑠𝑖𝑜𝑛
𝑟
𝑛
𝐷𝑡 𝑃𝑎𝑟 𝑉𝑎𝑙𝑢𝑒 Geometric Mean Return Portfolio Return
𝑉𝑜 = ∑ + 𝐺𝑒𝑜𝑚𝑒𝑡𝑟𝑖𝑐 𝑚𝑒𝑎𝑛 𝑟𝑒𝑡𝑢𝑟𝑛
(1 + 𝑟)𝑡 (1 + 𝑟)𝑛 𝑅𝑝 = 𝑤1̇ (𝑅1̇ ) + 𝑤2̇ (𝑅2̇ ) + 𝑤3 (𝑅3 ) … 𝑤𝑛 (𝑅𝑛̇ )
𝑡=1 = [(1 + R1 ) × (1 + R 2 ) × …
1
× (1 + R 𝑛 )]n −1
Price Multiples
𝐷1 Money Weighted Rate of Return Portfolio Standard Deviation
𝑁
𝐸1 𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜
𝐽𝑢𝑠𝑡𝑖𝑓𝑖𝑒𝑑 𝑃/𝐸 = = CFt 𝜎𝑝 = √(𝑤12̇ 𝜎12̇ + 𝑤22̇ 𝜎22̇ + 2𝑤1̇ 𝑤2̇ 𝜌1,2 𝜎1 𝜎2 )
𝑟−𝑔 𝑟−𝑔 ∑ =0
(1 + MWRR)t
𝑡=0 𝜎𝑝 = √(𝑤12̇ 𝜎12̇ + 𝑤22̇ 𝜎22̇ + 2𝑤1̇ 𝑤2̇ 𝐶𝑜𝑣(𝑅1 , 𝑅2 ))
𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝑃/𝐸 = *Use IRR function on calculator to solve this
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 Time Weighted Rate of Return Capital Allocation Line (CAL)
𝑃/𝐶𝐹 = 1 Portfolio Expected Return and Standard Deviation
𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑟𝑇𝑊 = [(1 + r1 ) × (1 + r2 ) × … × (1 + r𝑁 )]N −1
Plot of combinations Risk-Free and Risky Asset
𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝐸(𝑟𝑃 ) − 𝑟𝑓
𝑃/𝑆 = Nominal Return 𝐸(𝑟𝐶 ) = 𝑟𝑓 + 𝜎𝐶
𝑆𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝜎𝑃
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 (𝑟) = (1 + rrF ) × (1 + π) − 1

𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 Variance (Asset Returns) Capital Market Line (CML)
𝑃/𝐵 = Tangency point of efficient frontier on Capital
𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑇
∑𝑡=1(𝑅𝑡 − 𝜇)2
2
𝜎 = Allocation Line. The risky portfolio becomes the
𝑇 market portfolio.
Enterprise Value Multiples
𝐸𝑉 𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑣𝑎𝑙𝑢𝑒 𝑇
∑𝑡=1 (𝑅𝑡 − 𝑅̅ )2
=
𝐸𝐵𝐼𝑇𝐷𝐴 𝐸𝐵𝐼𝑇𝐷𝐴 𝑠2 =
𝑇−1

EQ (3/4) EQ (4/4) PM (1/3) PM (2/3)

Beta Semi-Annual Bond
𝐶𝑜𝑣(𝑅𝑖 , 𝑅𝑚 ) 𝜌𝑖,𝑚 𝜎𝑖
Fixed Income 𝑃𝑉
𝛽𝑖 = 2
= Basic Features of Fixed-Income Securities 𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛
𝜎𝑚 𝜎𝑚 = +
𝑌𝑇𝑀 2
Coupon Rate: Interest rate issuer agrees to pay (1 + ) (1 + 𝑌𝑇𝑀 )
2 2
Maturity: Time until principal paid 𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 + 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙
Expected Return (CAPM) Par Value: Bond’s Principal/Face Value + +. . +
𝐸(𝑅𝑖 ) = 𝑅𝐹 + 𝛽𝑖 [𝐸(𝑅𝑀 ) − 𝑅𝐹 ] 𝑌𝑇𝑀 3 𝑌𝑇𝑀 𝑁×2
Issuer: Sovereign Governments, Corporate Issuers (1 + ) (1 + )
2 2
Sinking Fund Provision: Periodic payments to retire
Security Market Line bonds early Pricing with Spot Rates
Expected Return and Beta Plot with CAPM used to 𝑁𝑜 𝑎𝑟𝑏𝑖𝑡𝑟𝑎𝑔𝑒 𝑝𝑟𝑖𝑐𝑒
form the SML. Stocks above the line are 𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛
Types of Bonds = +
undervalued. Stocks below the line are overvalued. (1 + 𝑆1 ) (1 + 𝑆2 )2
Callable Bonds: Issuer can force investors to sell 𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 + 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙
their bonds. Increases yield and lowers duration. + +. . +
(1 + 𝑆3 )3 (1 + 𝑆𝑛 )𝑁
Sharpe Ratio Putable Bonds: Investor can sell bond back to
𝑅𝑝 − 𝑅𝑓 issuer. Lowers yield and duration.
𝑆ℎ𝑎𝑟𝑝𝑒 𝑅𝑎𝑡𝑖𝑜 = Pricing with Forward Rates
𝜎𝑝 Convertible Bonds: Bondholders can convert bonds 𝐵𝑜𝑛𝑑 𝑣𝑎𝑙𝑢𝑒
Treynor Ratio to common shares
=
𝐶𝑜𝑢𝑝𝑜𝑛
+
𝐶𝑜𝑢𝑝𝑜𝑛
𝑅𝑝 − 𝑅𝑓 Eurobond: international bond denominated in 1 + 𝑆1 (1 + 𝑆1 ) × (1 + 1𝑦1𝑦)
𝑇𝑟𝑒𝑦𝑛𝑜𝑟 𝑚𝑒𝑎𝑠𝑢𝑟𝑒 = 𝐶𝑜𝑢𝑝𝑜𝑛
𝛽𝑝 currency not native to country where it is issued. +
(1 + 𝑆1 ) × (1 + 1𝑦1𝑦) × (1 + 2𝑦1𝑦)
M-Squared
𝜎𝑀 𝐸𝑚𝑏𝑒𝑑𝑑𝑒𝑑 𝑂𝑝𝑡𝑖𝑜𝑛 𝑉𝑎𝑙𝑢𝑒
𝑀 2 = (𝑅𝑝 − 𝑅𝑓 ) − (𝑅𝑀 − 𝑅𝑓 )
𝜎𝑝 = 𝐵𝑜𝑛𝑑 𝑉𝑎𝑙𝑢𝑒 𝑤𝑖𝑡ℎ 𝑂𝑝𝑡𝑖𝑜𝑛
− 𝐵𝑜𝑛𝑑 𝑉𝑎𝑙𝑢𝑒 𝑤𝑖𝑡ℎ𝑜𝑢𝑡 𝑂𝑝𝑡𝑖𝑜𝑛 Forward rate and Spot rate calculation
Jensen’s Alpha
𝛼𝑝 = 𝑅𝑝 − [𝑅𝐹 + 𝛽𝑖 (𝐸(𝑅𝑀 ) − 𝑅𝐹 )] Structured Financial Instruments
Collateralized Debt Obligations (CDO): securities (1 + 𝑆2 )2 = (1 + 𝑆1 )1 × (1 + 1𝑦1𝑦)
Total Risk
backed by pool of debt obligations
Total Risk = Systematic Risk + Non-Systematic Risk Flat Price
Capital Protected Instruments: Zero coupon bond +
Option Payoff 𝐹𝑙𝑎𝑡 𝑝𝑟𝑖𝑐𝑒 = 𝐷𝑖𝑟𝑡𝑦 𝑝𝑟𝑖𝑐𝑒(𝐹𝑢𝑙𝑙 𝑝𝑟𝑖𝑐𝑒)
Investment Policy Statement (IPS) − 𝑎𝑐𝑐𝑟𝑢𝑒𝑑 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
Yield Enhancement Instruments: Credit Linked Note
Accrued Interest
Introduction Participation Instruments: Floating Rate Bonds 𝐴𝑐𝑐𝑟𝑢𝑒𝑑 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
Statement of Purpose Leveraged Instruments: Inverse Floater = 𝐶𝑜𝑢𝑝𝑜𝑛 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
Statement of Duties and Responsibilities (𝐷𝑎𝑦𝑠 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑡ℎ𝑒 𝑙𝑎𝑠𝑡 𝑐𝑜𝑢𝑝𝑜𝑛 𝑑𝑎𝑡𝑒 𝑎𝑛𝑑 𝑠𝑒𝑡𝑡𝑙𝑒𝑚𝑒𝑛𝑡 𝑑𝑎𝑡𝑒)
Procedures ×
Bond Pricing (𝐷𝑎𝑦𝑠 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑡ℎ𝑒 𝑡𝑤𝑜 𝑐𝑜𝑢𝑝𝑜𝑛 𝑑𝑎𝑡𝑒𝑠)
Investment Objectives (Risk and Return Objectives)
Annual Bond
Investment Constraints (Liquidity, Time Horizon, Full Price
𝑃𝑉
Regulatory Requirements, Tax Status) 𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 𝑃𝑉 𝐹𝑢𝑙𝑙 = 𝑃𝑉(1 + 𝑟)𝑡/𝑇 = 𝑃𝑉 𝐹𝑙𝑎𝑡 + 𝐴𝑐𝑐𝑟𝑢𝑒𝑑 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
Investment Guidelines = +
(1 + 𝑌𝑇𝑀) (1 + 𝑌𝑇𝑀)2
Evaluation and Review 𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 + 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙
+ +. . +
(1 + 𝑌𝑇𝑀)3 (1 + 𝑌𝑇𝑀)𝑁 Option-Adjusted Price
Value of non-callable bond
= 𝐹𝑙𝑎𝑡 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑐𝑎𝑙𝑙𝑎𝑏𝑙𝑒 𝑏𝑜𝑛𝑑
+ 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑚𝑏𝑒𝑑𝑑𝑒𝑑 𝑐𝑎𝑙𝑙 𝑜𝑝𝑡𝑖𝑜𝑛

PM (3/3) FI (1/6) FI (2/6)

Yield Measures Option-Adjusted-Spread Modified Duration
𝑂𝐴𝑆 = 𝑍 𝑠𝑝𝑟𝑒𝑎𝑑 − 𝑂𝑝𝑡𝑖𝑜𝑛 𝑣𝑎𝑙𝑢𝑒 (bps per year) 𝑀𝑎𝑐𝐷𝑢𝑟
Current Yield 𝑀𝑜𝑑𝐷𝑢𝑟 =
𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ 𝑐𝑜𝑢𝑝𝑜𝑛 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 1 + 𝑌𝑇𝑀
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑖𝑒𝑙𝑑 = 𝑉− − 𝑉+
𝑏𝑜𝑛𝑑 𝑝𝑟𝑖𝑐𝑒 Securitization Parties 𝐴𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝑀𝑜𝑑𝐷𝑢𝑟 =
(2 × 𝑉0 × ∆𝑌𝑇𝑀)
Seller of the Collateral (Pool of Loans)
Effective Annual Yield Loan Servicer
𝑚 Effective Duration
𝐸𝐴𝑌 = (1 + 𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑟𝑎𝑡𝑒) − 1 𝑉− − 𝑉+
Special Purpose Entity (SPE)
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 =
(2 × 𝑉0 × ∆𝐶𝑢𝑟𝑣𝑒)
𝑚 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑃𝑒𝑟𝑖𝑜𝑑𝑠 𝑂𝑛𝑒 𝑌𝑒𝑎𝑟
Asset-Backed Securities
Portfolio Duration
Conversion for Periodicity Collateralized Debt Obligations (CDOs): MBS,
𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 = 𝑤1̇ (𝐷1̇ ) + 𝑤2̇ (𝐷2̇ )
𝐴𝑃𝑅𝑚 𝑚 𝐴𝑃𝑅𝑛 𝑛 Automotive Loans, Credit Card Loans
(1 + ) = (1 + ) + 𝑤3 (𝐷3 ) … 𝑤𝑛 (𝐷𝑛̇ )
𝑚 𝑛 *can be tranched by credit risk and prepayment risk Money Duration
Prepayment Risk: Contraction and Extension Risk 𝑀𝑜𝑛𝑒𝑦 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 = 𝐴𝑛𝑛𝑢𝑎𝑙 𝑀𝑜𝑑𝑖𝑓𝑖𝑒𝑑 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛
Money Market Instruments 𝑃𝑎𝑠𝑠 𝑡ℎ𝑟𝑜𝑢𝑔ℎ 𝑟𝑎𝑡𝑒 × 𝑃𝑉 𝐹𝑢𝑙𝑙
𝑀𝑜𝑛𝑒𝑦 𝑚𝑎𝑟𝑘𝑒𝑡 𝑦𝑖𝑒𝑙𝑑 = 𝑀𝑜𝑟𝑡𝑔𝑎𝑔𝑒 𝑟𝑎𝑡𝑒 𝑜𝑛 𝑡ℎ𝑒 𝑢𝑛𝑑𝑒𝑟𝑙𝑖𝑛𝑔 𝑝𝑜𝑜𝑙 𝑜𝑓 𝑚𝑜𝑟𝑡𝑔𝑎𝑔𝑒𝑠
𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 − 𝑃𝑟𝑖𝑐𝑒 − 𝑆𝑒𝑟𝑣𝑖𝑐𝑖𝑛𝑔 𝑓𝑒𝑒 − 𝑂𝑡ℎ𝑒𝑟 𝑓𝑒𝑒 ∆𝑃𝑉 𝐹𝑢𝑙𝑙 = −𝑀𝑜𝑛𝑒𝑦 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 × ∆𝑌𝑖𝑒𝑙𝑑
=( )
𝑃𝑟𝑖𝑐𝑒
360 𝑆𝑖𝑛𝑔𝑙𝑒 𝑀𝑜𝑛𝑡ℎ 𝑀𝑜𝑟𝑡𝑎𝑙𝑖𝑡𝑦 𝑅𝑎𝑡𝑒 (𝑆𝑀𝑀) 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 𝑔𝑎𝑝 = 𝑀𝑎𝑐𝑎𝑢𝑙𝑎𝑦 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛
×( ) 𝑃𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑚𝑜𝑛𝑡ℎ
𝐷𝑎𝑦𝑠 𝑡𝑜 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦 = − 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 ℎ𝑜𝑟𝑖𝑧𝑜𝑛
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑀𝑜𝑛𝑡ℎ𝑙𝑦 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 −
𝑆𝑐ℎ𝑒𝑑𝑢𝑙𝑒𝑑 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑅𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡

𝐵𝑜𝑛𝑑 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑦𝑖𝑒𝑙𝑑 Credit Risk Ratios

𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 − 𝑃𝑟𝑖𝑐𝑒 Debt-Service-Coverage Ratio (DSCR)
=( ) Price Value of a Basis Point
𝑃𝑟𝑖𝑐𝑒 𝑁𝑒𝑡 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒
365 =
×( ) 𝐷𝑒𝑏𝑡 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑉− − 𝑉+
𝐷𝑎𝑦𝑠 𝑡𝑜 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦 𝑃𝑉𝐵𝑃 =
Loan-to-Value ratio (LTV) 2
𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑏𝑎𝑠𝑖𝑠 𝑦𝑖𝑒𝑙𝑑 = (
𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒−𝑃𝑟𝑖𝑐𝑒
)× 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑚𝑜𝑟𝑡𝑔𝑎𝑔𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 Convexity
𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 = 𝑉− + 𝑉+ − 2 × 𝑉0
360 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑝𝑝𝑟𝑎𝑖𝑠𝑒𝑑 𝑣𝑎𝑙𝑢𝑒 𝐴𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐶𝑜𝑛𝑣𝑒𝑥𝑖𝑡𝑦 =
( ) (∆𝑌𝑇𝑀)2 × 𝑉0
𝐷𝑎𝑦𝑠 𝑡𝑜 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦

Bond Return 𝑉− + 𝑉+ − 2 × 𝑉0
Yield Spreads 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑡𝑢𝑟𝑛 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐶𝑜𝑛𝑣𝑒𝑥𝑖𝑡𝑦 =
(∆𝑐𝑢𝑟𝑣𝑒)2 × 𝑉0
1
G-Spread 𝐶𝑜𝑢𝑝𝑜𝑛 & 𝑅𝑒𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 + 𝑃𝑛 𝑛
𝐺 𝑠𝑝𝑟𝑒𝑎𝑑 = 𝑌𝑇𝑀𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝐵𝑜𝑛𝑑 − 𝑌𝑇𝑀𝐺𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝐵𝑜𝑛𝑑 =( ) −1
𝑃0 Price Change Estimate
I-Spread ∆𝑃𝑟𝑖𝑐𝑒 = −𝑎𝑛𝑛𝑢𝑎𝑙 𝑀𝑜𝑑𝐷𝑢𝑟 × (∆𝑌𝑖𝑒𝑙𝑑)
Duration 1
𝐼 𝑠𝑝𝑟𝑒𝑎𝑑 = 𝑌𝑇𝑀𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝐵𝑜𝑛𝑑 − 𝑆𝑤𝑎𝑝 𝑟𝑎𝑡𝑒 + × 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑜𝑛𝑣𝑒𝑥𝑖𝑡𝑦
Macaulay Duration 2
× (∆𝑌𝑖𝑒𝑙𝑑)2
Z-Spread 1+𝑟 1 + 𝑟 + [𝑁 × (𝑐 − 𝑟)] 𝑡
𝑃𝑀𝑇 𝑃𝑀𝑇 𝑃𝑀𝑇 + 𝐹𝑉
𝑀𝑎𝑐𝐷𝑢𝑟 = {
𝑟
−
(𝑐 × [(1 + 𝑟)𝑁 − 1] + 𝑟}
}−( )
𝑇
Expected Loss
𝑃𝑉 = + + ..+ 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑙𝑜𝑠𝑠 = 𝐷𝑒𝑓𝑎𝑢𝑙𝑡 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 × (1
(1 + 𝑧1 + 𝑍) (1 + 𝑧2 + 𝑍)2 (1 + 𝑧𝑛 + 𝑍)𝑁 − 𝑟𝑒𝑐𝑜𝑣𝑒𝑟𝑦 𝑟𝑎𝑡𝑒)

FI (3/6) FI (4/6) FI (5/6)

Loss Given Default (LGD) Put Option Value of Forward
𝐿𝑜𝑠𝑠 𝐺𝑖𝑣𝑒𝑛 𝐷𝑒𝑓𝑎𝑢𝑙𝑡(𝐿𝐺𝐷) = (1 − 𝑟𝑒𝑐𝑜𝑣𝑒𝑟𝑦 𝑟𝑎𝑡𝑒) Expiration Value (Long) 𝑉𝑡 (T) = 𝑆𝑇 − 𝐹0 (T)(1 + 𝑟)−(𝑇−𝑡)
𝑝𝑇 = 𝑀𝑎𝑥(0, 𝑋 − 𝑆𝑇 )
Four C’s of Credit 𝑉𝑡 (T) = (𝑆𝑡 − 𝐼 + 𝐶) − 𝐹0 (𝑇)(1 + 𝑟)−(𝑇−𝑡)
Profit (Long)
Capacity
Π = 𝑝𝑇 − 𝑝0 𝐹0 (𝑇)
Collateral 𝑉𝑡 (T) = 𝑆𝑇 + 𝐶 − 𝐼 −
Covenants (1 + 𝑅𝐹 )𝑇−𝑡
Character Expiration Value (Short)
−𝑝𝑇 = −𝑀𝑎𝑥(0, 𝑋 − 𝑆𝑇 ) Option Value Factors
Option Value = Time Value + Intrinsic Value
Derivatives Profit (Short)
Π = −𝑝𝑇 + 𝑝0
Exchange Traded vs OTC Derivatives Increase in:
Exchange Traded Stock Price: (C ↑); (P ↓)
Public European Option: Only exercisable at maturity Exercise Price: (C ↓); (P ↑)
Standardized American Option: Can be exercised at any time; Time to Expiration: (C ↑); (P ↑)
Regulated Can’t be priced less than European options Volatility: (C ↑); (P ↑)
No counterparty risk Risk-Free-Rate: (C ↑); (P ↓)
OTC Derivatives Future/Forward Payoff
Private 𝐿𝑜𝑛𝑔 𝑃𝑎𝑦𝑜𝑓𝑓 = 𝑆𝑇 – 𝐹0 (T) Put-Call Parity
Customizable 𝑋
Lower regulation 𝑆ℎ𝑜𝑟𝑡 𝑃𝑎𝑦𝑜𝑓𝑓 = 𝐹0 (T)− 𝑆𝑇 𝑆0 + 𝑝0 = 𝑐0 +
(1 + 𝑟)𝑇
Counterparty Risk *can be rearranged
Option Payoff Interest Rate Swaps
Call Option Can be viewed as series of Forward Rate
Expiration Value (Long)
Options Strategies
Agreements to lend/borrow at a future date. Protective Put: Long Underlying, Long Put
𝑐𝑇 = 𝑀𝑎𝑥(0, 𝑆𝑇 – 𝑋) Helpful for transforming the nature of debt. Covered Call: Long Underlying, Short Call
Profit (Long) Fiduciary Call: Long Call, Long Risk-Free Bond
Π = 𝑐𝑇 − 𝑐0 Forward Price Binomial Option Model
𝐹0 (T) = 𝑆0 (1 + 𝑟)𝑇 π𝑐 + + (1 − π)𝑐 −
𝐹0 (T) = (𝑆0 − 𝐼 + 𝐶)(1 + 𝑟)𝑇 𝑐0 =
Expiration Value (Short) 1+𝑟
−𝑐𝑇 = −𝑀𝑎𝑥(0, 𝑆𝑇 – 𝑋) 𝐹0 (T) = 𝑆0 (1 + 𝑟)𝑇 − (𝐼 − 𝐶)(1 + 𝑟)𝑇
𝐼 = present value of benefits 1+ 𝑟−𝑑
𝐶 = present value of costs π=
Profit (Short) 𝑢−𝑑
Π = −𝑐𝑇 + 𝑐0
Hedge Ratio
𝑐+ − 𝑐−
𝑛 =
𝑆+ − 𝑆−

FI (6/6) DER (1/3) DER (2/3) DER (3/3)

Alternative Investments Commodities
Precious Metals
Hedge Funds Base Metals
Equity Hedge: Market Neutral, Fundamental Energy Products
Growth, Fundamental Value, Quantitative Agricultural Products
Directional, Short Bias, Sector Specific
Event-Driven: Merger Arbitrage, Managed Futures: actively managed investment
Distressed/Restructuring, Activist, Special Situations funds
Relative Value: FI Convertible Arbitrage, FI Asset Futures price ≈ Spot price (1 + r) + Storage costs –
Backed, FI General, Volatility, Multi-Strategy Convenience yield
Macro Return Sources: Roll Yield, Collateral Yield, Changes
Fee Structure: Typically, 2 and 20; 2% of AUM and in Spot Price
20% of Profits

Infrastructure
Private Equity Long lived and capital intensive. These assets are
Leveraged Buyouts (LBOs): substantial use of intended for public use, as they provide essential
leverage to take companies private services.
LBO Target Characteristics: Strong and Sustainable
Cash Flows; Depressed Prices; Inefficient Companies
Fee Calculations
Venture Capital: Characterized by stage of company 𝑀𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡 𝐹𝑒𝑒 = 𝐴𝑠𝑠𝑒𝑡𝑠 𝑢𝑛𝑑𝑒𝑟 𝑚𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡
× % 𝑀𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡 𝑓𝑒𝑒
of interest 𝐼𝑛𝑐𝑒𝑛𝑡𝑖𝑣𝑒 𝐹𝑒𝑒 = 𝐺𝑎𝑖𝑛𝑠 𝑛𝑒𝑡 𝑜𝑓 𝑚𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡 𝑓𝑒𝑒
1. Formative-stage financing: a) Angel Investing b) × % 𝐼𝑛𝑐𝑒𝑛𝑡𝑖𝑣𝑒 𝑓𝑒𝑒
Seed-Stage c) Early-Stage
2. Later-stage financing Hurdle Rate: Rate above which incentive fees are
3. Mezzanine-stage financing paid. Hard hurdle rate: fess only apply to returns
Exit Strategies: Trade Sale, IPO, Recapitalization, that exceed the hurdle rate. Soft hurdle rate: fees
Secondary Sales, Write-Off/Liquidation apply to the entire return.
Valuation Methods: market or comparables, High Water Mark: Highest cumulative return used
discounted cash flow (DCF) and asset-based to calculate incentive fees

Real Estate
Private Debt (Mortgages, Construction Lending)
Public Debt (MBS, CMOs)
Private Equity (Direct/Indirect Ownership)
Public Equity (REITs, Real Estate Development
Companies)
Valuation Approaches: Comparable Sales, Income,
Cost

ALT (1/2) ALT (2/2)