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Ross Formula - Card Sheet

The document provides 18 formulas across various topics related to finance and valuation including: 1) Present value and net present value formulas for calculating the current value of future cash flows. 2) Formulas for valuing perpetuities, annuities, growing perpetuities, and growing annuities. 3) Formulas for measuring risk of individual assets and portfolios including variance, standard deviation, covariance, correlation, and beta. 4) The capital asset pricing model and k-factor model for calculating expected returns. 5) Formulas for incorporating leverage into cost of equity and valuing firms under corporate taxes. 6) The weighted average cost of capital and equity beta formulas

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170 views3 pages

Ross Formula - Card Sheet

The document provides 18 formulas across various topics related to finance and valuation including: 1) Present value and net present value formulas for calculating the current value of future cash flows. 2) Formulas for valuing perpetuities, annuities, growing perpetuities, and growing annuities. 3) Formulas for measuring risk of individual assets and portfolios including variance, standard deviation, covariance, correlation, and beta. 4) The capital asset pricing model and k-factor model for calculating expected returns. 5) Formulas for incorporating leverage into cost of equity and valuing firms under corporate taxes. 6) The weighted average cost of capital and equity beta formulas

Uploaded by

kazadirati
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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Some Useful Formulas

1 Present Value
The discounted value of T future cash flows
T
C1 C2 CT Ct
PV  
1  r (1  r ) 2
    
(1  r )T t 1 (1  r )t

2 Net Present Value


Present value minus initial costs
NPV = PV  Cost
C0 =  Cost
T
Ct
NPV  C0  
t 1 (1  r )t

3 Perpetuity
The value of C received each year, forever
C
PV 
r

4 Annuity
The value of C received each year for T years
C
PV = [1  1 (1  r )t ]
r

5 Growing Perpetuity
The value of a perpetuity that grows at rate g, where the first payment is C
C
PV 
rg

6 Growing Annuity
The value of a T-period annuity that grows at the rate g, where the first payment is C
 1 1 1  g  
T
PV  C     
 r  g r  g  1  r  
 
7 Measures of Risk for Individual Assets

Var (RA) =  2A = Expected value of ( RA  RA ) 2

SD (RA) = A = Var ( RA )

Cov (RA, RB) = AB = Expected value of [( RA  R ) A ) ( RB  RB )]

Corr(RA, RB) = AB = Cov (RARB)/AB

8 Expected Return on a Portfolio of Two Assets


RP  X A RA  X B RB

9 Variance of a Portfolio of Two Assets

 P  X A2  2A  2 X A X B   AB  X B2  2B

10 Beta of a Security
Cov( RA , RM )
A 
 2 ( RM )

11 Capital Asset Pricing Model


RA  RF   A  ( RM  RF )

12 k-Factor Model
Ri = Ri + i1F1 + i2F2 +  + ikFk + i

13 Leverage and the Cost of Equity


Before tax:

rs  ro 
B
ro  rB 
S
After tax:
B
rs    (1  TC )(  rB )
S

14 Value of the Firm under Corporate Taxes


VL = VU + TCB
15 Weighted Average Cost of Capital
 S   B 
 rs   rB 1  TC 
S  B S  B

16 Equity Beta
Equity
No-tax case: Unleveredfirm   Equity
Debt  Equity
Equity
Corporate tax case: Unleveredfirm   Equity
Equity  1  TC Debt

17 Black-Scholes Model
C = SN(d1)  Eert N(d2)

where d1 = [1n (S/E) + (r + 1


2
2
)t]/  2t

d 2  d1   2 t

18 Sustainable Growth
P  (1  d )  (1  L)
Growth 
T  [ P  (1  d )  (1  L)]

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