FNAN 303 Formulas and Notes (p.

1 of 11)
t
FVt = C0 × (1+r)
Financial calculator: In either BEGIN or END mode, FV is the future value in N
periods from the reference point (time 0) of a cash flow equal to -PV at the
reference point with an interest rate, return, etc. of I% per period
FVt = Ck × (1+r)(t-k)
PV0 = PV = Ct / (1 + r)t
Financial calculator: In either BEGIN or END mode, PV is the opposite of the
present value as of the reference point (time 0) of a cash flow equal to FV that
takes place in N periods from the reference point, with a discount rate of I% per
period
PV0 = PV = C0 + [C1/(1+r)1] + [C2/(1+r)2] + … + [Ct-1/(1+r)t-1] + [Ct/(1+r)t]
PV for an annuity = [C/(1+r)] + [C/(1+r)2] + … + [C/(1+r)t]
= C × [{1 – 1/(1+r)t } / r ] = C × [(1/r) – 1/{r(1+r)t}] = (C/r) × [1 – (1/{(1+r)t})]
Financial calculator: In END mode, PV is the opposite of the present value as of
the reference point (time 0) of a series of N regular cash flows equal to PMT per
period where the first regular cash flow takes place 1 period from the reference
point, the last cash flow takes place N periods from the reference point, and the
discount rate is I% per period
PV for an annuity due = (1+r) × PV for an annuity = C + [C/(1+r)] + [C/(1+r)2] +
[C/(1+r)3] + … + [C/(1+r)t-1]
= (1+r) × C × [{1 – 1/(1+r)t } / r ] = (1+r) × C × [(1/r) – 1/{r(1+r)t}] = C + (C/r) ×
[1 – (1/{(1+r)t-1})])
Financial calculator: In BEGIN mode, PV is the opposite of the present value as
of the reference point (time 0) of a series of N regular cash flows equal to PMT
per period where the first regular cash flow takes place at the reference point, the
last cash flow takes place N-1 periods from the reference point, and the discount
rate is I% per period
PV0 = PV = PVk / (1+r)k
PV for a fixed perpetuity = [C/(1+r)] + [C/(1+r)2] + [C/(1+r)3] + … = C / r
Rate of return for a fixed perpetuity = r = C /PV
Cash flow for a fixed perpetuity = C = PV × r
 FNAN 303 Formulas and Notes (p. 2 of 11)
PV for a growing perpetuity = C1/(1+r) + [C1(1+g)]/(1+r)2 + [C1(1+g)2]/(1+r)3 +
… = C1 / (r – g)
Rate of return for a growing perpetuity = r = [C1 / PV] + g
First cash flow for a growing perpetuity = C1 = PV × (r – g)
Growth rate for a growing perpetuity = g = r – [C1 / PV]
Ck = C1 × (1 + g)k – 1 which is the same as Ct = C1 × (1 + g)(t – 1)
Also, Cb = Ca × (1 + g)(b-a) so g = [(Cb / Ca)[1/(b-a)]] – 1
FVt = [C0 × (1+r)t] + [C1 × (1+r)t-1] + [C2 × (1+r)t-2] + … + [Ck × (1+r)t-k] + … +
[Ct-1 × (1 + r)1] + [Ct]
FV for an annuity = [C1 × (1+r)t-1] + [C2 × (1+r)t-2] + … + Ct
= (1+r)t × C × [{1 – 1/(1+r)t} / r] = C × [{(1+ r)t – 1} / r] = (1+r)t × C × [(1/r) –
1/{r(1+r)t}]
Financial calculator: In END mode, FV is the future value in N periods from the
reference point (time 0) of a series of N regular cash flows equal to -PMT per
period where the first regular cash flow takes place 1 period from the reference
point, the last cash flow takes place N periods from the reference point, and the
interest rate, return, etc. is I% per period
FV for an annuity due = (1+r) × FV for an annuity = [C0 × (1+r)t] + [C1 × (1+r)t-1] + …
+ [Ct-1 × (1+r)1]
= (1+r)t+1 × C × [{1 – 1/(1+r)t} / r] = (1+r) × C × [{(1+r)t – 1} / r] = (1+r)t+1 × C
× [(1/r) – 1/{r(1+r)t}]
Financial calculator: In BEGIN mode, FV is the future value in N periods from
the reference point (time 0) of a series of N regular cash flows equal to -PMT per
period where the first regular cash flow takes place at the reference point, the last
cash flow takes place N-1 periods from the reference point, and the interest rate,
return, etc. is I% per period
EAR = Effective annual rate = [(1 + periodic rate)# of periods in a year] – 1 = [1 +
(stated rate/# pds per year)]# pds per year – 1
Periodic rate = [stated rate / # periods per year]
 FNAN 303 Formulas and Notes (p. 3 of 11)
Bond value = [cpn/(1+r)1] + [cpn/(1+r)2] +…+ [cpn/(1+r)t] + [face/(1+r)t]
= {cpn × [{1 – 1/(1+r)t} / r]} + {face/(1+r)t} = {cpn × [(1/r) – 1/{r(1+r)t}]} +
{face/(1+r)t}
Financial calculator: Bond value equals -PV, where PV is the opposite of the
present value as of the reference point (time 0) of N coupon payments equal to
PMT per period where each coupon equals the coupon rate multiplied by the face
value divided by the number of coupons per year, the first coupon is paid 1
period from the reference point (END mode), N is the number of coupons paid
before maturity and equals number of coupons per year multiplied by the number
of years to maturity, the discount rate is I% per period, where I% equals the
bond’s yield-to-maturity divided by the number of coupons per year, and FV is
the face (or par) value of the bond
r for a bond = discount rate per period = (yield-to-maturity ÷ number of coupons
per year)
= (YTM ÷ number of coupons per year)
Coupon payment = (coupon rate × face value) / number of coupons per year
= total aggregate dollar amount of coupons per year / number of coupons per
year
Total aggregate dollar amount of coupons per year = coupon rate × face value =
coupon rate × par value
= coupon payment × number of coupons per year
Coupon rate = annual coupon rate = total aggregate dollar amount of coupons per
year / face value
YTM = yield-to-maturity = expected annual return for a bond (as a stated rate)
= r × the number of coupons per year
= discount rate per period × the number of coupons per year
 FNAN 303 Formulas and Notes (p. 4 of 11)
Stock value
P0 = [(D1 + P1)/(1 + R)]
= [D1/(1+ R)] + [(D2 + P2)/(1 + R)2] = [D1/(1 + R)] + [D2/(1 + R)2] + [P2/(1 + R)2]
= [D1/(1 + R)] + [D2/(1 + R)2] +...+ [(DN + PN)/(1 + R)N] = [D1/(1+R)] +
[D2/(1+R)2] +...+ [DN/(1+R)N] + [PN/(1+R)N]
= [D1/(1 + R)] + [D2/(1 + R)2] + ...
R for a stock is the annual expected return for the stock divided by the number of
possible dividends per year
Expected stock value
Pt = [(Dt+1 + Pt+1) / (1 + R)]
= [Dt+1/(1+R)] + [(Dt+2 + Pt+2)/(1+R)2]
= [Dt+1/(1+R)] + [Dt+2/(1+R)2] + [Pt+2/(1+R)2]
= [Dt+1/(1 + R)] + [Dt+2/(1 + R)2] + ... + [(Dt+N + Pt+N)/(1 + R)N]
= [Dt+1/(1 + R)] + [Dt+2/(1 + R)2] + ...
Constant dividend (no-growth) model
P0 = D / R
R = D / P0 and D = R × P0
Constant dividend (no-growth) model
Pt = D / R
R = D / Pt and D = R × Pt
Constant dividend growth model
P0 = D1 / (R – g)
Dt = D1 × (1 + g)t – 1 = Dt – 1 × (1 + g)
R = (D1 / P0) + g and D1 = P0 × (R – g) and g = R – (D1 / P0)
Constant dividend growth model
Pt = Dt+1 / (R – g)
R = (Dt+1 / Pt) + g and Dt+1 = Pt × (R – g) and g = R – (Dt+1 / Pt)
Non-constant dividend growth model
P0 = [D1/(1 + R)] + [D2/(1 + R)2] + ... + [(DN + PN)/(1 + R)N] where PN = DN+1 /
(R – g)
 FNAN 303 Formulas and Notes (p. 5 of 11)
Net present value = NPV = C0 + [C1/(1+r)1] + [C2/(1+r)2] + … + [Ct/(1+r)t]
Financial calculator: npv(discount rate, C0, {C1, C2, …, last non-zero expected
cash flow}) produces NPV
Internal rate of return = IRR = discount rate such that the present value of a
project’s expected cash flows is zero
0 = C0 + [C1/(1+IRR)1] + [C2/(1+IRR)2] + … + [Ct/(1+IRR)t]
Financial calculator: irr(C0, {C1, C2, …, last non-zero expected cash flow})
produces IRR
The payback period is the length of time that it takes for the cumulative expected
cash flows produced by a project to equal the initial investment
If payback period is between t and t+1 years, then the portion of year t+1 needed
to produce the cash for payback
= expected CF needed for payback after t years / expected CF in year t+1
= [investment – cumulative expected CFs produced through time t] / expected
CF in year t+1
= [investment – (C1 + C2 + ... + Ct)] / Ct+1
Relevant cash flow for a project = incremental expected cash flow
= expected cash flow with project – expected cash flow without project
Relevant revenue = revenue with project – revenue without project
Relevant costs = revenue with project – revenue without project
Relevant depreciation = depreciation with project – depreciation without project
Relevant amount for any item = amount for the item with project – amount for
the item without project
Relevant cash flow for a project relevant CF for a project = operating cash flow –
change in net working capital – capital spending
Operating cash flow = OCF = net income + depreciation
Project net income = EBIT – taxes
Project EBIT = project earnings before interest and taxes = project taxable
income
= revenue – costs – depreciation
Project taxes = taxable income × tax rate = EBIT × tax rate
Total costs = costs = total expenses = expenses = fixed costs + variable costs
 FNAN 303 Formulas and Notes (p. 6 of 11)
Annual straight-line depreciation = (investment – amount item is depreciated to)
/ depreciable life
= (investment – amount item is depreciated to) / useful life
Note: depreciation expense can only be taken during depreciable / useful life
Annual accelerated depreciation = investment × relevant rate
Net working capital = NWC = current assets – current liabilities = CA – CL
Change in NWC = ΔNWC = NWC at end of period – NWC at start of period,
except for the initial change in NWC at time 0, which equals NWC at time 0
ΔNWCt = NWCt – NWCt-1 and ΔNWCt+1 = NWCt+1 – NWCt
Capital spending = amount spent making capital investments – net amount
received from selling capital investments
Cash flow from asset sale = net amount received from selling a capital
investment
= sale price of asset – taxes paid on sale of asset
Taxes paid on sale of asset = (sale price of asset – book value of asset) × tax rate
= taxable gain on asset × tax rate
Book value of asset = initial investment – accumulated depreciation
Accumulated depreciation = cumulative sum of all depreciation taken for an
asset
 FNAN 303 Formulas and Notes (p. 7 of 11)
Total dollar return = cash flows from investment + capital gain
= cash flows from investment + ending value – initial value
Total dollar return = coupons + ending bond value – initial bond value for a bond
Total dollar return = dividends + ending stock value – initial stock value for a
stock
= (D1 + P1 – P0) / P0 when time 1 is today or earlier (so all relevant time periods
have taken place)
Total dollar return = initial value × percentage return = initial value × return
Expected total dollar return = expected cash flows from investment + expected
capital gain
= expected cash flows from investment + expected ending value – expected
initial value
= expected dividends + ending stock value – initial stock value for a stock
= (D1 + P1 – P0) / P0 when time 0 is today or later (so not all relevant time
periods have taken place)
Expected total dollar return = expected initial value × exp percentage return =
expected initial value × exp return
Percentage return = return
= total dollar return ÷ initial value
= (cash flows from investment + capital gain) ÷ initial value
= (cash flows from investment + ending value – initial value) ÷ initial value
Expected percentage return = expected return
= expected total dollar return ÷ expected initial value
= (expected cash flows from investment + expected capital gain) ÷ expected
initial value
= (expected CFs from investment + expected ending value – expected initial
value) ÷ expected initial value
Expected return for a stock
= (expected dividends + expected capital gain) ÷ expected initial stock value
= (expected dividends + expected ending stock value – expected initial stock
value) ÷ expected initial stock value
= (D1 + P1 – P0) / P0 when time 0 is today or later (so not all relevant time
periods have taken place)
 FNAN 303 Formulas and Notes (p. 8 of 11)
Average annual return = arithmetic average return = arithmetic average annual
return = arithmetic mean return
= arithmetic mean annual return = arithmetic return = arithmetic annual return =
mean return = mean annual return
= (return in year 1 + return in year 2 + … + return in year n) / n
= (1/n)(return in year 1) + (1/n)(return in year 2) + … + (1/n)(return in year n)
Compound return = compound annual return = geometric average return =
geometric average annual return
= geometric mean return = geometric mean annual return = geometric return =
geometric annual return
= [(ending value / starting value)](1/n) – 1 with no interim CFs or with
reinvestment of any interim CFs
= [(1 + return in year 1) × (1 + return in year 2) × … × (1 + return in year n)](1/n)
–1
(1 + compound annual return)n
= (ending value / starting value) with no interim CFs or with reinvestment of any
interim CFs
= (1 + return in year 1) × (1 + return in year 2) × … × (1 + return in year n)
(1 + nominal rate) = (1 + real rate) × (1 + inflation rate)
Nominal rate = [(1 + real rate) × (1 + inflation rate)] – 1
= the “regular” or “normal” return, expected return, discount rate, etc. used
throughout the course
(1 + real rate) = (1 + nominal rate) ÷ (1 + inflation rate)
Real rate = [(1 + nominal rate) ÷ (1 + inflation rate)] – 1
Variance of R based on past returns = sample variance
Var(R) = ({[R1 – mean(R)]2} + {[R2 – mean(R)]2} + … + {[Rt – mean(R)]2} +
… + {Rn – mean(R)]2}) / (n – 1)
Standard deviation of R based on past returns = sample standard deviation
= √variance of R based on past returns = √sample variance = square root of
sample variance
 FNAN 303 Formulas and Notes (p. 9 of 11)
Expected return based on possible future outcomes = E(R) = [p(1) × R(1)] +
[p(2) × R(2)] + … + [p(S) × R(S)]
R(s) is the return in outcome s
p(s) is the probability of outcome) occurring, where the sum of all probabilities
equals 1, which is 100%
Variance of returns based on future outcomes
= {p(1)× [R(1) – E(R)]2} + {p(2)× [R(2) – E(R)]2} + … + {p(S)×[R(S) – E(R)]2}
Standard deviation of returns based on future outcomes = √variance of returns
based on future outcomes
Expected portfolio return = E(Rp) = [x1 ×E(R1)] + [x2 ×E(R2)] + ... + [xn × E(Rn)]
xi = (value of holdings of asset i in the portfolio) / (total value of the portfolio)
where the sum of all weights equals 1, which is 100%, and the total value of the
portfolio is the sum of all asset holdings in the portfolio
Expected return = return on risk-free asset + risk premium
= risk-free rate + risk premium
= required return for financial asset like a stock or bond
Risk premium = expected return – return on risk-free asset
= expected return – risk-free rate
Actual return = E(R) + U = expected return + unexpected return
= E(R) + systematic portion of unexpected return + unsystematic portion of
unexpected return
= E(R) + macroeconomic surprises + individual surprises (in FNAN 303)
Total risk = systematic risk + unsystematic risk
= risk from macroeconomic surprises + risk from individual surprises (in FNAN
303)
β for a portfolio = βp = x1β1 + x2β2 + … + xnβn
E(Ri) = Rf + (βi × [E(RM) – Rf])
= Rf + (βi × market premium) for asset I with CAPM
E(Rp) = Rf + (βp × [E(RM) – Rf])
= Rf + (βp × market premium) for portfolio p with CAPM
Market risk premium = market premium = (expected market return – risk-free
rate) = E(RM) – Rf
 FNAN 303 Formulas and Notes (p. 10 of 11)
After-tax expected cost of debt = pre-tax cost of debt × (1 – Tc) = RD × (1 – Tc)
= YTM × (1 – Tc) for a bond
With 3 capital structure items (common stock, preferred stock, and debt):
Weighted average cost of capital = WACC = [(E/V) × RE] + [(P/V) × RP] +
[(D/V) × RD × (1 – Tc)]
where V = E + P + D = value of firm’s assets = value of firms’ capital structure
E, P, and D = value of all of firm’s common equity, preferred equity, and debt
respectively
For each: E, P, or D = (number of that particular type of shares or bonds × price
per that type of share or bond) ÷ V

If you round, you can safely round if you

Round values less than $10,000 to nearest penny and values equal to or greater
than $10,000 to nearest dollar
Round rates (and figures based on rates) to nearest hundredth of a percent
Round squared deviation terms and variance figures to at least 4 decimal places
Round (asset weight multiplied by asset β) terms to at least 3 decimal places
Round portfolio and asset β figures to at least 2 decimal places
Assume a given rate is for a year unless told otherwise.
Assume a given rate is a stated rate unless told otherwise.
Note that a quarter is 3 months, a semi-annual period (or half year) is 6 months,
and a year is 12 months
Assume “in x periods” is equivalent to “in x periods from today” unless told
otherwise.
Assume the rate (interest rate, discount rate, expected return, cost of capital, etc.)
associated with any set of cash flows depends only on risk (not timing or other
factors).
Assume interest rates, discount rates, expected returns, costs of capital, etc. are
positive, unless explicitly noted as negative or given information that indicates the
rate is or may be negative.
The terms “value” and “market value” refer to present value unless it is explicitly
indicated that some other value (like future value, book value, or face value) is
relevant and being referred to.
 FNAN 303 Formulas and Notes (p. 11 of 11)
For a given source of cash flows, assume that the discount rate is the same for
each individual time period. Likewise, assume the expected return for stocks,
bonds, and other financial investments remains constant over time, so it is the
same for each individual time period.
Assume that the rate of return is greater than the growth rate with a growing
perpetuity or a stock with a constantly growing dividend.
If a question asks for a "payment" or a “contribution” then the payment or
contribution equals the magnitude of the cash flow and is a positive number.
Assume the term bond refers to a “typical” bond that pays regular, fixed coupon
payments and all principal at maturity; par (or face) value is $1,000; and amount
initially borrowed is par (or face) value unless explicitly noted otherwise.
When valuing a bond or stock at the same time that a coupon or dividend is paid,
assume the coupon or dividend is paid just before the bond or stock is valued.
Likewise, if a bond or stock is sold at the same time that a coupon or dividend is
paid, assume the security is sold just after the coupon or dividend is paid.
The terms “return” and “rate of return” refer to percentage return, not total dollar
return.
Unless explicitly noted or told otherwise, use the arithmetic average return when
computing an average (or a mean, which is the same thing). The terms “average”
and “mean” refer to the arithmetic average.
Unless noted otherwise, assume the returns of the assets in a portfolio (with more
than 1 asset) do not move perfectly together in the same direction by the same
relative amount.
Unless noted otherwise, assume that any information that is “announced” is
information that was previously private and made public by the announcement.
Assume the expected return of the market portfolio is greater than the risk-free
return and that both are greater than 0.