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P0(OA) = C r 1 1/(1 r ) (1 r )n 1
n
PV of OA Fn(OA) = C r FV of OA & deferred OA
Discount
P0 = Fn/[1 + (n/365) r] P0 Fn (1 kd )n
securities
Dt
P0 C kd 1 (1 kd ) n
Fn (1 kd )n Pt 1 Price today
price coupon paying securities/YTM ke g
Ordinary shares//expected
Pt = (Dt+1 + Pt+1)/(1 + ke) pricing ordinary shareske = (Dt+1 + Pt+1)/Pt 1 rate of return
ra = [R1 + R2 + ... + Rn]/n Arithmetic average rg = [(1 + R1) (1 + R2) (1 + Rn)]1/ n 1 Geometric average
2
j = p1[R1 E(rj)]2 + p2[R2 E(rj)]2 + ... + pn[Rn E(rj)]2 variance
12 1 2 12
covariance 12 = 12 / 1 2 correlation
Formula Sheet 1 of 2
FNCE20001 Business Finance Semester 1, 2016
2
E(rp) = w1E(r1) + w 2E(r2) p w12 2
1 w22 2
2 2w1w2 12 variance between two securities retu
Expected return - 2 securities
2
2 2 2 2 2 *
p w 1 1 w2 2 2w1w2 1 2 12 w1 2
2
2
12 1 2
correlation of returns 2s 1 2 2 12 1 2
n m m
E(Rp ) wi E ( Ri ) p = w j wk jk SD of M security portfolio
expected return
i=1 of an M security portfolio j =1 k =1
CML 2
E(rp) = rf + [E(rm) rf ][ p / m] j jm m jm j m
beta/covariance of security with marke
E rjt rft jm E rmt rft jS E SMBt + jH E HMLt Fama and French three factor model
N
Ct C1 C2 CN
NPV t
I0 NPV 0 ... I0
t 1 1 k (1 r ) (1 r ) 2 (1 r ) N IRR when equal to 0
Average annual earnings Average annual earnings
ARR(1) ARR(2)
Initial investment Average investment
N
( Rt OCt )(1 tc ) tc Dt SVN
NPV I0 (1 + r) = (1 + r*)(1 + i)
cash flow estimation t 1 (1 k )t (1 k ) N fisher relationship
(1 k ) N D E
NPV NPV0 EAV / k k0 kd ke Weighted average cost of capital
(1 k ) N 1 V V
NPV of infinite chain/projects with different lives
D E P D E
k0 kd ke kp k0 kd (1 tc ) ke after tax WACC
+ preference shares V V V V V
D E P
k0 kd (1 tc ) ke kp Franking credit = Div[tc/(1 tc)]
after tax WACC V V V
Grossed-up dividend = Div/(1 tc) VU = EBI/ko value of firm (and equity) with no debt
V L = E L + DL EL = (EBI Interest)/ke value of firm with non-zero debt
value of firm with non-zero debt
DL = Interest/k d firm with non-zero debt ke
value of k0 k0 kd D E MM proposition 2
e 0 0 d DE VL = VU + tc D
proposition 2 systematic risk beta
Dp
VL = VU + PV(TS) PV(BC +AC) kp cost of preference shares
P
V0 = [(n + m)P1 I + X]/(1 + ke) X + mP1 = nD1 + I
F0, t = S0 (1 + c) Cost of carry model Call option payoff = Max(ST X, 0)
Call option profit = Max(ST X, 0) C Put option payoff = Max(X ST, 0)
Put option profit = Max(X ST, 0) P
Formula Sheet 2 of 2