FNCE20001 Business Finance Semester 1, 2016

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Fn Present value using simple interest

Fn P0 (1 n r ) P0
Future value using simple interest (1 n r )
FV of a single cash Fn PV of single cash
Fn P0 (1 r )n P0
flow/compound interest (1 r ) n flow//Fn(1+r)^-n
C C/r
P0 PV of perpetuity P0
r (1 r ) n PV of deferred perpetuity

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

P0(AD) = C r 1 1/(1 r ) 1 r PV of AD Fn(AD) = C r (1 r )n 1 1 r

n
FV of AD

re = (1 + r/m)m 1 Effective interest rate r e = er 1

Discount
P0 = Fn/[1 + (n/365) r] P0 Fn (1 kd )n
securities

Annualized cost of BAB = FaceValue 1 365 Annualised cost of funds

P0 Costs n

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

ke = Dt+1/Pt + g g = ke Dt+1/Pt constant dividend growth

constant dividend growth
model, find g
P0
expected price earning ratio
P0 (1 g )
current price earning ratio
E1 ke g E0 ke g

Rt = (Pt + Dt Pt-1)/Pt-1 Discrete returns rt = ln[(Pt + Dt)/Pt-1] Continuously compounded returns

ra = [R1 + R2 + ... + Rn]/n Arithmetic average rg = [(1 + R1) (1 + R2) (1 + Rn)]1/ n 1 Geometric average

Cn = C0(1 + rg)n E(rj) = p1R 1 + p2R 2 + ... + pnRn Expected return

2
j = p1[R1 E(rj)]2 + p2[R2 E(rj)]2 + ... + pn[Rn E(rj)]2 variance

12 = p1[r11 E(r1)][r21 E(r2)] + ... + pn[r1n E(r1)][r2n E(r2)] ??

12 1 2 12
covariance 12 = 12 / 1 2 correlation

The formula sheet continues on the next page

Formula Sheet 1 of 2
 FNCE20001 Business Finance Semester 1, 2016

This page may be detached from the exam booklet

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(rj) = rf + [E(rm) rf] j p = w1 1 + w2 2 + ... + w n n

SML/security market line
E(rj) = 0 + 1 1j + 2 2j + ... + n nj APT/arbitrage pricing theory

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