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FORMULAS
Activity Ratios:

Liquidity Ratios:

Solvency Ratios:

Profitability Ratios:

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Free Cash Flow to the Firm:

FCFF = net income + noncash charges + [cash interest paid × (1 − tax rate)] − fixed
capital investment − working capital investment
FCFF = cash flow from operations + [cash interest paid × (1 − tax rate)] − fixed
capital investment
Free Cash Flow to Equity:
FCFE = cash flow from operations − fixed capital investment + net borrowing
common-size income statement ratios =
common-size balance sheet ratios =
common-size cash flow ratios =

original DuPont equation:

extended DuPont equation:

diluted EPS =

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Coefficients of Variation:

Inventories:
ending inventory = beginning inventory + purchases − COGS
FIFO COGS = LIFO COGS − (ending LIFO reserve − beginning LIFO reserve)
Long-Lived Assets:

units-of-production depreciation =

average age =
total useful life =

remaining useful life =

Deferred Taxes:
income tax expense = taxes payable + ΔDTL − ΔDTA
Debt Liabilities:

Performance Ratios:

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Coverage Ratios:

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FORMULAS

breakeven points:

perfect competition: AR = ATC

imperfect competition: TR = TC
short-run shutdown points:

perfect competition: AR < AVC

imperfect competition: TR < TVC

GDP, expenditure approach:

GDP = C + I + G + (X − M)
where:
C = consumption spending
I = business investment (capital equipment, inventories)
G = government purchases
 X = exports
M = imports

GDP, income approach:

GDP = national income + capital consumption allowance + statistical discrepancy
national
= compensation of employees (wages and benefits)
income
+ corporate and government enterprise profits before taxes
+ interest income
+ unincorporated business net income (business owners’ incomes)
+ rent
+ indirect business taxes − subsidies (taxes and subsidies that are
included in final prices)
personal income = national income
+ transfer payments to households
− indirect business taxes
− corporate income taxes
− undistributed corporate profits
personal disposable income = personal income − personal taxes
growth in potential GDP = growth in technology + WL(growth in labor) + WC(growth
in capital)
where:
WL = labor’s percentage share of national income
WC = capital’s percentage share of national income
growth in per-capita potential GDP = growth in technology + WC(growth in the capital-
to-labor ratio)
where:
WC = capital’s percentage share of national income

equation of exchange: money supply × velocity = price × real output (MV = PY)
Fisher effect: nominal interest rate = real interest rate + expected inflation rate
neutral interest rate = real trend rate of economic growth + inflation target
fiscal multiplier:

where:
t = tax rate
MPC = marginal propensity to consume

forward premium (+) or discount (−) for the base currency:

interest rate parity:

Marshall-Lerner condition:
WX εX + WM (εM − 1) > 0
where:
WM = proportion of trade that is imports
WX = proportion of trade that is exports
εM = elasticity of demand for imports
εX = elasticity of demand for exports
FORMULAS
nominal risk-free rate = real risk-free rate + expected inflation rate
required interest rate on a security = nominal risk-free rate

+ default risk premium

+ liquidity premium

+ maturity risk premium

effective annual rate = (1 + periodic rate)m − 1

continuous compounding: er − 1 = EAR

FV = PV(1 + I/Y)N

general formula for the IRR:

bank discount yield

365 / t
effective annual yield = (1 + HPY) –1

money market yield

population mean:

sample mean:
geometric mean return (RG):

harmonic mean:

weighted mean:

position of the observation at a given percentile, y:

range = maximum value – minimum value

excess kurtosis = sample kurtosis – 3

coefficient of variation:

joint probability: P(AB) = P(A | B) × P(B)

addition rule: P(A or B) = P(A) + P(B) – P(AB)
multiplication rule: P(A and B) = P(A) × P(B)
total probability rule:
P(R) = P(R | S1) × P(S1) + P(R | S2) × P(S2) + . . . + P(R | SN) × P(SN)
expected value: E(X) = ΣP(xi)xi = P(x1)x1 + P(x2)x2+ … + P(xn)xn
Cov(Ri,Rj) = E{[Ri – E(Ri)][Rj – E(Rj)]}
portfolio expected return: = w1E(R1) + w2E(R2) + … + wnE(Rn)

portfolio variance:

where

Bayes’ formula:

combination (binomial) formula:

permutation formula:

binomial probability:

for a binomial random variable: E(X) = np; variance = np(1 – p)

for a normal variable:
90% confidence interval for X is X – 1.65s to X + 1.65s
95% confidence interval for X is X – 1.96s to X + 1.96s
99% confidence interval for X is X – 2.58s to X + 2.58s

SFRatio =

continuously compounded rate of return:

for a uniform distribution:

sampling error of the mean = sample mean – population mean = x – μ

standard error of the sample mean, known population variance:

standard error of the sample mean, unknown population variance:

confidence interval: point estimate ± (reliability factor × standard error)

confidence interval for the population mean:

tests for population mean = μ0: ,

test for equality of variances: , where

paired comparisons test: t-statistic =

test for differences in means:

t-statistic = (sample variances assumed unequal)

t-statistic = (sample variances assumed equal)

FORMULAS
for an annual-coupon bond with N years to maturity:

for a semiannual-coupon bond with N years to maturity:

bond value using spot rates:

full price between coupon payment dates:

(Bond value at last coupon date based on the current YTM) × (1+ YTM/#)t/T

where # is the number of coupon periods per year, t is the number of days from the
last coupon payment date until the date the bond trade will settle, and T is the number
of days in the coupon period.

flat price = full price – accrued interest

current yield =

forward and spot rates: (1 + S2)2 = (1 + S1)(1 + 1y1y)

option-adjusted spread: OAS = Z-spread − option value

money duration = annual modified duration × full price of bond position

money duration per 100 units of par value =

 annual modified duration × full bond price per 100 of par value

price value of a basis point: PVBP = [(V– − V+) / 2]

%Δ full bond price = –annual modified duration(ΔYTM) + annual

convexity(ΔYTM)2

duration gap = Macaulay duration − investment horizon

risky asset + derivative = risk-free asset

risky asset − risk-free asset = – derivative position

derivative position − risk-free asset = − risky asset

no-arbitrage forward price: F0(T) = S0 (1 + Rf)T

payoff to long forward at expiration = ST − F0(T)

value of forward at time t: –

intrinsic value of a call = Max[0, S − X]

intrinsic value of a put = Max[0, X − S]

option value = intrinsic value + time value

put-call parity: c + X / (1 + Rf)T = S + p

put-call-forward parity: F0(T) / (1 + Rf)T + p0 = c0 + X / (1 + Rf)T

FORMULAS

WACC = (wd)[kd (1 − t)] + (wps)(kps) + (wce)(kce)

after-tax cost of debt = kd (1 − t)
cost of preferred stock = kps = Dps / P
cost of common equity:

kce = Rf + β[E(Rm) − Rf]

kce = bond yield + risk premium
unlevered asset beta:

project beta:

cost of common equity with a country risk premium:

operating cycle = average days of inventory + average days of receivables

cost of trade credit =

where:
 days past discount = number of days after the end of the discount period

sample covariance from historical data:

standard deviation for a two-asset portfolio:

equation of the CML:

total risk = systematic risk + unsystematic risk

capital asset pricing model (CAPM): E(Ri) = Rf + βi[E(Rmkt) − Rf]

preferred stock valuation model:

one-period stock valuation model:

infinite period model:

multistage model:

earnings multiplier:
expected growth rate: g = (retention rate)(ROE)

where: