Quick Access to all the practical financial formulae

1. Time value of money at a glance
1. FV=PV(1+K) n (compounding)
2. Pv=fv(1+k) n (discounting)
Annuity/PMT
Annuity is an equal periodic payment made at regular interval
1. Fv an =pmt  
k
k n
1)1( 
(in case of ordinary / deferred annuity)
2. Fv an = pmt )1(
1)1(
k
k
k n





 
(in case of annuity due)
3. pv an = pmt 




  
k
k n
)1(1
(in case of ordinary/deferred annuity)
4. pv an = pmt )1(
)1(1
k
k
k n





  
( in case of ordinary due)
Uneven cash flow
 pv= N
N
K
CF
K
CF
K
CF
)1()1()1( 2
2
1
1





 FV=CF 1(1+K) n-1 +CF 2 (1+k) n-2+------+CF3(1+k) n-3
Perpetuity
 Pv= INTEREST
PMT
[when interest rate rises the pv drops and vice versa ]
 EAR = (1+ 0.1)
m
interestNominal
mt
 PBR=
investmenttotal
100flowcashaverage 
 Irr(Internal rate of return) = A+ )( AB
DC
C


[
 NPV= (average cash flow*pvifa) – (total investment)
N;B: IF interest is compounded semiannually the interest rate will be divided by 200 and the time
(that is n ) is multiplied by 2.thus divided by 400 and multiplied by 4 in case of quarterly,600 and 6 in
case of bi-monthly,1200 and 12 monthly,2400 and 24 in case of forth-nightly ,5200 and 52 in case of
weekly.36000 in case of 360 in case of daily.

2. Cost of capital at a glance
The minimum rate of return that a firm must earn on its investments in project to maintain or
remain unchanged its market value. In other words, the cost of capital is the firm’s required rate of
return or opportunity cost rate.
Cost of capital is the summation of 3 costs--------
Risk free rate +business risk premium (b)+financial risk premium
Type of cost formulae description
Cost of debt Irredeemable or perpetual
Ki= 







Kd=
)1(
100tax)-value(1faceoninterest
fpo 

Ki= cost of debt before tax
Kd= cost of debt after tax
Int=annual interest on face value
Nsv =net sales valur (we get net sales value
subtracting flotation cost from sales value
Po= market price of share
F= flotation cost
Redeemable cost of debt
Kd= 100


2
NSVRV
N
NSV-RV
t)-int(1
When there is no (redemption/Redeemable) value
we have to take face value as redemption
value.we must remember that interest will always
be on face value.
N= number of year to maturity
Cost of preferred
stock
Irredeemable or perpetual cost of preferred stock
Kp =
f)(1P
100P
o
d


Pd =annual dividend per share
Redeemable cost of preferred stock
Kp = 100
2



NSVRV
N
NSV-Rv
PD
Cost of common
stock
Dividend model:
Ke=
o
o
p
100D 
Ke= cost of equity
Do =average previous dividend
G= growth rate
D1 =expected dividend
Dividend growth model
Ke = 100g]
p
D
o
1

 )1(
[
f

3. In case of new common stock
Ke= 100g]
P
D
o
1

 )1(
[
f
D1= Do(1+g)
Thus D26= Do(1+g) 25
Cost of retained
earnings
Ke= Kr ,if there is no personal tax and flotation
cost.if personal tax and flotation cost are given
then the formula is as under
Kr = 100g]
p
D
o
1

 )1(
[
pt
We must remember that flotation cost are not
included in this formula or better flotation cost is
not considered while calculating cost of retained
earning
Composite cost
or overall cost
WACC =Weke+Wdkd(1-T)+Wpkp+Wrkr
Growth rate
G= 100
OP
DPS-EPS