1

2201 AFE Corporate Finance - Formulae Sheet

Mid Semester Exam

PV =
t
R
FV
) ( + 1
this is simple present value formula

FV =
t
R PV ) ( + 1 simple future value formula
) 1 ( R LN
PV
FV
LN
t
+
= finding the number of periods when you have a single present and future value
R 1
1
|
.
|

\
|
=
t
PV
FV
finding the rate when you have a single present and future value
This four formulas above refer to a single value for example: you invest 300 now for 9 years at 5% pa.
how much will you have at the end of 9 years? you use simple future value formula because you only
have a cash flow.
PV or
t
t
r
C
r
C
r
C
r
C
C NPV
) (
...
) ( ) ( ) ( +
+ +
+
+
+
+
+
+ =
1 1 1 1
3
3
2
2 1
0
this formula applies when you have
multiple cash flows that are NOT EQUAL. you must discount them individually and add them together
to find the present value. The same rule applies if you need to find the future value you compound
them individually then add them. (the formula for FV is not here).
The above formula also applies when you find the NPV of a project taking in consideration the initial
cost which is a negative number.
PV
(
(
(
(

=
R
R
C
t
) (1
1
1
the present value annuity formula this applies when you have multiple cash
flows that ARE EQUAL and occur periodically. If you read in the question about loans or pensions you
apply this formula, also if there is info about a regular payment.. think annuity formulas. for example if
you borrow some money and have to pay 200 per month for 20 years and the borrowing rate is 7.5% pa.
how much have you borrowed? this is asking for the PV of this 240 (20y x12) regular cash flows.
FV =
(

+
R
R
C
t
1 1 ) (
the future value annuity formula - If the question asks you what is the value of
your pension if you start depositing 100 every month for 30 years and the rate is 10% pa? Use this
formula not forgetting to change the years and rate in the same time units as the payment (monthly)
EAR = 1
m
NIR
1
m

|
.
|

\
|
+ this is to calculate the effective annual rate in order to compare the rates
of two or more investments when we have different compounding periods. remember, in our questions
the rates that we have, the quoted rate is the NIR, because we can divide that rate and find the period
rate per month/quarter. so given our NIR in the question you transform it into an equivalent rate to
enable comparison with other investments. you had a question in tutorial when you had two banks First
National and First united
( ) | | 1 1 EAR m NIR
1/m
+ = if you are given the EAR, transform it into NIR
2
t
t
R
F
R
R
C P
) (
) (
+
+
(
(
(
(

=
1
1
1
1
the bond valuation formula which is made up of the PV of annuity
which takes in consideration the coupon payments (regular equal cash flows) AND the simple PV
formula which takes in consideration the principal/face value that we receive at the end when the bond
matures.


The following refer to share valuation
P
0
=
R
D
finding the value of the share today using the perpetuity formula (case I of share
valuation) when we have constant dividends and no growth rate. g=0 and D1=D2=D3=Dt

P
0
) (
D
) (
) ( D
1 0
g R g R
g

+
=
1
finding the price of the stock today, current market value, when we have
a constant growth rate (case II). Then we know the dividends are not equal. g>0, D0<D1<D2<Dt.
here is important to take the correct dividend. if the problem says the company just paid a dividend you
know is D0, if it says the company is expecting to pay, you have D1
P
t
) (
) ( D
t
g R
g

+
=
1
finding the price of a share at any point in time. remember, as long as you have a
known dividend, D0, or D1 or D15 you can always find the price of a stock. for example what is the
price of a stock in 10 years time if the company is thinking of paying shareholders a dividend that grows
at 5%. the company just paid a dividend of 1.30 and the required rate of return is 12%. D0=1.30, g=5%
R=12%
using the above formula P10 = D10(1+g)/R g = D11/R-g
so first you find D11 = D0(1+g)
11
then apply the formula. even if in the problem the dividend given is
for year 7, you can still find D11 as D11=D7(1+g)
4
remember the rule, the number on the left of equal
sign must equal to the numbers on the right of equal sign
P
0
=
t
t
t
t
R
P
R
D
R
D
R
D
) ( ) (
....
) ( ) ( +
+
+
+ +
+
+
+ 1 1 1 1
2
2 1
this is the last scenario (case III) when you have
multiple growth rates in dividend. then to solve the problem you combine case II with single cash flow
discounting. this is because first you need to find the dividends based on each individual growth rate,
then once you hit the constant growth rate you apply the case II. draw timelines to solve these
problems.. remember if you have 3 different growth rates g1=10%, g2 = 8% and then a constant g =6%,
you have to find 3 separate dividends D1, D2 and D3. you discount individually only D1 and D2, the
only reason we calculate D3 is to find P2 using case II formula because from this year the growth rate is
constant. so P0 = D1/1+R + D2/(1+R)2 + P2/(1+R)2