Cfp Formulas

Question 1

Dividend payout ratio

Answer 1

Dpr-common dividend paid/EPS

Hint: DCE

Question 2

Stock yield

Answer 2

Stock yield=Dividends per share/

stock price per share

Question 3

Return on equity

Answer 3

ROE=EPS/Common equity (net worth or book value)

*book value per share is book value/shares outstanding

Question 4

Intrinsic value of call

Answer 4

Call IV= MP-EP
Hint: CME

60-50= 10 in the money
49-50= is not -1, cannot be negative, it is zero!

Question 5

Intrinsic value of a put option

Answer 5

Put IV = EP-MP
Hint: PEM

30-25= 5 in the money 
30-35= -5 but not the answer as can’t be negative! Must be zero Out of the money

Question 6

Price/earnings ratio
Stock with estimated earnings of $3 per share and has a currently market price of 45.

Now Figure current market price from formula

Answer 6

P/E ratio = current market price/
Earnings

45/3= 15

For valuation:
CME = earnings X P/E ratio

3.00x15=45

Question 7

Current yield

If a 1000 bond with a 10% coupon is now selling for $900, what is current yield?

Answer 7

CY=annual interest in dollars/
Bond market price

Cy= 100/900= 11.11%

Question 8

Tax exempt yield

Example : Susan marginal tax rate is .15. She is considering a bond paying 7% or tax exempt muni bond paying 5.5. Which should she buy?

Answer 8

TEY= taxable yield x (1-marginal tax rate)
7-%x(1-.15) = 5.95

Or if given tax free looking for TEY
Tax free bond yield / 1-marginal tax rate = taxable equivalent taxable bond

Question 9

Required rate of return

Is known as capital asset pricing model (CAPM)

Answer 9

R=rf + (Erm -rf)B

Risk free rate + (market return -risk free rate) Beta)

Formula for security market line

Unless the expected return exceeds the required return, an investment is unacceptable

Question 10

Constant growth model (DDM)

Answer 10

D1/r-g = Do (1+g) / r-g

Dividend (1+growth rate of dividend/
Required rate of return-growth rate of dividend

Expected return= Do (1+g)\
Price + growth

Question 11

Covariance COV & Correlation coefficient Pij (3 formulas)

Answer 11

COVij =Pij Qi Qj

Pij=COVij/ Qi Qj

Qi= COVij/ Pij Qj

Question 12

Margin call

Answer 12

Margin call
1-initial margin percentage/
1-maintenance margin percentage

(Above ) x purchase price of stock

Question 13

Beta (2 formulas )

Answer 13

B-volatility of returns-measure risks

Bi = COVim/ =PimQi/
Q2M. Qm

Bi = Pim Qi/
Qm

Q = STardard deviation 
M= market