Formula

Question 0

DISCOUNTING ANNUITIES

Answer 0

AF(1-n) = (1/r)*(1-(1/((1+r)^n)))

An amount is received at the end if the year for a set number of years.

Question 1

DISCOUNT FACTOR

Answer 1

DFn = 1/((1+r)^n)

Question 2

PERPETUITIES

Answer 2

AF(1-inf) = 1/r

An amount is received at the end of the year forever.

Question 3

GROWING PERPETUITY

Answer 3

AF(1-inf) = 1/(r-g)

A perpetuity which grows annually at a rate g.

Question 4

IRR

Answer 4

a + [(NPVa/(NPVa - NPVb)) x (b-a)]

Question 5

EQUIVALENT ANNUAL COST

Answer 5

EAC = PV of costs / Annuity factor

Question 6

CAPM

Answer 6

Rj = Rf + B (Rm - Rf)

Rj = required return from investment
Rf = risk free rate
Rm = average rate of the market
B = systematic risk of investment

Question 7

THEORETICAL EX-RIGHTS PRICE (TERP)

Answer 7

(MV of shares in issue) + (Proceeds from new shares) + (NPV)
______________________________________________

     Number of shares in issue post rights/ new issue

Question 8

THEORETICAL VALUE OF A RIGHT

Answer 8

TERP - the exercise price

Question 9

WACC (Weighted Average Cost of Capital)

Answer 9

(MVe x ke) + (MVd x kd) + (MVp x kp)
WAAC = ____________________________
(MVe + MVd + MVp)

Question 10

THE COST OF EQUITY (ke)

Answer 10

D0 (1+g)
Price (P0) = _________
ke - g

             D0 (1+g) => ke = \_\_\_\_\_\_\_\_\_\_\_   + g
                  P0 Where g is the growth rate of dividends

Question 11

ANNUAL DIVIDEND GROWTH

HISTORIC METHOD

Answer 11

g = [(D0/Dividend n yrs ago)^(1/n)] - 1

Question 12

GORDON GROWTH MODEL

EARNINGS RETENTION MODEL

Answer 12

g = r x b

r = accounting rate of return
b = earning retention rate

Question 13

THE COST OF PREFERENCE SHARES (kp)

Answer 13

D
Price (P0) = ___
kp

           D => kp = \_\_\_
           P0

Question 14

THE COST OF DEBT (kd) FOR IRREDEEMABLE DEBENTURES

Answer 14

i(1-T)
Price (P0) = ______
kd

            i(1-T) => kd = \_\_\_\_\_\_
              P0

Where P0 = i/r where
i = annual interest starting in 1 years time
r = debt holders required return (yield)

Question 15

THE COST OF DEBT (kd) FOR REDEEMABLE DEBENTURES

Answer 15

Calculate the NPV or IRR longhand.

Question 16

OPERATING GEARING

Answer 16

A measure of the extent to which a firms operating costs are fixed rather than variable:

Fixed costs or Fixed costs
___________ _________
Variable costs Total costs

High operating gearing means higher risk (operating profit is more variable).

Question 17

FINANCIAL GERARING

Answer 17

A measure of the extent to which debt is used in the capital structure:

  Debt                or          Debt \_\_\_\_\_\_\_\_\_\_                    \_\_\_\_\_\_ Debt + Equity                     Equity

High financial gearing means higher risk (fixed interest cost makes profits available to shareholders more variable).

Question 18

BETA (EQUITY AND ASSET)

Answer 18

B(equity) = B(asset) [1 + ((D(1+T))/(E)]

E = market value of equity
D = market value if debt
T = corporation tax rate

Question 19

DIVIDEND YIELD

Answer 19

Dividend Dividend
Yield = ________ or Price = ________
Price Yield

Question 20

DETERMINE NUMBER OF CONTRACTS NEEDED

Answer 20

Loan or deposit Loan or deposit
amount period in months
_____________ x _____________
Contract size 3 months

Question 21

IRPT

Answer 21

Interest rate parity theory:

                                                       1 + i(f) Forward rate = Current spot rate x \_\_\_\_\_\_
                                                      1 + i(uk)

i(f) = foreign currency interest rate for period
i(uk) = UK interest rate for the period

Question 22

PPP

Answer 22

Purchasing power parity:

                                                       1 + infl(f) Forward rate = Current spot rate x \_\_\_\_\_\_\_
                                                      1 + infl(uk)

infl(f) = expected foreign currency inflation for period
infl(uk) = expected UK inflation for the period