Formulas Flashcards
Real Rate of Return
[1+Nominal Rate] /
[1+Inflation Rate]
- 1 x 100
Arithmetic Average
Σ+
Σ+
Σ+
Shift 7 (x-,y-)
Standard Deviation
Σ+
Σ+
Σ+
Shift 8 (Sx,Sy)
Holding Period Return
Beg Value
Profit / Sale
Geometric Return
[[[(1+R1)(1+R2)(1+R3)] ^ 1/3 ] - 1] x 100 (Provided on CFP)
Used Shift x (multiply sign) (y^x) to get the exponent
-1 x 100
Intrinsic value of a bond
Calculate PV (FV and PMT are positive; N x 2 and Yield to Maturity should be divided by 2)
Use % for coupon to calculate coupon payments
Use “comparable market rate” divide by 2 as I/YR for PV calculate
intrinsic value of a bond represents the present value of its future cash flows, which are the coupon payments and the principal payment at maturity.
The present value of the cash flows is calculated using the bond’s yield to maturity, which is the rate of return that investors require for investing in the bond
YTC or YTM of a Bond
Calculate I/YR (remember to x 2 to get to final answer)
(PV will be provided, should be negative, N x 2, FV and PMT postive)
For YTC, use FV and N for callable
Monthly Mortgage Payments
PV = +/- Loan amount
N = loan term x 12
I/YR = mortage interest rate / 12
FV = 0
Solve for PMT
Net Present Value
Use CFj Key to enter the cashflows (starting with the purchse price and ending with selling price)
Use I/IR to enter the %
Shift PRC (NPV)
Constant Growth Dividend Discount Model (DDM)
V = D1 / (r-g)
D1 = next year’s dividend
r = the investor’s required rate of return
g = the dividend growth rate
Calculates the value of a dividend-paying security (with constant dividend growth) in dollar terms
Stock Valuation Steps
V = D1 / (r-g)
Step 1: Calculate end-of year dividends for first set of years where dividend is constant
D1 = D0 x (1 + g (Growth Rate))
D2 = D1 x (1+g)
D3 = D2 x (1+g)
Step2: Calculate the stock valuation at the last year based on new constant divident/projected dividends rate
V = D3 (1 + Projected dividend rate) / (Required Rate of Return - Projected Dividend Rate)
Step 3: Solve for NPV
I/YR = Required Rate
CF0 = 0 (zero entry)
CF1 = D1
CF2 = D2
CF3 = D3 + V
Shift PRC/NPV
When should Investor avoid the stock?
When IV < MV, Stock is overvalue, Er < K = avoid stock
When should investor buy the stock?
When IV > MV, Stock is undervalued & Er > k = buy stock
When IV = MV, stock is fairly valued & Er = K = buy stock
What is IV, MV, Er and K
IV = Intrinsic Value
MV = Market Value
Er = Expected return
k = required return
Expected Rate of Return
Covariance
Standard Deviation
Beta
Standard Deviation of two portfolio
SD of a population
SD of Small sample
Holding Period Return
Income + (Selling price - purchase price) / purchase price
HPR = [(1+R1)(1+R2)(1+R3)…] - 1 x 100 (Provided on CFP)
total return received from holding an asset or portfolio of assets over a period of time
Margin Call Price
NOT PROVIDED
(1 - Initial Margin) /
(1 - Maintenance Margin)
X Initial Purchase Price
HO Co-Insurance Formula
[(coverage - 80% of RCV) x loss amount ] - Deductible
RCV = Replacement Cost Value
What formula do you use when the question is “how did the portfolio manager do??
Jensen Alpha Formula!
a >= 0 , PM did better than market
a < 0, PM did worse than market
Gross Profit Margin
Gross Profit / Sales
Operating Profit Margin
Operating Income / Revenue
Return on Assets (ROA)
Earnings After Taxes / Total Assets
Return on Equity (ROE)
Earnings After Taxes / Equity
Earnings available for common (EPS) / Common equity (net worth or book value)
Current Ratio
Current Assets / Current Liabilities
Quick Ratio
(Current Assets - Inventories) / Current Liabilities
Working Capital
Current Assets - Current Liabilities
Debt of Equity
Total Long-Term Debt / Equity
Debt Ratio
Total Debts / Total Assets
Front End Ratio
aka Mortgage Debt Service Ratio or Housing Cost Ratio
For mortgage approvals
(Principle + Interest + Taxes + Insurance) / Gross Income
(Principle + Interest + Taxes + Insurance) = PITI
Pass <= 28% is good
If Greater than 28%, bad
Back-end Ratio
Total Debt Ratio or Debt Repayment Ratio
Formula = (PITI + Monthly Consumer Debt) ÷ Monthly Household Gross Income
PASS = ≤ 36%
20% 28% 36%
20% = Consumer Debt Ratio pass rate
28% = House Cost Ration /Front End Ratio pass rate
36% = Total Debt Ratio or Debt Repayment Ratio (Back-end ratio) pass rate
Times Interested Earned
EBIT / Interest Expense
Alimony Recapture - If P2 - P3 <= $15,000
Alimony Recapture = P1 - [(P2+P3) / 2] - 15,000
Alimony Recapture = P1 - [P2 & P3 Avg] - 15,000
Alimony Recapture - if P2 - P3 GREATER THAN $15000
Recapture amount = P1 + P2 - 2(P3) - 37,500
(this mount will be listed as income for payor and deduction for payee)
Consumer Debt Ratio
Formula = Monthly Consumer Debt (Non-Housing) ÷ Monthly Net Household Income
PASS = ≤ 20%
Note: Consumer Debts (non-housing) include:
Auto loans
Student Loans
Credit Cards
Unsecured Debts
GDP Formula
GDP (Y) = C + I + G + (X – M)
C is consumer spending
I is investment made by industry (indisutrial investments)
G is government spending
X-M is excess of exports over imports (you may see this listed as ‘NE’ for Net Exports)
The GDP formula would be listed as C + I + G + NE
Current Yield
Annual Coupon/Interest Payment / Bond’s market price
Property’s Intrinsic Value
Net Operating Income (NOI) / Captilization Rate
Intrinsic Value for Call Options (COME) Call Option
= Market Value - Exercise Price
Intrinsic Value for Put Options (POEM) Put Option
= Exercise Price - Market Value
Nominal Yield (Bond)
Nominal Yield = Coupon Rate
Market Risk Premium (MRP)
AKA equity risk premium (ERP)
Rm - Rf
CAPM
Ri = Rf + ((Rm - Rf) x Beta)
Ri = Rf + (Market Risk Premium x Beta)
CAPM = Ri = Rf + Stock Risk Premium
Stock Risk Premium
(Rm−Rf) βi
= Market Risk Premium x Beta
NPV
used to evaluate the cash flows associated with CAPITAL PROJECTS AND EXPENDITURES
NPV is superior
NPV >= 0 (positive) - go for it (actual return > Er)
NPV < 0; avoid it (actual return < Er)
If the NPV and the IRR suggest two different investment projects, select the project with a higher positive NPV.
Taxable Equivalent Yield (TEY)
Tax-exempt Yield / (1 - Marginal tax rate)
Tax-exempt Yield
Taxable Equivalent Yield * (1 - Marginal Tax Rate)
Dividend Payout Ratio
Common dividends paid / earnings available for commons (EPS)
Stock Yield
Divident per share / stock price per share
P/E Ratio
Current Market Price / Earnings
EFC Formula and %
Expected Family Contribution = Income (Parent & Student) + Asset (Parent & Student)
Financial Need Formula
Financial Need = Cost of Attendance (COA) – EFC
When should Treynor Ratio and Sharp Ratio be used?
- If the R2 is > 0.7, use the Treynor Ratio.
- If the R2 < 0.7, use the Sharpe Ratio.
