Formulas

Question 1

What is the CAPM formula, and what are the components?

Answer 1

ri = rf + Beta(rm - rf)
- ri = expected return of equity
- rf = risk free rate
- B = beta of security
- rm = expected market return
rm - rf = market risk premium

Question 2

What is the Dividend Discount/ Gordon Growth model formula, and what are the components?

Answer 2

P = D1/ Ke - g
P = Share Price
D1 = Next year’s dividend
Ke = Cost of equity
G = Constant growth rate

Question 3

What is the Accounting Rate of Return formula?

Answer 3

ARR = Avg annual profit/ Avg investment X100

Question 4

What is the formula for NAV, as well as the formula for one of its key components?

Answer 4

NAV = Net tangible assets / No. of Shares
Where:
Net tangible assets = Total Equity - non-current intangible assets

Question 5

What are the P/E ratio formulas?

Answer 5

PE Ratio = Price Per share / EPS
OR
PE Ratio = Market Cap / Net Income

Question 6

How does the DGM formula change for DCF model?

Answer 6

Numerator changes to Cash Flows, replacing dividends.
Becomes:
P = CF / Ke - g

Question 7

What are the components of the geared/ ungeared beta formula?

Answer 7

Bu = Ungeared Beta
Bg = Geared Beta
T = Tax rate
E = Equity
D = Debt

Question 8

What is the formula for Irredeemable Bond Pricing, and what are its components?

Answer 8

P = C / i
Where:
P = Bond price
C = Coupon value
i = Discount rate/ Yield

Question 9

What is the formula for Redeemable Bond pricing, and what are the components?

Answer 9

P = SGMA Ct / (1+i)^t + Rn / (1+i)^n
Where:
P = Bond Price
Ct = Coupon value
i = Discount rate/ YTM
n = Years to maturity