VARIOUS FORMULAS

Sr. No. Formula For Formula Where Example Solution

1 Present Value of Perpetual Bond V = A/R V = Value of Security Bond pays Coupon of 90/10% = 900
A – Instalment per Rs. 90 Per Year. If
year or Interest Per Market Rate of Return
Year is 10% what is the
R – Expected Rate of value of Bond
Return
2 Formula for Growing Perpetuity V = A1/(R-G) V = Value of Security Company paid Equity Step 1
(It is assumed that Growth in A1 – Interest in Year 1 Dividend of Rs. 5 per 5 x 6% = 5.30
Dividend will be Constant till R – Expected Return share in current year Step 2
perpetuity). G – Growth in which is expected to 5.30/(15%-6%) = 58.88
If Questions gives Dividend of Dividend grow at 6% for ever. If
Current Year (that is Year 0) then expected rate of
FIRST calculate A1 (Dividend in return is 15% what is
Year 1) and then apply the the Current Value of
Formula. Equity Share
3 Weighted Average Cost of
Capital
(a) Cost of Debt R-(R*T) R – Rate of Interest on Rate of Interest is 18% 18%-(18% x
Debt Tax Rate is 30% 30%)=12.60%
T – Tax Rate
(b) Cost of Equity Rf+(Rp*B) Rf – Risk Free Rate Rate of 10 Yr. Govt. Step 1
Rp – Risk Premium Bond is 6% Risk Premium = (15%-
B – Beta Nifty Rate of Return is 6%) x 1.5 = 13.5%
(Risk Premium = 15% Step 2
Expected Rate of Beta of Company is Cost of Equity = 6%
Return – Risk Free 1.5 +13.5% = 19.5%
Rate)
(c) WACC Cost of Eq * Weight + Weight of Equity and Debt Equity Ratio is WACC = (12.6 X 2 +
Cost of Debt * Weight Debt will correspond 2:3 19.5 X 3)/5 = 16.74%
to the respective
 share in total Capital +
Debt
(d) Cost of Redeemable PD + (RV – NP)/n PD – Preference
Preference Shares (RV + NP)/2 Dividend
RV – Redemption
OR Value
NP – Issue Price
N – Number of Years
(e) Cost of Redeemable Instead of PD it will be
Debentures Interest x (1 – T)

Fair Value of Firm for Specific Fair Value = Growth refers to the If FCFF of a Firm in Fair Value = 200/18%-
4 Year FCFF/(WACC-Growth) expected growth in year 2020 is Rs. 200 5%) = 1538.46
FCFF Crore.
Growth in FCFF is
expected to be 5%
WACC = 18%

5 Growth Rate of Equity ROE * Retention Ratio Retention Ratio means PAT is Rs. 100 Growth Rate of Equity
Ratio of Profits Retain Dividend Paid is Rs. 40 = 18% x (100-40)%
after Declaring Return on Equity is = 18% x 60%
Dividend 18% = 10.80%
6 Growth Rate of Firm ROI * Reinvestment PAT is Rs. 100 Growth Rate of Firm
Ratio Dividend Paid is Rs. 40 = 20% x (100-40)%
Return on Investment = 20% x 60%
is 20% = 12%

Normally Reinvestment Ratio is Net Income (after Reinvestment Ratio of

to be calculated as adjustment of Non > 1 indicates that
Cash Exp and Non Company is inducting
Cash Income, if any - more funds in the
 Dividend) - + business apart from its
Depreciation + Capital Profits.
Expenditure + Change
in Working Capital +
Increase in Net Debt
Divided by Net
Income (after
adjustments )
NOTE:
If NO information is
given then Retention
Ratio is to be
considered as
Reinvestment Ratio.
7 Value Performance / Performance means Company pays Value = 5/10%
Expectation Actual Rate of Return dividend of Rs. 5 per = Rs. 50/-
Expectation means share.
Expected Rate of Market Expectation is
Return 10% p.a.
8 Terminal Value FCF*(1+G)/(WACC-G) FCF – Free cash Flow FCF 2020 = Rs. 100 Terminal Value
of last year of Crore = 100 (1+2%)/18%-2%)
forecasting period. Terminal Growth Rate = 637.50
G – Terminal Growth = 2%
Rate WACC = 18%
WACC- Weighted
Average Cost of
Capital
Present Value of Terminal Value TV * Discount Factor If TV = 637.50 Discount Factor =
of the last year of Discount Rate = 18% 1/(1+.18)^5 = 0.44
explicit period (Say 5th Explicit Period = 5 PV of TV =
Year) Years 637.50 * 0.44 = 280.50
9 YTM C+(R-P)/N C- Coupon Amount (Not Bond Face Value Rs. 1000 YTM
R+P/2 Rate) Rate of Interest 9% pa. Step 1
R – Redemption Price Redemption at Par = 90+(1000-1020)/5
In Excel Formula is P – Initial Investment Purchase Price Rs. 1020 = 86
=Rate(nper,pmt, pv, fv) N – Number of periods till Maturity 5 Years Step 2
Maturity = 86/(1000+1020)/2
nper = period = 8.51%
pmt = Coupon Amt. NOTE: In Excel Market
pv = Purchase Value i.e. Price should be entered
Market Price (figure to as (-) i.e. Negative since it
be entered in negative) is an outflow. Also
fv = Final Value i.e. COUPON AMOUNT is to
Redemption Price be entered and NOT
COUPON RATE.
TO CALCULATE AFTER TAX
YTM CONSIDER AFTER TAX
COUPON AMOUNT AND AFTER
TAX REDEMPTION AMOUNT
10 YTC (Yield to Call) Same Formula as above R – Call Price
– But N – Period to Call

11 Current Yield C/P C – Coupon Amount Face Value Rs. 1000 Current yield
P – Price Rate of Interest 9% = 90/1020
Price Rs. 1020 = 8.82%
12 Capital Gain Yield YTM – Current Yield Capital Gain Yield
= 8.51 – 8.82
= - 0.31%
Thumb Rule For Par Bonds YTM = Current Yield =
Coupon
For Discount Bonds YTM > Current Yield >
Coupon
13 Value of Share as per DDM D1/(R-G) D – Dividend Amount Company paid dividend of Current Value of Share
(Dividend Discount Model) R – Expected Rate of Rs. 4 per share in current = 4/(20%-10%)
(Applicable when Dividend is Return or Cost of Capital year. Dividend is expected = 40
expected to grow at Constant G – Constant Growth in to grow at 10% for ever
Rate) Dividend Expected Market rate of Return is
(Also this method can be used 20%
ONLY when Dividend Growth
Rate is LESS Than Required
Rate)
14 Macaulay’s Duration In Excel In Excel:
=Duration(Issue Date,
Maturity Date, Coupon
%, YTM%, Period,
Interest Frequency)
Duration of Perpetual Bond 1 + YTM/YTM If YTM is 6% = 1+0.06/0.06
Coupon is 8% = 1.06/0.06
Period – Perpetual = 17.67%
What is the Duration
Modified Duration Duration / (1+YTM) If Duration of Bond is 4.24 Step 1
Sensitivity of Duration to Modified Duration * (1+ YTM is 17% Modified Duration
Change in Interest Rate % Change in Interest What is its modified = 4.24/(1+17%)
Rate) duration 3.62
What will be Change in Step 2
price if Interest Rate Sensitivity (Price Change
increases by 1% pa. %)
3.62 (1+1%)
= 3.66%
15 Annuity Calculation in Excel =PMT(Rate, Period, FV) Rate – Coupon Rate
Period – Maturity Period of
Bond
FV - Face Value
16 Nominal Rate TO Effective ER = (1+NR/n)n – 1 ER – Effective Rate If NR = 20% = (1+ .20/4)^4 – 1
Rate NR – Nominal Rate Compounding – Quarterly = 1+.05)^4 -1
n – Number of Times = 0.2155 Or 21.55%
Compounding

17 Effective Rate to Nominal Rate NR = [(1+ER)^1/n-1)] x n ER – Effective Rate If Effective Rate is 21.55% = [(1+.2155)^1/4-1] x 4
NR – Nominal Rate = [(1.2144)^.25-1] x4
n – Number of Times = (1.05-1) x 4
Compounding = 0.05 x 4
= 0.20 or 20%
18 Conversion of Levered Beta to Bl = Bu ((1+(D/E*(1-T)) Bl = Levered Beta If Levered Beta of a Unlevered Beta
Unlevered Beta Bu = Unlevered Beta Company is 1.5 Steps
D = Debt Debt Equity Ratio 2:1 1.5 = Bu((1+(2/1*(1-.30))
E = Equity Tax Rate 30% 1.5 = Bu(1+(2*.70)
T = Tax Rate Calculate Unlevered Beta 1.5 = Bu(1+1.40)
1.5 = Bu (2.40)
Bu = 1.5/2.40
Bu = 0.625
19 Conversion of Unlevered Beta Bu = Bl ((1+D/E*1-T)) Bl = Levered Beta If unlevered Beta is 0.625 Levered Beta
to Levered Beta Bu = Unlevered Beta Debt Equity Ratio is 2:3 Steps
D = Debt Tax Rate is 30% Bl = 0.625 ((1+(2/3*1-.30))
E = Equity Calculate Levered Beta Bl = 0.625(1+(.67*.70)
T = Tax Rate Bl = 0.625 (1+.469)
Bl = 0.625 *1.469
Bl = 0.918
20 Earning Per Share (EPS) DPS/Pay Out Ratio DPS = Dividend Per Share If Dividend Per Share is Rs. EPS = 5/50% = 10
Pay Out Ratio = % of Net 5
Profit Distributed as Pay Out Ratio is 50%
Dividend
21 Discount for Lack of Control 1-(1/(1+Control If Control Premium is 25% DLOC = 1-(1/(1+.25))
(DLOC) Premium)) then DLOC will be = 1-(1/1.25)
= 1-0.80
DLOC = 0.20 OR 20%
22 Discount for Lack of
Marketabillity (DLOM)
23 Total Discount = 1-[1-DLOC) * (1- IF Total Discount
(This is not sum of two DLOM)] DLOC = 25% = [1-(1-0.25)*(1-0.10)
discounts but Multiplicating DLOM = 10% = 1- [0.75]*(0.90)
Discount – Apply One Discount = 1-67.50
and then on the Net Apply = 32.50%
Second Discount and Add the OR
two discount) First Discount = 25%
Second Discount
= 100 X 25% = 75
75 X 10% = 7.5%
TOTAL = 25 + 7.5 = 32.50%
24 Growth Rate Return on Equity x If Return on Equity is 15% 15% x 60% = 9%
Retention Ratio Retention Ratio is 60%
Then Growth Rate will be
25 Return on Equity Earning available to Earning available to Equity If Earning Available to 1.50 / 10 = 15%
Equity Shareholders / Shareholders = PAT – Equity Shareholders is
 Equity Shareholders Preference Dividend 1.50 Cr
Fund (Equity Capital) Equity Capital is Rs. 10 Cr
Then ROE will be
26 Retention Ratio EPS – DPS / EPS EPS – Earning Per Share If EPS is Rs. 5 5-2/5 = 60%
DPS – Dividend Per Share DPS is Rs. 2
Retention Ratio will be
27 Valuation of Company having H – MODEL D0 = Most Recent Dividend If: = (3(1+.02) + 3 x 6(0.10-
Declining Dividend Growth Stock Value = Payment -Dividend Paid is Rs. 3/- 0.02) / (0.11-0.02)
Rate ( In case of ONLY LINEAR D0 (1+G2) + D0 *H(G1-G2)/(R- G1 = Initial Growth Rate -Expected Growth is 10% = (3.06) + (18 x
Decline) Linear Decline means G2) G2 = Terminal Growth Rate -Decline over next 12 0.08)/(0.09)
Growth Rate is declining at R = Discount Rate years to 2% stable growth = 3.06 + 1.44/0.09
same rate over a specified H = Half of Linear Declining rate. = 4.50 / 0.09
period. Period ( if period given is 8 - Required Rate of Return = 50
Years then H will be 4) is 11% Then Stock Value
will be
28 Operating Leverage = Q X (P – VC)/Q X (P – Q – Quantity If: = 1,00,000 x
(High Operating Leverage VC) – FOC P – Selling Price per Unit Quantity is 1,00,000 (10-5)/1,00,000 x(10-5)-
means Company has high VC – Variable Cost per Unit Price is Rs. 10 per unit 4,00,000
Fixed Cost and therefore it can FOC – Fixed Operating Cost VC – Rs. 5 Per Unit = 5,00,000/ 4,00,000
earn more profits by FOC – 4,00,000 = 1.25
increasing sales volume)
29 Degree of Operating Leverage Sales – VC / Profit Sales Rs. 5 Lac = (5-1)/2
VC Rs. 1 Lac = 4/2
Profit Rs. 2 Lac = 0.50 or 50%
30 PEG Ratio (Price to Earning (MPS/EPS)/Growth Rate MPS – Market Price Per If: =(10/8)/2.5%
Growth Ratio) in EPS Share MPS – Rs. 10 = 1.25/2.5
Or EPS – Earning Per Share EPS – Rs. 8 =0.50
PE Ratio / Growth Rate Growth in EPS expected Interpretation
in EPS 2.5% If PEG Ratio is above 1
then the Stock Price is
OR Overvalued
If PE Ratio is 10 If PEG Ratio is below 1
Growth Rate in EPS is 8 then the Stock Price is
 Then PEG Ratio 10/8 = Undervalued.
1.25 – Stock is Overvalued
by 0.25

If PE Ratio is 10
Growth in EPS is 15
Then PEG Ratio = 10/15 =
0.67 – Stock is
undervalued by 0.33

31 Economic Profit = IC * (ROC – WACC) IC – Invested Capital If Method 1

OR ROC – Return on Capital Invested Capital – 20 Lac = 20,00,000 * (7%-6.5%)
= NOPAT – Capital Employed NOPAT – 1.40 Lac (This = 20,00,000 * 0.5%
Charge NOPAT – Net Operating means ROC is 7%) = 10,000
Profit After Tax WACC is 6.5% Method 2
Capital Charge = IC * WACC = 1,40,000 –
(20,00,000*6.5%)
= 1,40,000-1,30,000
= 10,000
32 Enterprise Value (EV) = NOPAT * Where If EBIDTA is given and Tax
(1-g)/ROCI/(WACC-g) NOPAT – Net Operating Rate and Depn is given
Profit (PAT + Interest) then
g – Growth Rate First Work Out NOPAT &
WACC – Weighted Avg. then Calculate EV with
Cost of Capital the help of this Formula
ROCI – Return on Capital
Invested
33 Altman’s Z Score Z = 1.2A + 1.4B + 3.3C + A – Working Capital / Total 1. Positive A means Interpretation of Z Score
0.6D + 1.0 E Assets Ratio Company can meet its Z Score of 0 to 1.8 means
B – Retained Earnings / short term liabilities and Company is heading for
Total Assets Ratio has surplus funds to invest Bankruptcy.
C – EBIT / Total Assets and grow.
Ratio 2. A high B means that 1.8 to 3 means it is in
 D – Market Value of Company does not need Gray Area
Equity / Total Liability Ratio to borrow to fund its
E – Total Sales / Total growth. A positive sign. 3.00 and above means
Assets Ratio 3. High C means Company Strong Financials.
is making good use of its
Assets to generate profits.
4. A high D means
investors have confidence
in financial strength of the
Company.
5. A high E means that
Company is utilising its
Assets efficiently. This
means that a small
investment can generate
High Profit.
34 TOBIN’S Q Total Market Value of This ratio is about A Q Ratio of 0 to 1 means
Firm / Total Asset Value Relationship between that Cost to Replace its
of Firm Market Value of the Firm Assets is greater than its
and Replacement Value of Market Value and so the
Or its Assets. Stock is UNDERPRICED

Equity Market Value + A Q Ratio of Greater Than

Liability Market Value/ 1 means that the firm’s
Equity Book Value + Stock Value is more than
Liability Book Value the Replacement Cost of
its Assets and so the Firm
Or is OVERVALUED.
(It is presumed that
Liability Book Value and
Market Value is same)

Equity Market Value/

Equity Book Value