<p> Important formulas</p><p>Dividend Discount Model (Gordon’s formula):</p><p>Constant growth dividend discount model:</p><p>Po= D1/k-g</p><p>Multi stage dividend discount model:</p><p>1. Formula to calculate value of stock (for 2 years) by using multi-stage dividend discount model is:</p><p>1 2 2 Value of the stock= P0= D1 / (1+k) + D2 / (1+k) + P2 / (1+k)</p><p>2. Formula to calculate value of stock (for n years) by using multi-stage dividend discount model is:</p><p>1 2 n n Value of the stock= P0= D1 / (1+k) + D2 / (1+k) + ….+ Dn / (1+k) + Pn / (1+k) </p><p>Current Ratio = Current Assets / Current Liabilities</p><p>Working Capital = Current Assets – Current Liabilities</p><p>Acid Test Ratio = (Current Assets - Inventory) / Current Liabilities</p><p>Gross Profit Margin = Gross Profit / Net Sales*100</p><p>Operating Margin = Operating Income / Net Sales</p><p>Net Profit Margin = Net Profit / Net Sales*100</p><p>Earnings per Share = Profit Available to Shareholders/Average common shares outstanding</p><p>Leverage = Long term debt / total equity</p><p>Interest Coverage Ratio = Earnings before interest and tax / interest expense DPS (dividend per share) = Dividends paid to Shareholders / Average common shares outstanding</p><p>Dividend Yield = Annual Dividends / Current Market Share Price</p><p>P/E = Current Market Share Price / EPS</p><p>ROE = Net income after taxes/Stockholder’s equity</p><p>Book value per share = Stockholder’s equity excluding preferred shares/No. Shares Outstanding</p><p>ROA (Return on Asset) = Net income after tax/ total assets</p><p>SUE (standardized unexpected earnings) = (Actual quarterly EPS – Forecast quarterly EPS)/ Standardization variable</p><p>Bond price = PV (interest) +PV (principal) = CCF [1-1/(1+r)n]/r </p><p>OR</p><p>2 n n Bond price = CF1/(1+r) +CF2/(1+r) +...+CFn/ (1+r) +PAR Value/ (1+r) Where: </p><p>CF1= coupon payment for first year</p><p> nd CF2= coupon payment for 2 year and so on</p><p>Effective annual rate = (1+ r/n)n -1</p><p>Where: r= yield to maturity n = number of payments per year</p><p>Semi-annual realized Compound Yield = </p><p>RCY =[total ending wealth / purchase price of bond] ½*n – 1.0 n</p><p>Macaulay Duration = D = Σ PV (CFt) * t / Market price i=1 Where: t = the time period at which the cash flow is expected to be received n = the number of periods to maturity</p><p>PV (CFt) = present value of the cash flow in period t, discounted at the yield to maturity.</p><p>Market price = the bond's current price or present value of all the cash flows</p><p>Holding period return = Ending value – Beginning value + Income</p><p>Beginning value</p><p>Total risk = General risk + Specific risk OR</p><p>= Market risk + Issuer risk OR</p><p>= Systematic risk + Nonsystematic risk</p><p>Total Return = TR = Any cash payments received + Price changes over the period</p><p>Price at which the asset is purchased</p><p>TR = CFt + (PE - PB)</p><p>PB = CFt + PC</p><p>PB Where:</p><p>CFt = cash flows during the measurement period t</p><p>PE = price at the end of period t or sale price</p><p>PB = purchase price of the asset or price at the beginning of the period PC = change in price during the period, or PE minus PB</p><p>Cumulative Wealth Index = CWIn = WI0 (1 + TR1) (1 + TR2) … (1 + TRn) Where:</p><p>CWIn = the cumulative wealth index as of the end of period n WI0 = the beginning index value, typically $1</p><p>TR1, n = the periodic TRs in decimal form</p><p>Total return in Domestic terms = RR x Ending value of foreign currency</p><p>Beginning value of foreign currency </p><p>Where:</p><p>RR= Return Relative </p><p>Arithmetic Mean = = ΣX</p><p> n Or the sum of each of the values being considered divided by the total, number of values n.</p><p>1/n Geometric Mean = G = [(1 + TR1) (1 + TR2)... (1 + TRn)] – 1</p><p>Inflation Adjusted Returns = TRIA = (1 + TR) - 1 (1 + IF)</p><p>Where:</p><p>TRIA = the inflation-adjusted total return IF = the rate of inflation</p><p>Standard Deviation = </p><p>Where:</p><p>X = each value in the set = the mean of the observations n = the number of returns in the sample s = σ = (σ2)1/2 = standard deviation Expected Return for a Security = </p><p>Where:</p><p>E (R) = the expected return on a security' th Ri = the i possible return th Pi = the probability of the i return Ri m = the number of possible returns</p><p>The variance of returns = </p><p>Covariance between securities = m</p><p>σAB = Σ [RA,i – E (RA)] [RB,i – E(RB)] pri i=1 Where:</p><p>σAB = the covariance between securities A and B</p><p>RA = one possible return on 'security A</p><p>E(RA) = the expected value of the return on security A , m = the number of likely outcomes for a security for the period</p><p>Relating the Correlation Coefficient and the Covariance: ρAB = σ AB / σA σB</p><p>Return (TR) on security i = Ri = αi + βiRM + еi</p><p>Where:</p><p>Ri = the return (TR) on security i</p><p>RM = the return (TR) on the market index:</p><p>αi = that part of security i’s .return independent of market performance</p><p>βi = a constant measuring the expected change in the dependent variable, Ri given a change in the independent variable, RM</p><p>еi = the random residual error;</p><p>Required rate of return on asset i= ki = Risk-free rate + Risk premium CAPM equation: ki = RF + βi [E (RM) - RF] Where: ki = the required rate of return on asset i</p><p>E(RM) = the expected rate of return on the market portfolio</p><p>βi = the beta coefficient for asset i Risk premium for security i = βi (market risk premium) = βi [E (RM) - RF]</p><p>Market value of a portfolio = Rp=VE -VB ⁄ VB Where:</p><p>VE is the ending value of the portfolio and VB is its beginning value.</p><p>Reward–to-variability ratio =RVAR = [TRp - RF] / SDp = Excess return / risk</p><p>Reward-to-volatility ratio = RVOL = [TRp - RF] / βp</p><p>Basis risk of futures= Cash price - Futures price</p><p>Stocks estimated value = V0 -/Estimated EPS x expected P/E ratio</p>