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MAF302 Formula Sheet 2010 

Future Value Present Value


FV = C n * (1 + r ) n
PV =
Cn
(1 + r ) n
PV of a Perpetuity of $1 per year PV Ordinary Annuity
$1 ⎡1 − (1 + r ) − t ⎤
PV = =
PV C ⎢
r ⎥
⎣ r ⎦
Net Present Value Put Call Parity
C C2 Cn Value of call + PV of exercise price =
NPV = C0 + 1 + + ... + Value of put + share price
1 + r (1 + r ) 2
(1 + r ) n

One-period binomial option pricing model Black-Scholes Call Option Formula


pCu + (1 − p )Cd Call Value = [N(d1) x P] – [N(d2) x PV(EX)]
C=
1+ r where
where
ln( PV (PEX ) ) v t
rf − d d1 = +
p = probability of upside change = v t 2
u−d
d 2 = d1 − v t
or N(d) = cumulative normal probability function
PV(EX) = present value of exercise price
C = Δ × S 0 − PV (ΔSu − Cu ) or t = number of periods to exercise date
C = Δ × S 0 − PV (ΔS d − Cd ) P = current price of stock
v = standard deviation per period
ln = natural logarithm

Option Delta Adjusted Present Value (APV)


spread of possible option prices APV = base-case NPV + PVs impact of financing
Δ=
spread of possible stock prices
Weighted Average Cost of Capital Value of a firm or a project
⎛D⎞ E
WACC = rD (1 − TC )⎜ ⎟ + rE FCF1 FCF2 FCFH PVH
⎝V ⎠ V PV = + + ... +
(1 + wacc)1 (1 + wacc)2 (1 + wacc) H (1 + wacc) H
or
⎛D⎞ E P FCFH × (1 + g )
WACC = rD (1 − TC )⎜ ⎟ + rE + rP where PVH =
⎝V ⎠ V V wacc − g
where
rD, rE and rP = expected returns on debt, ordinary
equity and preference equity respectively
TC = the marginal tax rate
D, E and P = the market values of debt, equity and
preference respectively

MM’s Proposition II Value of Lease


The required rate on equity (rE) increases in line If LCFt is the lease’s cash outflow in period t, the value of
with the debt-equity ratio calculated using market an N-period lease of an asset costing INV is:
values (D/E) N
LCFt
D NPVLease = INV − ∑
rE = rA + (rA − rD ) × t =0 [1 + r (1 − TC )]
t

MAF302 Formula Sheet 
MAF302 Formula Sheet 2010 

PV of an annuity due Interest tax shield


⎡1 − (1 + r ) ⎤
−t
Tax shield = D × rD × Tc
PV = C ⎢ ⎥ (1 + r )
⎣ t ⎦
Merger Gains Merger Costs (when cash is used)
Gain = PVAB – (PVA + PVB) = ∆PVAB Cost = cash paid – PVB

Merger Costs (when stock is used) Merger NPV (when cash is used)
Cost = xPVAB – PVB NPV = gain – cost
x = the fraction of the combined firm given to B = ∆PVAB – (cash – PVB)

Merger NPV (when stock is used)


NPV = gain – cost
= ∆PVAB – (xPVAB – PVB)

MAF302 Formula Sheet 

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