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Formula Sheet

Present value of perpetuity

PV=cr

Present value of growing perpetuity

PV=C1r-g

Present value of annuity

PV=cr1-11+rT

Bond Price =

Bond Price =

Capital Asset Pricing Model

ERi=Rf+βiERm-Rf

Equity Risk Premiums

Implied Equity Risk Premium = Expected Return on the Stock index - T.Bond rate

Emerging Market ERP

= Implied Equity Risk Premium in developed market +

Operating Leverage

Fixed Costs Measure = Fixed Costs / Variable Costs

EBIT Variability Measure = % Change in EBIT / % Change in Revenues

Beta and leverage

βlevered=βunlevered×1+1-tC×DE

Weighted Average Cost of capital

WACC = wE RE + wD RD(1TC) + wP RP

Operating Cash Flow

OCF = EBIT + depreciation – taxes

= (Sales – Costs) (1 – tC) + tC Depreciation

= (Sales – Costs) – (Sales – Costs – Depreciation ) tC

Cash Flow From Assets or Equity (also known as Free Cash Flow to Firm or Equity)

CFFA (or FCFF) = OCF – Net capital spending– Changes in NWC

CFFE (or FCFE) = CFFA – after tax interest –Net Debt issues

Some examples where we used these formulas in weeks 1-4:

Using the present value of growing perpetuity formula to solve a implied equity risk premium problem:

Week 2, Tutorial Question 1

You are trying to estimate the implied equity risk premium to use for an emerging market and have been provided with the following information:

* The equity index for the market is currently trading at 10,500

* Based upon earnings in the just completed financial year, the market trades at a price earnings ratio of 10.

* Earnings are expected to grow 5% a year in perpetuity and firms are expected to pay out 60% of their earnings as dividends in perpetuity.

* The riskfree rate for the market is 5.2%.

Estimate the implied equity risk premium for the emerging market, using the information supplied in the problem.

Present value of growing perpetuity

PV=cr-g

(You have used this formula extensively in constant...