CA Final – SFM Formula Sheet

❖ Risk Management ❖ Security Analysis ❖ Valuation of Debentures

and Bonds
∑(x−x̅)𝟐 Gordon’s Dividend Growth Model :
Variance :
n
D1 Bond Value :
Current Stock Price(P) =
where x is observation, n is number k−g n
C M
of observations and 𝑥̅ is the mean of P0 = ∑ +
Where, (1 + y) t (1 + y)n
observations. t=1
D1 is value of next year dividend, Or,
Standard Deviation : σ = k is the minimum rate of return,
√Variance g is growth rate of dividend. P0 = C (PVIFA y, n) + M (PVIF y, n)
Current Market Price Where,
PE Multiple : P0 = Bond price; n = Maturity period;
(x−x̅)(y−y
̅) Earnings per share
Covariance: ∑ n C = Coupon; y = YTM; M = Maturity
Confidence Index : value
Cov(X,Y) Avg yield on high grade bond
Correlation : ρ = Alternate Formula :
σx σy Avg yield on low grade bond
C 1 M
Where, Cov (X,Y) is covariance Arithmetic Moving Average : Po = x [1 − n
]+
y (1 + y) (1 + y)n
𝜎 is Standard Deviation AMA n, t = 1/n [Pt + Pt-1+ … + Pt-(n-1)] Bond value (when coupon
Where, payments are semi-annual) :
Standard Deviation of portfolio:
N is number of total periods and t is 2n C
period. 2 M
σp = √σ12 + σ22 + (2(σ1 σ2 ρ)) Po = ∑ y t+ y 2n
Exponential Moving Average: t=1 (1 + 2) (1 + 2)
Where 𝜎1 standard deviation of 1st
EMA t = aPt + (1-a) (EMAt-1)
Where,
security and 𝜎2 is standard deviation
2
of 2nd security. Where, a(exponent) = 2n = Maturity period expressed in
n+1
terms of half-yearly periods; C/2 =
Or,
N Is number of days, Pt is price of Semi-annual coupon; y/2 = Discount
today and EMAt-1 is previous day rate applicable for half-year period
w12 σ12 + w22 σ22 + EMA.
√
(2(w1 w2 σ1 σ2 ρ)) Bond Basic Value (between 2
For Run tests,
coupon dates) :
Where w1 & w2 is the weight of 2n1n2
respective securities in the portfolio
Mean = + 1, Present Value of (A + Coupon)
n1+n2
− Accrued Interest
Value at Risk (VAR) : where n1 and n2 are sign changes,
Where,
σp x Portfolio Value x Cumulative Z Variance = A = Bond price calculated as on next
2n1n2 (2n1n2−n1−n2)
score x √N Days coupon date after payment of
(n1+n2)(n1+n2) (n1+n2−1) coupon
Where, Z score indicates how many Present value of (A + Coupon)
Number of runs : Runs lies between
standard deviation away from mean =
A + Coupon
μ ± t(σ) , where
Req. YTM Time until next coupon

Market Capitalisation: Total t is distribution with degree of (1 + ) Total coupon period

No. of periods
number of shares × Market price of freedom (DoF) & DoF – Number of
share Runs – 1
 Accrued Interest Where, t is Time; c is Coupon; I is In simple terms,
Coupon rate Interest rate; P is Principal; n is
= Face Value x x 1
No. of periods Maturity and M is Maturity value Convexity =
P (1 + y)2
n
Time elapsed Or CFt x t x (t + 1)
+ ∑
Total coupon period (1 + y)t
t=1
1+y (1 + y) + t(c − y)
−
𝑦 C((1 + y)t − 1) + y
Coupon Conversion Value of Debenture :
Current Yield: Where, Y is yield to maturity
Current market price Price per equity share x Converted
Modified Duration: no. of shares per debenture
Yield To Maturity (YTM) :
NPV at LR
Macaulay Duration Value of Warrant : (MP – E) x n
LR + NPV at LR −NPV at HR x (HR − LR) =−
YTM Where,
(1 + n )
Where, MP is Current Market Price of Share
Where,
LR = Lower Rate; HR = Higher Rate E is Exercise Price of Warrant
YTM is Yield to Maturity; n is Number
n is No. of equity shares convertible
of compounding periods per year
with one warrant
YTM (Approximate Formula) : Or,
(F−P)
C± C
n n x (M − y) Yield on Treasury Bills:
C 1
F+P (1 − )+
y2 (1 + y)n (1 + y)n+1 FV − Issue Price 365
2 x
P Issue Price Maturity
Where,
C is coupon, F is face value, P is Convexity adjustment: Yield on Commercial Bills/
market price of bond/issue Price, n is Δy2 Certificate of Deposit/ Commercial
years to maturity C* x x 100 Paper:
2

Where, FV − Sale Value 365

Yield To Call : x
C* is Convexity formula; Δy is Change Sale Value Maturity
n in yield for which calculation is done
C Call price
Po = ∑ + Dirty Price = Clean Price + Accrued
(1 + y) t (1 + y)n
t=1 Interest
V+ +V− −2V0
Where y is Yield to Call and n is Call Convexity Formula :
V0 (Δy)2
Start Proceeds in Repo
period
Where, V+ is Price of Bond if yield Dirty Price
increases by Δy Nominal Value x x
100
Yield To Put : V– = Price of Bond if yield decreases
100 − Initial Margin
by Δy
n 100
C Put price V0 = Initial Price of bond; Δy = Change
Po = ∑ +
(1 + y)t (1 + y)𝑛 in Yield Repayment at Maturity in Repo
t=1

Where y is Yield to Put and n is Put Alternate Formula: Start Proceeds x (1

No, of days
period t(t + 1)C n(n + 1)M + Repo Rate x )
∑nt=1 + 360
(1 + y)n+2 (1 + y)n+2
P
Macaulay Duration :

txc nxM
∑nt=1 +
(1 + i)t (1 + i)n
P
❖ Security Valuation Where, PE or Multiple Approach
D0 is Dividend Just Paid,
Expected Return : Value of an Equity Share = EPS X PE
g1 is Finite or Super Growth Rate
g2 is Normal Growth Rate Ratio
(Rx) = Rf + βx (Rm - Rf)
Ke is Req. Rate of Return on Equity
Enterprise Value (EV)
Where, Pn is Price of share at the end of
Rx is expected return on equity Super Growth. FCFF
EV =
Rf is risk-free rate of return K−g
βx is beta of "x" H Model
Where,
Rm is expected return of market t
D0 X 2 X (gs − gL ) D0 (1+gL ) FCFF is Free cash flow to firm
P0 = +
(Ke − gL ) (Ke − gL ) k is Weighted Average cost of Capital
Equity Risk Premium :
g is Growth rate
(Rx -Rf ) = βx (Rm - Rf) Where,
gs is super normal growth rate
Equity Valuation for a holding gL is normal growth Theoretical Ex-Right Price (TERP)
period of one year t is time period
nP0 +S
TERP =
n+ n1
P0 = D1+1+KP1 Gordon’s Model (Earnings
e
Approach) Where,
Where, n is Number of existing equity shares,
EPS1 (1−𝑏) P0 is Price of Share Pre-Right Issue,
𝐷1 – Dividend at the end of year 1, 𝑃1 - P0 =
(Ke − br ) S is Subscription amount raised from
Price at the end of Year 1 & 𝐾𝑒 – Cost
Right Issue &
of Equity. Where, n1 is No. of new shares offered
P0 is Price per share
b is Retention ratio Value of Right
Valuation of Equity – Zero Growth r is Return on Equity
D br is Growth Rate (g) P0 − S
P0 =K Value =
e n

Where, D is Dividend at the end of Value of Preference Share :

Gordon’s Model (Dividend
year 1.
Approach) D1 D2 Dn +Maturity Value
(1+r)1
+ (1+r)2
+ …… + (1+r)n
Valuation of Equity – Constant D1 (1−b)
Growth P0 = Where,
(Ke − br )
1D D1 is Dividend at the end of Year 1
P0 = 𝐾 −𝑔 Where, D2 is Dividend at the end of Year 2
𝑒
D1 is dividend at the end of year 1 Dn is Dividend at the end of Year n
Where, D1 = D0 (1+g), g is growth rate r – Cost of Preference Shares
Walter’s Model
Valuation of Equity – Two Stage
Growth D0 + (E−D)
r
Ke
P0 =
D0 (1+g1 ) D0 (1+g1 )2 (Ke )
P0 = [ + + …….
(1+Ke ) (1+ke )2
Where,
D0 (1+g1 )n Pn
+ n
]+ E is earning per share and D is
(1+ke ) (1+ke )n
dividend per share for the just
D0 (1+g1 )n (1+g2 ) concluded year
Pn =
(Ke − g2 )
❖ Portfolio Management 𝜎𝑖 – standard deviation of Individual 𝜎𝑖 is Standard deviation of security 1
security return 𝜎𝑗 is Standard deviation of security 2
Expected Return :
n 𝜎𝑚 is standard deviation of market 𝑤𝑖 is Weight of security 1 in portfolio
̅) = ∑ Xi p(Xi )
(X return 𝑤𝑗 is Weight of security 2 in portfolio
i=1 r is correlation of individual security 𝑟𝑖𝑗 is correlation between security 1

Where, return (i) and market return (m) and 2

𝑋𝑖 is Possible Returns of a security,
P (X i ) is Related probability & Beta Under Regression Method Portfolio Risk with different
̅ is Expected Return
X correlation coefficient :
(n ∑ xy − ∑ x ∑ y)
Variance :
β=
n ∑ x 2 − (∑ x)2 when r is 0, (σp )
n Or,
= √w12 . (σ1 )2 + w22 (σ2 )2
̅)2 . p(X i )
(σ2 ) = ∑ (X i − X ∑ xy − nx̅y̅
i=1 β= when r is + 1, (σp ) = (𝑤1 𝜎1 + 𝑤2 𝜎2 )
∑ x 2 − nx̅ 2
2 when r is − 1, (σp ) = (𝑤1 𝜎1 − 𝑤2 𝜎2 )
Where, σ is Variance
where,
Standard Deviation : 𝑥 is independent market return Covariance :
𝑦 is dependent stock return
∑n ̅ 2
i=1 (Xi −X)
Cov(x, y) = rxy . σx σy
SD = √variance = √σ2 = √
n
Beta (Slope of line) : Where,
Covariance :
𝑦 = α + βx 𝑟𝑥𝑦 – correlation between x and y
n
̅) (Yi − Y
Cov (X, Y) = ∑(Xi − X ̅) /n Where,
I=1 𝛼 − alpha, intercept value Standard Deviation of portfolio :
Where, 𝛽 −Beta, Slope of the line n n
X is security 1 2
σp = ∑ ∑ xi xj . rij . σi . σj
Portfolio Return :
X is Mean of security 1
̅
i=1 j=1
Y is security 2 Or,
̅ is Mean of security 2
E(R)p = ∑ R i wi
Y n n
n is no. of observations
Where, 2
σp = ∑ ∑ xi xj . σij
𝐸(𝑅)𝑝 is Portfolio Return i=1 j=1
Correlation Coefficient 𝑅𝑖 is Return on Stock Where,
𝑤𝑖 is Weightage of stock in the 𝑥𝑖 : weightage of security 1 in portfolio
Cov(X, Y)
rXY = portfolio 𝑥𝑗 : weightage of security 2 in portfolio
σ X . σY
𝑟𝑖𝑗 is correlation between security 1
Where, Portfolio Risk: and 2
𝜎𝑋 is standard deviation of X (σp)2 = wi2 . (σi )2
+ wj2 . (σj )
2

𝜎𝑌 is standard deviation of Y + 2σi σj rij wi wj Variance of portfolio for 3

Securities :

= wi2 . (σi )2 + wj2 . (σj )

2 σ2 = [2σy σz wy wz ryz ] +
Beta Under Correlation Method
+ 2Cov(𝑖, 𝑗)wi wj [2σx σy wx wy rxy ] + [2σx σz wx wz rxz ] +
rim σi Cov(i,m) 2 2
β= Or [(σx )2 (wx )2 + (σy ) (wy ) +
σm (σm )2 (σz )2 (wz )2]
Where,
Where, i is security 1 & j is security 2
𝛽 is Beta (degree of dependency of 𝜎𝑝 is Portfolio risk Where, x, y & z are Security 1, 2 & 3
returns / risk) (𝜎𝑝)2 is Portfolio variance? respectively
Slope of Capital Market Line (CML): Risk (SD) of portfolio – Sharpe Weight to achieve Minimum
Model: Variance Portfolio :
Rm − Rf
n 2 [ σB 2 − rAB σA σB ]
σm 2 WA = 2
(σp ) = [∑ xi βi ] . (σm )2 σA + σB 2 − 2rAB σA σB
Where,
i−1
R 𝑚 is Market return Relationship of weight of securities
n
𝑅𝑓 is Risk free rate of return 2 in Minimum Variance Portfolio :
+ [∑(x i )2 (σϵi ) ]
𝜎𝑚 is Market risk (SD of market) 𝑊𝐵 = 1−𝑊𝐴
i−1
Slope is reward per unit of risk borne
Sharpe ‘s Optimal Portfolio :
Return of the portfolio – Sharpe
Expected return of the portfolio
Model: Calculation of cutoff point (C*):
(using CML): n
n
2
(R i − R f )βi
Rm − Rf σm . ∑
E(R p) = Rf + ( ) . σp E = ∑ xi (αi + βi R m ) σei 2
σm i−1
i=1
𝒏
Where, σp is Portfolio risk 2
βi 2
Alpha of the portfolio : 1 + σm ∑
σei 2
Expected return of the portfolio 𝒊=𝟏
(using CAPM):
n Highest C value is taken as cut off
αp = ∑ xi αi point (C*)
E(R) = R f + β(R m − R f )
i=1 Calculation of weights :
Expected return of the stock – Zi
Where, n
Sharpe Model :
𝑥𝑖 is weightage of ‘x’ security in ∑ zi
R i = αi + βi R m +∈i portfolio i=1
𝛼𝑖 is intercept of the straight line or
Where, Where,
alpha co-efficient
𝑅𝑖 is Expected return on a security i β Ri −R0
Zi = [ × C∗]
𝛼𝑖 is intercept of the straight line or Beta of the portfolio: σ2ei βi
alpha co-efficient n 2
𝜎𝑚 𝑖𝑠 Variance of the market
𝛽𝑖 is slope of straight line or beta co- βp = ∑ wi βi
efficient i=1
Σei 2 is Stock’s unsystematic risk
𝑅𝑚 is rate of return on market index
Expected return using SML : Rm −Rf
𝜖𝑖 is error term Sharpe Ratio: S =
σi
Expected risk of the stock – Sharpe Rm − Rf
ER = R f + σim [ (σ )2 ] Rm −Rf
Model : m Treynor Ratio: T =
βi
(σi )2 2 2
= (βi ) . (σm ) + (σϵi ) 2 Expected return – Arbitrage Pricing
Jensen Alpha :
theory : ER = R f + λ1 β1 +
Where, λ2 β2 … λn βn Or, Alpha(α) = A(R) − E(R)
(𝜎𝑖 )2 is variance of the security = R p − (R f
ER = R f + (EV1 − AV1 )β1
𝛽𝑖 is slope of straight line or beta co- − β(R m − R f ))
+ (EV2
efficient − AV2 ) β2 … … (EVn Where,
(𝜎𝑚 )2 is market variance − AVn )βn
2
(𝜎𝜖𝑖 ) is Variance of errors Jensen’s Alpha is α
Where, λ 𝑖𝑠 Risk premium for the A(R) is Actual return
Covariance between securities – factors like GDP, inflation, interest E(R) is Expected Return as per CAPM
Sharpe Model : rate, etc

(σij ) = (βi ) . (βj ) (σm )2 (𝐸𝑉𝑛 − 𝐴𝑉𝑛 ) – Surprise Factor due to

change in Value of Factor
❖ Mutual Funds Δ in value of stock Binomial Model :
Beta :
Δ in value of INDEX
NAV per unit : ert −d
Value of futures contracts to be Probability : p =
Net Assets of the Scheme)/(No. of u−d
units outstanding) hedged : Portfolio Value x Beta of Where,
the portfolio
Where, Su
u=
net assets of the scheme = ❖ Derivative Analysis and S0
Su is spot going up & S0 is current
Market value of Investments + Valuation - Options
spot
Receivables + Other accrued income
+ Other assets – Accrued expenses – Long call payoff : Max (0, (ST – X))
Sd
Other payables – Other liabilities Where, d=
S0
ST – Spot price at Maturity Date
X – Strike Price Sd is spot going down
Tracking Error (TE) :
̅ 2 Short call payoff : Min((X – ST), 0) Present Value :
√∑(d−d)
n−1 (P) x (u)+(1−P) x (d)
Where, Long put payoff : Max(0, (X - ST))
ert
d is Differential return
d’ or d̅ is Average differential return Short put payoff : Min((ST - X), 0)) Black Scholes Merton Method:
n = No. of observation
Delta (Δ): C = S0 N(d1) – K e-rt N(d2)
Change in the price of the option
❖ Derivative Analysis and
Change in the price of the stock S0 σ2
Valuation – Futures ln( )+(r+
K 2
)T
d1 =
σ√T
Gamma (ɣ):
Basis : Spot Price – Futures Price
Change in the price of the option
d2 = d1 – σ√T
Annual Compounding : Change in delta
A = P(1+r/100)t
where, C is Call Value , S0 is Spot
Where, Theta (θ) :
Price
A is Compounded amount,P is Change in the price of the option
Principal amount,r is Rate of interest Change in time period
N(d1) - hedge ratio of shares of
& t is Time period stock to Options.
Vega (V) :
Change in the price of the option
Interval Compounding : K e-rt N(d2) – borrowing equivalent
Change in Volatility
A = P(1+r/n)nt to PV of the exercise price times an
Where, n is no of intervals Rho (ρ): adjustment factor of N(d2)
Change in the price of the option
Continous Compounding : Futures price of Commodity :
Change in Interest rate
P x ert = X
Where, (S0) x e(r+s-c)t
e is Epsilon and X is Future Value Put Call Parity :
C + (K x e-rt) = P + S0 Where,
Futures Price : Where, S0 is Spot price
F = S x e(r-y)t C is Value of call r is Rate of interest
Where, K is Strike price s is Storage cost
F is Future Value ,S is Spot Value & y is e-rt is Present Value c is convenience yield
Dividend Yield P is Value of Put t is time.
S0 is Spot price
Contract Value : Lots size × Futures
Price
❖ Foreign Exposure and Risk Expected Spot Rate = dtm is days of loan (FRA Specified
Management Current Spot Rate (Direct Q) x period)
1+Domestic Inflation Rate
DY is Total number of days (360 or
Relationship between direct and 1+ Foreign Inflation Rate
365 days)
indirect quote:
International Fisher Effect :
Direct Quote = 1/(Indirect Quote) Expected Spot Rate
= Interest Rate Cap =
Current Spot Rate
dt
1+ Domestic interest rate (N) max(0, R A − R C ) .
Ask−Bid Days in year
% Spread = x 100 1+Interest rate in Foreign market
Bid Where,
❖ International Financial N is notional principal amount of
Forward Rate = Spot Rate ± Management the agreement,
Premium/Discount 𝑅𝐴 is actual spot rate on the reset
Modified IRR
date
MIRR =
𝑅𝐶 is cap rate (expressed as a
Forward Premium % = n
√
FV (Positive Cash Flows, Reinvestment rate)
−PV (Negative cash Flows, Finance rate) decimal)
Forward Premium
x 100 -1 dt is the number of days from the
Spot Rate
Where, interest rate reset date to the
n is number of years of the project payment date
Forward Premium (Annualised) :

Forward Premia 12 X Interest Rate Floor

x x 100 𝐀𝐏𝐕 = −I0 + ∑nt=1 (1+K)
t
t +
Spot Rate Given Period dt
T S =(N) max(0, R F − R A ) .
∑nt=1 (1+it )t + ∑nt=1 (1+it )t Days in year
d d

Forward Rate as per Covered Interest Rate Collar :

Where,
Interest Parity : Payment = (N)[max(0, R A −
I0 is Present Value of Investment dt
R C ) − max(0, R F − R A )]. Days in year
= Current spot rate (Direct Q) x Outlay
Xt
1+ Current domestic interest rate is present value of operating
(1+K)t Interest Rate Swaps :
1+ Interest rate of foreign market
cash flow t d
Tt
Rate Payment = N. (AIC). 360
is present value of Interest
Expected Future Spot Rate as per (1+id )t Where,
Uncovered Interest Parity: Tax shields N is notional principal amount of
St
= Current spot rate (Direct Q) x is present value of Interest the agreement,
(1+id )t
AIC is All In Cost (Interest rate –
1 + Current domestic interest rate subsidies
1 + Interest rate of foreign market
fixed or floating)
dt is number of days from the
❖ Interest Rate Risk interest rate to the settlement date
Purchasing Power Parity (Absolute Management
Form) : ❖
Settlement amount on FRA ❖ Corporate Valuation
Spot Rate dtm E
Price level in domestic market N(RR−FR)(
DY
) Beta of Assets : βa = βe [ ]+
=αx E+D(1−t)
Price level in foreign market [1+RR(
dtm
)] D
DY βd [E+D(1−t)]
Where,
Where, Where,
α = Sectoral constant for adjustment
N is notional principal amount 𝛽𝑎 − Ungeared or Asset Beta
RR is Reference Rate prevailing on 𝛽𝑒 – Geared or Equity Beta
Purchasing Power Parity (Relative the contract settlement date 𝛽𝑑 – Debt Beta
Form) : FR is Agreed-upon Forward Rate E – Equity
D is Debt
t is Tax rate
P/E to Growth Ratio:
PE Ratio
A glimpse of our Engaging Videos
PEG Ratio = g x 100
Where,
P is Market Price per share
E is Earnings per share
g is Growth rate of EPS

Enterprise Value:
EV = MC + D − C
Where,
MC is Market capitalization,
D is debt and C is Total Cash
Equivalents.

Economic Value Added

EVA =
✓ Simple Conceptual Explanations
NOPAT − Capital Charge =
✓ 517+ Illustrations
EBIT (1 − tax rate) − Key Features ✓ Comprehensive Coverage of SM, Past Exams, RTPs
Invested Capital ∗ WACC
& MTPs
Where,
SFM by 1FIN
✓ Formula Sheet for Every Chapter
NOPAT = Net Operating Profit After ✓ Expert Faculty with 15+ years of experience
Taxes, EBIT – Earnings before
Interest and Tax
WACC – Weighted Average Cost of
Capital
Invested Capital = Total Assets
minus Non-Interest-Bearing
Liabilities

Note: Adjust EBIT and Invested Capital

for non-cash charges (other than
depreciation) like provisions for
doubtful debts, P&L adjustments.

Market Value Added (MVA):

MVA = MV of E & D – Invested
Capital
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SFM Faculty & Director, 1FIN

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