Finance Formula Cheat Sheet

Navigating the world of finance requires understanding and applying various formulas. This cheat sheet provides a quick reference to some of the most commonly used formulas across different areas of finance.

I. Time Value of Money

• Future Value (FV): FV = PV * (1 + r)^n

  Where: PV = Present Value, r = Interest Rate, n = Number of periods

  This formula calculates the value of an asset at a specified date in the future based on its current value and the interest rate it earns.

• Present Value (PV): PV = FV / (1 + r)^n

  This calculates the current worth of a future sum of money or stream of cash flows, given a specified rate of return.

• Annuity Future Value (FVA): FVA = PMT * [((1 + r)^n - 1) / r]

  Where: PMT = Payment amount per period

  This formula determines the future value of a series of equal payments made at regular intervals.

• Annuity Present Value (PVA): PVA = PMT * [(1 - (1 + r)^-n) / r]

  This calculates the present value of a series of equal payments made at regular intervals.

II. Financial Ratios

• Profit Margin: (Net Income / Revenue) * 100

  Measures the percentage of revenue that translates into profit.

• Return on Equity (ROE): (Net Income / Shareholder Equity) * 100

  Measures how efficiently a company is using shareholders' investments to generate profits.

• Debt-to-Equity Ratio: Total Debt / Shareholder Equity

  Indicates the proportion of debt a company is using to finance its assets relative to the value of shareholders' equity.

• Current Ratio: Current Assets / Current Liabilities

  Measures a company's ability to pay its short-term obligations with its short-term assets.

III. Investment Valuation

• Dividend Discount Model (DDM): P0 = D1 / (r - g)

  Where: P0 = Current Stock Price, D1 = Expected Dividend Next Year, r = Required Rate of Return, g = Dividend Growth Rate

  This model values a stock based on the present value of its expected future dividends.

• Capital Asset Pricing Model (CAPM): r = Rf + β * (Rm - Rf)

  Where: r = Expected Return on Investment, Rf = Risk-Free Rate, β = Beta, Rm = Expected Market Return

  This model calculates the expected rate of return for an asset or investment.

• Net Present Value (NPV): Sum of [CFt / (1 + r)^t] - Initial Investment

  Where: CFt = Cash Flow in period t, r = Discount Rate, t = Period

  Calculates the profitability of an investment by subtracting the present value of cash outflows from the present value of cash inflows.

• Internal Rate of Return (IRR): The discount rate at which NPV = 0

  The IRR is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

IV. Loan Calculations

• Loan Payment Formula: PMT = P * (r * (1 + r)^n) / ((1 + r)^n - 1)

  Where: P = Principal Loan Amount, r = Interest Rate per Period, n = Number of Periods

  Calculates the periodic payment required to repay a loan with a fixed interest rate over a specified period.

Disclaimer: This is a simplified cheat sheet and does not cover all financial formulas. Consult with a financial professional for specific advice.