Finance Class Formulas
15 essential formulas and financial ratios with detailed explanations, examples, and when to use them.
Present Value
PV = FV / (1 + r)^n
Discount a future cash flow back to today. Present value tells you what a future dollar is worth right now.
Future Value
FV = PV ร (1 + r)^n
Compound a present amount forward to find its future worth.
Net Present Value
NPV = ฮฃ CF_t / (1+r)^t - Initial Cost
Sum the present values of all project cash flows minus the initial investment. Positive NPV means value creation.
Internal Rate of Return
0 = ฮฃ CF_t / (1+IRR)^t - Initial Cost
The discount rate that makes NPV exactly zero. IRR tells you the project's implied percentage return.
WACC
WACC = (E/V)รRe + (D/V)รRdร(1-T)
Weighted average cost of capital blends the cost of equity and after-tax cost of debt using market-value weights.
CAPM
E(R) = Rf + ฮฒ ร (Rm - Rf)
The Capital Asset Pricing Model estimates the expected return on an asset based on its systematic risk (beta).
Gordon Growth Model
P = D1 / (r - g)
Value a stock based on a perpetually growing dividend stream. Also called the Dividend Discount Model for constant growth.
Bond Price
Price = ฮฃ C/(1+r)^t + FV/(1+r)^n
Price a bond by discounting all coupon payments and the face value at the yield to maturity.
Current Ratio
Current Ratio = Current Assets / Current Liabilities
Measures a firm's ability to pay short-term obligations. A higher ratio means more liquidity cushion.
Debt-to-Equity Ratio
D/E = Total Debt / Total Equity
Shows how much debt a company uses relative to equity. Higher D/E means more financial leverage and risk.
Return on Equity
ROE = Net Income / Shareholders' Equity
Measures how effectively a company uses equity capital to generate profit. DuPont analysis decomposes ROE into three drivers.
Payback Period
Payback = Years before full recovery + (Unrecovered cost / Cash flow in recovery year)
How long it takes for a project's cash flows to repay the initial investment. Simple but ignores TVM.
Profitability Index
PI = PV of Future Cash Flows / Initial Investment
Measures the bang for the buck. A PI above 1.0 means the project creates value per dollar invested.
Free Cash Flow to Firm
FCFF = EBIT(1-T) + D&A - CapEx - ฮNWC
Cash available to all capital providers after reinvestment. FCFF is the foundation of enterprise DCF valuation.
EBITDA Margin
EBITDA Margin = EBITDA / Revenue
Measures operating profitability before depreciation, amortization, interest, and taxes. Useful for comparing firms with different capital structures.
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