Chapter 2 Risk Management

1) VaRt days = Z Score x SDt days

2) SDt days =SD1 day x √t days

VaRt days = Z Score x SD1 day x √t days
i.e.
VaRt days = Z Score x SDt days
VaRt days = VaR1 day x √t days
 Chapter 3 Security Analysis

1) Dividend Growth Model

D ( 1)
P(0)=
(k-g)

With growth,
D0 (1+g)
P(0)=
(k-g)

2) PE Multiple Approach
bE(1)
P(0)= (k-g)

or
bE0 (1+g)
P(0)=
(k-g)

(No. of Advancing Stocks-No. of Declining Stocks)

3) ABI= Total Issues Traded

Total Issues Traded= Advancing Stocks + Declining Stocks + Stocks

Avg YTM (Best Grade Bonds)

4) Confidence Index= Avg YTM (Intermediate Grade Bonds)

5) RSI = (% Change in Stock price) / (% Change in Index)

6) Arithmetic (Simple) Moving Average (AMA):

1
AMAn,t = [Pt +Pt-1 +…+Pt-(n-1) ]
n
𝐢. 𝐞.
Total of the closing prices in a data
AMAn,t =
number of observation

7) Exponential (Weighted) Moving Average (EMA):

EMA= [CP x e]+ [Previous EMA x (1-e)]
CP= Current Closing Price, e = exponent in decimals=2/n+1
 3. Security Analysis
8) Run Test Analysis:
1. Total Number of Runs (r)
2. Number of positive price changes (n1)
3. Number of negative price changes (n2)
2n1 n2
4. Mean (µ) =n1+n2 + 1
2n1n2(2n1n2-n2-n2)
5. Standard Deviation (σ)=√ (n1+n2)2 (n1+n2-1)

6. Lower limit: [µ - t (σ)]

7. Upper limit: [µ + t (σ)]
Where, t = value from t table at the confidence level (5%) for given degrees
of freedom (between 5.76596)

9) Explain Buy and Sell Signals Provided by Moving Average Analysis

Buy Signal Sell Signal
Stock price line rise through the Stock price line falls through
moving average line when graph of moving
the moving average line is flattering average line when graph of the
out. moving average line is flattering out.
Stock price line falls below moving Stock price line rises above moving
average line which is rising. average line which is falling.
Stock price line which is above Stock price line which is slow
moving average line falls but moving
begins average line rises but begins to fall
to rise again before reaching the again before reaching the moving
moving average line average line.
 Chapter 4 Security Valuation

1) Internal Rate of Return Factor:

Net initial investment
Internal rate of Return Factor=
Annual cash inflow

2) CAPM:
Rx= Rf+βx (Rm-Rf)

3) Valuation
1. Dividend Based:
i. Single Period Holding
D1 P1
1
+
(1+ Ke ) (1+ Ke )1

ii. Multi Period Holding

a. Zero Growth Model:
D
P=
Ke

b. Constant Growth Model:

D0 (1+g)
P= [ ]
Ke -g

c. Variable Growth Model:

 Two Stage Dividend Discount Model
D0 (1+g1 ) D1 (1+g1 ) Dn-1 (1+g1 ) Pn
P0 = [ + +… ]+
(1+Ke ) 1 (1+Ke ) 2 (1+Ke ) n
(1+Ke)n

 Three Stage Dividend Discount Model

D0 (1+gn ) D0 H1 (gn +gc )
P0 [ + ]
(Ke -gn ) ke +gn

 H Model
 4. Security Valuation
D0 (1+g1 ) D1 (1+g1 ) D2 (1+g1 ) D3 (1+g2 ) D4 (1+g2 ) Dn-1 (1+g2 ) Pn
[ 1
+ 2
+ 3
]+[ 4
+ 5
+…+ n
]+
(1+Ke ) (1+Ke ) (1+Ke ) (1+Ke ) (1+Ke ) (1+Ke ) (1+Ke)n

2. Earning Based
i. Gordons Model
EPS1 (1-b)
Ke-br

ii. Walters Model

r
D+ (E-D)
Ke
P= Ke

iii. PE Multiplier
Market Price = EPS x PE Ratio
PAT-Preference Dividend
EPS=
No. of Equity Shares

3. Enterprise Value
EV = Market Value of Equity
+ Market Value of Preferred Equity
+ Market Value of Debt
+ Minority Interest
- Cash and Investments.

i.Enterprise value to EBITDA Multiple

Enterprise Value
Enterprise Multiple=
EBITDA

ii.Enterprise value to Sales multiple

Enterprise Value
Enterprise Multiple=
Sales

4) Free Cash Flows to Firm (FCFF):

1. Based on its Net Income:
 4. Security Valuation
FCFF= EAT + I(1-t) + D -/+ Capex -/+ ∆WC

2. Based on Operating Income or Earnings Before Interest and Tax

(EBIT):
FCFF= EBIT (1-t) + D -/+ Capex -/+ ∆ Non Cash WC

3. Based on Earnings before Interest, Tax, Depreciation and

Amortization (EBITDA):
FCFF= EBITDA (1-t) + D* tax rate -/+ Capex -/+ ∆Non Cash WC

4. Based on Free Cash Flow to Equity (FCFE):

FCFF= FCFE +I (1-t) + Principal Prepaid– New Debt + Pref. Dividend

5. Free Cash Flows to Equity (FCFE)

FCFE = EAT + D -/+ Capex -/+ ∆WC+ New Debt- Debt Repayment
Capital Expenditure
Capex = Closing FA + Fixed Asset Sold + Depreciation – Opening FA

5) One Stage, Two Stage and Three Stage Model for the Valuation of the
firm
1. For one stage Model:
Intrinsic Value = Present Value of Stable Period Free Cash Flows to Firm

2. For two stage Model:

Intrinsic Value = Present value of Explicit Period Free Cash Flows to Firm
+ Present Value of Stable Period Free Cash Flows to a Firm,
or
Intrinsic Value = Present Value of Transition Period Free Cash Flows to Firm
+ Present Value of Stable Period Free Cash Flows to a Firm

3. For three stage Model:

Intrinsic Value = Present value of Explicit Period Free Cash Flows to Firm
+ Present Value of Transition Period Free Cash Flows to Firm
+ Present Value of Stable Period Free Cash Flows to Firm
 4. Security Valuation

6) Right Share
Ex-Right Price of shares
nP0 +n1 S
Ex-Right Price (P1 )=
n+n1
Value of the Right
No. of right shares
Value of right= x (Market price-Subscription price)
Total Holding (Old+New)
n1 (Po-S)
Value of right=
n+n1
Alternatively
Value of right=P0 -P1
Ex Right Price (P1 ) = Market Price before right issue (Po) − Value of the Right

7) Value Preference Shares

1. Value of the redeemable preference shares
Dividend1 Dividend2 (Dividendn +Maturity Value)
+ +…+
(1+r)1 (1+r)2 (1+r)n
2. Value of the irredeemable preference shares
Preference Dividend
MP=
Required return on Preference Shares

8) Value of bond
BV= I x PVAFYTM, n + RV x PVFYTM, n
Where,
BV = Value of the bond or Theoretical Market Price or Intrinsic Value of the
bond [Present value of all the future cash flows]
I = Annual interest payable on the bond
RV = Redemption value of the bond. [May be at par, premium or discount]
n = maturity period of bond
YTM = yield to maturity or required rate of return or going rate on new bond
with same risk
Bond’s Value with semi-annual interest rate
 4. Security Valuation
I
BV= x PVAFYTM + RV x PVFYTM
2 2
, 2n
2
, 2n

9) Current Yield
Interest
Current Yield= x 100
Market price

10) Yield to Maturity

1. Average Method

(RV-MV)
C+
YTM= n
(RV+MV)
2
2. Discounted Cash Flow Method (IRR Method)
BV= I x PVAFYTM, n + RV x PVFYTM, n
Where,
BV = Theoretical Value of Bond
I = Annual Interest/Coupon Amount
PVAF = Present Value Annuity Factor
YTM = Yield to Maturity (Investors Required Rate of Investors)
PVF = Present Value Factor

11) Duration of Bond

1. Macaulay’s Duration of bond
Mac D= ∑ Weight x Year
Where,
Weight = Weight of a Present Value of cash flows in Total Present Value

Alternative 1
∑ PV x Yr
Mac D=
∑ PV
Draft Format
Year Cash flows PVF@ YTM Present PV x Year
Value(PV)

1 Interest
 4. Security Valuation
2 Interest
3 Interest
4 Interest +
Principal
∑ 𝐏𝐕 ∑ 𝐏𝐕 𝐱 𝐘𝐫

Alternative 2

1+YTM (1+YTM)+t (c-YTM)

Mac D= -
YTM c [(1+YTM)t -1]+YTM
Where,
c= coupon rate, t= Time to maturity, YTM = yield to maturity

Alternative 3
t*c n*M
t+
∑ n
(1+i) (1+i)
MacD=
P
Where,
n= no. of cash flows,
c= coupon rate
t= Time to maturity,
i= Required yield,
M= Maturity Value,
P= Bond Price

2. Modified Duration (%) or Volatility of the Bond

Macaulay' s Duration
Volatility or Mod D =
YTM
(1+ n )

Where, n = no. of compounding in a year

12) Convexity
PV+ +PV- -2PV0
Convexity= 2
2PV0 x (∆Yield)
%∆PV ≈ (-AnnModDur x ∆Yield)+[Convexity x (∆Yield)2 ]
 4. Security Valuation
Where,
PV+ =Bonds price when yield increases
PV- =Bonds price when yield decreases
PV0 =Initial Bond Price at given yield
∆Yeild=Change in Yield
AnnModDur=Annual Modified Duration

13) Convertible Bonds

1. Conversion Ratio:
The number of shares each convertible bond converts into. It may be
expressed per bond.
2. Conversion Value:
Conversion Value=Market price per common share x Conversion ratio
3. Conversion Premium:
The amount by which the price of a convertible security exceeds the
current market value of the common stock into which it may be
converted.
CP = Market price of Convertible Bond − Conversion Value
CP = MP – CV
4. Conversion Premium Ratio:
Ratio which shows at what premium the convertible bond is trading in
the market.
MV
Conversion Premium Ratio= -1
CV
5. Straight Value of the Bond:
It is the price where the bond would trade if it were not convertible to
stock. Its then is equivalent to non-convertible bond.
6. Minimum Value of the Convertible Bond:
A convertible bond should at the lowest trade at the higher of either the
conversion value or straight value.
7. Downside Risk:
Downside risk is the % premium over the straight value of the bond.
MP
DR (%)= ( -1) ×100
SV
 4. Security Valuation
8. Conversion Parity Price or Market Conversion Price:
Price at which the investor will neither gain nor lose on buying the bond
and exercising it.
MP
CPP= ×100
N
9. Favourable Income Differential Per Share
It represents extra income earned in Bond over dividend income in
shares.
Interest from Bond—(Dividend from Equity x CR)
FID=
Conversion Ratio
10. Premium Payback Period:
It represents the time in which we recover premium paid (to purchase
the Convertible Bond) using extra income of interest.
Conversion Premium
PPP=
Favourable Income Differential
 Chapter 5 Portfolio Management

1) Return of Investment in Single Security or Single Asset

Forecasted Dividend+Forecasted Capital Appreciation
R=
Initial Investment
D+CA
R=
II

2) Expected Return:
n
̅ = ∑ Ri Pi
R
i=1

3) Portfolio Return
n
̅i Wi
Rp = ∑ R
i=1
Rp =W1 R1 +W2 R2 +…Wn Rn

4) Return of security under CAPM

Ri =Rf +βi (Rm -Rf )
Rp =Rf +βp (Rm -Rf )

5) The Arbitrage Pricing Theory Model

Stocks/Portfolios Returns according to APT will be
R j = R f + β1 λ1 + β2 λ2 + β3 λ3 + ⋯ + ei
Where,
λ1 , λ2 , λ3 are average risk premium for each of the factors in the model
β1 , β2 , β3 are betas of the security for each of the factors

6) Single index model

The single index model equation is:
Ri = αi+ βiRm +∈i
Where,
Ri =expected return on security i
αi =alpha coefficient or intercept of the straight line
βi=beta coefficient or slope of the line
 5. Portfolio Management
Rm =the rate of return on market index
∈i =unsystematic risk of the security

7) Total Risk = Systematic Risk + Unsystematic Risk

8) Beta
1. Regression Analysis
∑ XY - nX̅ Y
̅
βi = ̅²
∑ Y² - nY
Where,
βi =Beta of the stock i
X=Return(%)from the stock,
Y=Return(%) from the market
̅ =Expected or Mean value of returns from stock
X
̅ =Expected or Mean value of returns from market
Y
n=number of observation

2. Correlation Analysis
Corrxy σx σy Corrxy σx Covxy
βi = or or
σ2y σy σy 2
Where,
βi =beta of the stock i
Corrxy =Correlation between returns of the stock and returns of the market
σx =standard deviation of returns of the stock i
σy =standard deviation of returns of the market index
σ2y =variance of the market index
Covxy =Covariance of stock x and y

3. Portfolio Beta Using Weighted Average Method

βp = ∑ W i βi
Where,
βp =Portfolio Beta
βi =Beta of the each asset in the portfolio
Wi=weight of each asset in the portfolio
 5. Portfolio Management
Value of Interpretation Example
Beta
β<0 Asset generally moves in the Gold, which often moves opposite to
opposite direction as compared the movements of the stock market
to the index
β=0 Movement of the asset is Fixed-yield asset, whose growth is
uncorrelated with the movement unrelated to the movement of the
of the benchmark stock market
0 < β < 1 Movement of the asset is Stable, "staple" stock such as a
generally in the same direction company that makes soap. Moves in
as, but less than the movement the same direction as the market at
of the benchmark large, but less susceptible to day-to-
day fluctuation.
β=1 Movement of the asset is A representative stock or a stock that
generally in the same direction is a strong contributor to the index
as, and about the same amount itself.
as the movement of the
benchmark
β>1 Movement of the asset is Volatile stock, such as a tech stock, or
generally in the same direction stocks which are very strongly
as, but more than the movement influenced by day-to-day market
of the benchmark news.

9) Covariance:
̅̅̅̅a ][Rb -R
∑ [Ra -R ̅̅̅̅b ]
Cov ab =
N
Covim =σi σm rim

10) Coefficient of correlation

Covab
rab =
σa σb
Where,
COVab = Covariance between a and b
Ra = Return on stock a
Rb = Return on stock b
R-a = Expected or mean return on stock a
R-b = Expected or mean return on stock b
βx = Beta of the stock x
 5. Portfolio Management
Corrxy = correlation between returns of the stock and returns of the market
σx = Standard Deviation of returns of the stock i
σy = Standard Deviation of returns of the market index
σy2 = Variance of the market index
Covxy = Covariance of stock x and y

11) Risk of Single Security

1. Without probability
2
̅̅̅
∑ (R- R)
σ=√
N
N = Number of observations
2. With probability
n
̅ )2 p
σ= √∑ [(R- R
i=1

p = probability of ith return

12) Risk of Portfolio having 2 securities/assets

σ2p = w2a σ2a + w2b σ2b +2wa wb (rab σa σb )
Where,
σ2p =portfolio variance,
wa =proportion of funds invested in first security,
wb =proportion of funds invested in second security,
σa =Standard deviation of first security
σb =Standard deviation of second security
rab =correlation coefficient between the returns of the two securites

13) Risk of Portfolio having 3 securities/assets

σ2p = w2a σ2a + w2b σ2b +w2c σ2c +2wa wb (rab σa σb ) +2wb wc (rbc σb σc )+2wc wa (rca σc σa )
σ2p = ∑ni=1 ∑ni=1 wi wm σi σm rim
σ2p = ∑ni=1 ∑ni=1 wi wm Covim
Where,
σ2p =portfolio variance,
wi =proportion of funds invested in first security,
 5. Portfolio Management
wm =proportion of funds invested in second security,
Covim =covariance between the pair of securities a and b
n = Total number of securities in the portfolio

14) Single Index Model

Security Variance (𝛔𝒊 𝟐 )
σ2 =β2i σ2m +∈2i
Where,
σ2 =total variance
2
βi σ2m =systematic variance
σ2∈i =unsystematc variance
Portfolio variance (σp 2 )
2
σp 2 = [(∑ Wi βi ) σ2m ] + [∑ (Wiϵi )2 ]

Portfolios Alpha and Beta

N

αp = ∑ wi αi
i=1
N

βp = ∑ wi βi
i=1

15) Three market Lines:

1. Capital Market Line
σi
Ri = Rf + (Rm -Rf )
σm
σi =Standard deviation of the security
σm =Standard deviation of the market

2. Security market line

Ri =Rf +βi (Rm -Rf )
SML is the graphical representation of Capital Asset Pricing Model

3. Security Characteristic Line

ri= αi+ βiRm
 5. Portfolio Management
Where,
ri=expected return on security i
ri=alpha
βi Rm =component of return due to market movement

16) Optimum Portfolio Theory

1. Find out the “excess return to beta” ratio for each stock under
consideration using Treynor ratio.
2. Rank them from the highest to the lowest.
3. Proceed to calculate Ci for all the stocks/portfolios according to the
ranked order using the following formula:
(Ri-Rf )βi
σ2m ∑N
i=1
σ2ei
Ci =
β2i
1+σ2m ∑N
i=1
σ2ei
Where,
σ2m =Variance of the market index
σ2ei =Vriance of the stock' s movement that is not associated with the
movement of market index i.e stock' s unsystematic risk.
4. Determine the relative Zi investment of each stock in the selected
portfolio
β Ri -Rf *
Zi = 2i ( -C )
σei βi
5. Find out the weight of Xi each stock in the selected portfolio
Zi
Xi = N
∑j=1 Zi

17) Portfolio Evaluation Measures

Ri -Rf
1. Sharpe ratio= σi

Ri -Rf
2. Treynor ratio= βi

3. Jensen’s Alpha = Actual Return-Required return [CAPM return]

 5. Portfolio Management
Jensen’s Alpha=Ri-(Rf+β(Rm-Rf)

18) Minimum Variance Portfolio

σ2B -CovA,B
WA =
σ2A +σ2B -2CovA,B
WB =1-WA
Where,
WA =Weight of security A in minimum variance portfolio
WB =Weight of security B in minimum variance portfolio

19) Constant Proportion Portfolio Insurance Policy

Equity Value = Multiplier x [Portfolio Value - Floor Value]

20) The covariance of returns between securities i and j

Covij = βiβj σ2m

21) Fixed Income Portfolio

 Arithmetic Average Rate of Return
∑R
AARR = N i
Ri = Returns of respective period
N = no. of periods

 Time Weighted Rate of Return

TWRR = [(1+ R1) (1+ R2)…….. (1+ Rn)] – 1
 MWRR (IRR), 0 = PV of CIF – PV of COF
 Annualised Return
365
ARR = (1+ R) × No. of days
R= Entire return for holding period
 Chapter 7 Mutual Funds

1) Net Assets Value

(Total Assets-Total Liabilities)
NAV= No. of Units

2) Holding Period Return

(NAV1 - NAV2 )+CG+I
HPR= NAV0

Return in case the dividend and capital gains are reinvested

(N1 - NAV1 )+(N0 - NAV0 )
HPR=
(N0 - NAV0 )

3) Return earned by Mutual Funds

1
r2 = × r1 +recurring exp.
1-Initial exp.
Where,
r2 = Return desired by Investor
r1 = Return earned by Mutual Funds

4) Expense Ratio
Expenses incurred per unit
ER=
Average NAV
Expenses
ER=
Average value of portfolio
 Chapter 8 Derivatives

1) Forwards [OTC Market]

Basis Time Value of Money Derivatives
Annual A=P(1+r)t F=S(1+r)t
Multiple r nt r nt
A=P (1+ ) F=S (1+ )
n n
rn rn
Continuous A=Pe F=Se

– Hedging with Futures

Value to be hedged
N= ×Risk to be reduced
Futures Contract Value
Contract Values = Futures Value × Lot Size

2) Binomial Model
Cu x p+Cd x (1-p)
Option Value=
(1+r)
Where,
P is the probability of price moving upwards
r is the risk free rate of interest
t is the time interval
Cu is the options value at upper level
Cd is the options value at lower level
Also, P can be calculated using this formula
(1+r)-d
p=
u-d
Where,
stock price at upper level
u= ,
spot price
stock price at lower level
d=
spot price
or,
u= volatility of price moving upwards,
d= volatility of price moving downwards.
 8. Derivatives
3) Risk Neutral Method
Stock Price at upper level x p+Stock Price at lower level x(1-p)
Spot Price=
1+r

Su x p+Sd x(1-p)
Spot Price=
1+r
Where,
Su is the Stock Price at upper level
Sd is the Stock Price at lower level

4) Black Scholes Model

Co =S x N(d1 )–Ke-rt x N(d2 )
Where,

S σ2
ln ( ) + (r+ ) t
K 2
d1 = , d2 =d1 -σ√t
σ√t
S=current stock price
K=strike price of the option
t=time remaining until expiration
r=current continuously compounded risk free interest rate
σ=standard deviation of continuously compounded annual return
ln=natural logarithm
N(x)=Standard normal cumulative distribution function
e=exponential function

Adjusting for Dividends

Call Option= Co =Se-yt x N(d1 )–Ke-rt x N(d2 )
Put Option= Po =Ke-rt x[1- N(d2 )]-Se-yt x[1- N(d1 )]
Where,
S σ2
ln ( ) + (r-y+ ) t
K 2
d1 = , d2 =d1 -σ√t
σ√t

5) Put Call Parity Theory

S+P0 =C0 +PV of Exercise price of the stock
 8. Derivatives
Where,
S = Current price of the underlying asset
P = Price (Premium) of the put option
C0 = Price (Premium) of the call option

6) Portfolio Replicating Theory

Δ= Number of units of the underlying asset bought = (Cu - Cd )/(Su - Sd)
Where,
Δ= Delta/ Hedge Ratio
Cu = Value of the call if the stock price is Su
Cd = Value of the call if the stock price is Sd
According to the Replicating Portfolio Model, value of the option can be
calculated as follows
Call Option
C0 =Buy Delta Stock-Borrowing required to replicate the portfolio
Where,
C0 =value of the call option
Borrowing needed to replicate the option=PV of [Δ x Sd -Option value at Sd ]
Put Option
P0 =Investment required –Sell Delta Stock
Where,
P0 =value of the put option
Lending needed to replicate the option=PV of [Δ x Su +Option value at Su ]

7) Option Greeks
 8. Derivatives

8) Intrinsic Value [IV] & Time Value [TV]

1. Intrinsic Value
For a call option, IV= Max (0, S-K)
For a put option, IV= Max (0, K-S)
2. Time Value
Time value = Option Premium – Intrinsic Value

9) Option Payoff
Position Option Payoff Effect
Long (Holder Call Payoff= Max (0,S-K) Limited Loss,
of the option) Unlimited Profit
Put Payoff= Max (0,K-S) Limited Profit,
Limited Loss
Short (Writer Call Payoff= Min (0,K-S) Limited Profit,
of the option) Unlimited Loss
Put Payoff= Min (0,S-K) Limited Loss,
Limited Profit
Break Even = Break-even price is the price at which your net payoff is “0”
Call Put
Long S-K-P=0 K-S-P=0
Short K-S+P=0 S-K+P=0

10) Write a short note on Factors affecting Option Valuation

8. Derivatives
 Chapter 10 Forex

1) Premium/Discount
Premium/(Discount) in Premium/(Discount) in
Base Currency Counter Currency
F-S F S-F S
or -1 or -1
S S F F
Where, Where,
F = Forward exchange rate F = Forward exchange rate,
S = Spot exchange rate S = Spot exchange rate
N= Number of months of the N= Number of months of the
forward contract forward contract

2) Interest Rate Parity Theory

When Exchange Rates are in Direct Quote
1+rd F
=
1+rf S
When Exchange Rates are in Indirect Quote
1+rf F
=
1+rd S
Where,
rd = Rate of interest in domestic market
rf = Rate of interest in foreign market
F= Forward rate of the foreign currency
S= Spot rate of the foreign currency

3) Purchasing Power Parity Theory

1+id
F=S x 1+if
Where,
id= Inflation rate in domestic market
if= Inflation rate in foreign market
F = Forward rate for foreign currency
S = Spot rate for foreign currency

4) International Fisher Effect

∆S≈Rd-Rf
Or
 10. Forex
1+Rd
F=S x
1+Rf
Where,
Rd= Nominal Interest rate of domestic country
Rf = Nominal Interest rate of foreign country

5) Broken Period Forward Rate

6) Nostro, Vostro and Loro Account

 Chapter 11 International Financial Management

1) Forward Rate Agreement

dtm
(N)(RR-FR)( )
Settlement = DY x100
dtm
[1+RR ( )]
dy

Where,
N = the notional principal amount of the agreement;
RR = Reference Rate for the maturity specified by the contract prevailing
on the contract settlement date; typically LIBOR or MIBOR
FR = Agreed-upon Forward Rate; and
dtm = maturity of the forward rate, specified in days (FRA Days)
DY = Day count basis applicable to money market transactions which could
be 360or 365 days.
If LIBOR > FR the seller owes the payment to the buyer, and if LIBOR<FR
the buyer owes the seller the absolute value of the payment amount
determined by the above formula.

2) Value of the Swap

Vswap = Bfl – Bfix

3) Adjusted Net Present Value

APV= NPV+PV of Tax Shield on Interest +PV of Interest Subsidies
 Chapter 12 Corporate Valuation

Methods of Valuation
1) Asset Based
Book Value = Total Assets – Long Term Debt
 Total Assets = Fixed Assets + Intangible Assets + Current Assets –
Current Liabilities
 This can also be equated to share capital plus free reserves

2) Earnings Based
EAT
Value of the Equity = Ke

EBITDA
Value of the Company = Ko

3) Enterprise Value Based

Enterprise Value=Market Value of Equity
+Market Value of Preference
+Market Value of Debt
+Minority Interest
- Cash & Cash Equivalent

4) Other Methods
1. Economic Value Added
EVA = NOPAT – (Invested Capital * WACC)
Or
EVA = NOPAT – Capital Charge
2. Market Value Added
MVA = Market Value – Book Value
3. Shareholders Value Analysis

Steps involved in SVA computation:

1. Arrive at the Future Cash Flows (FCFs) by using mix of the ‘value drivers’
2. Discount these FCF using WACC
3. Add the terminal value to the present values computed in step (b)
 12. Corporate Valuation
4. Add market value of non-core assets
5. Reduce the value of debt from the result in step (d) to arrive at value of
equity