CA Final SFM New Syllabus Full Chalisa Book by Aaditya Jain Sir

The Best CA/CMA Final
SFM
WITH PRACTICAL STOCK MARKET KNOWLEDGE
SFM CHALISA FOR MAY-22
CA Aaditya Jain
With Sunrise You Rise
CA, MBA(FINANCE), NCFM/NISM, B.COM, M.COM
AWARDED AS NSE CERTIFIED MARKET PROFESSIONAL
AND MASTER OF FINANCIAL ANALYSIS, POST GRADUATE DIPLOMA IN
FINANCIAL MARKET, CFA (ICFAI)
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TIME VALUE OF MONEY
FUTURE VALUE OF A SINGLE CASH FLOW / COMPOUNDING TECHNIQUE

Future Value = Present Value x (1 + r)n
Future Value
PRESENT VALUE OF A SINGLE CASH FLOW / DISCOUNTING TECHNIQUE: Present Value =
1  r n
PRESENT VALUE OF EQUAL CASH FLOW UPTO PERPETUITY/INFINITY/FOREVER-WITHOUT GROWTH
Annual Cash Flow
Present Value =
Discount Rate
PRESENT VALUE OF CASH FLOW UPTO PERPETUITY/INFINITY / FOREVER-WITH GROWTH

Cash Flows Arising At Year End 1 CF1
Present Value = =
Discount Rate – Growth Rate Discount Rate – Growth Rate
Lower Rate NPV
INTERNAL RATE OF RETURN : Lower Rate + x (Higher Rate - Lower Rate)
Lower Rate NPV – Higher Rate NPV
VALUATION OF SECURITY : EQUITY
Total Earnings Available for Equity Shareholde rs

EARNING PER SHARE (EPS): Earning Per Share (EPS) =
Total Numbers of Equity Shares
Total Dividend Paid To Equity Shareholde r

DIVIDEND PER SHARE (DPS): Dividend Per Share (DPS) =
Total Number of Equity Shares
Total Market Value / Market Capitaliza tion / Market Cap
MARKET PRICE PER SHARE: MPS =
Total Number of Equity Shares
Dividend Per Share

DIVIDEND PAYOUT RATIO (D/P RATIO): Dividend Payout Ratio = x100
Earning Per Share
RETENTION RATIO
 EPS - DPS   Retained Earning Per Share 
Retention Ratio =  x 100 or (1 - Dividend Payout Ratio) or  x 100
 EPS   EPS
RELATIONSHIP BETWEEN RETENTION RATIO & PAYOUT RATIO

Dividend Payout Ratio = 1 - Retention Ratio or Retention Ratio = 1 - Dividend Payout Ratio
Note: Retention Ratio + Dividend Payout Ratio = 1 or 100%
Total Retained Earnings
RETAINED EARNING PER SHARE: Retained Earning Per Share = EPS - DPS OR Total No. Of Equity Shares
Dividend Per Share

DIVIDEND RATE: Dividend Rate = x 100
Face Value
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Note: Dividend is always paid on face value of share and not market price .
GORDON'S MODEL / DIVIDEND GROWTH VALUATION MODEL / GORDON GROWTH'S MODEL / DIVIDEND
DISCOUNT MODEL / CONSTANT GROWTH RATE MODEL
DPS1 DPS0 ( 1  g) EPS1 (1 - b) EPS0 (1 - b)(1 + g)
P0 = or P0 = or P0 = K - g or P0 = Ke - g
Ke – g Ke - g e
DPS1 = DPS next year / Dividend to be paid / Expected Dividend /Dividend not yet paid
DPS0 = DPS of current year / Dividend just paid / DPS as on today/Dividend Per Share of previous year / Dividend
Recently Paid / Last year dividend
EPS = Earning Per Share
Ke = Cost of Equity / Investor's Expectation / Capitalization Rate / Expected Return / Discount Rate / Opportunity
Cost for shareholders
P0 = Current Market Price Per Share Ex-Dividends, Theoretical Market Price Per Share, Intrinsic Value Per Share
or Equilibrium Price Per Share ,Present Value Market Price , Market Price Per Share as on today
g = Growth rate of dividend = b x r
b = Retention Ratio (%)
r = Rate of Return / Internal Rate of Return (IRR) / Return on Equity / Return on Investment(ROI)
(1 - b) = Dividend Payout Ratio
OPTIMUM DIVIDEND PAYOUT OR OPTIMUM RETENTION RATIO AS PER GROWTH MODEL (ALL OR NOTHING
APPROACH)
Optimum
Nature of Firm Relation Dividend Payout Retention Ratio
Growth Company Ke < r 0% 100%
Declining Company Ke > r 100% 0%
Normal Company Ke = r Indifferent Indifferent
UNEQUAL GROWTH RATE/VARIABLE GROWTH RATE CONCEPT

Dividend Growth Model cannot be applied directly in case where dividend is not growing at a constant rate
from year 1 onwards .In such case we will modify Dividend Growth Model and calculate Current Market Price in
the following manner : P0 [ Assuming Dividend is growing constantly from year 4 onwards ]
D1 D2 D3 D4 D5 1
= + + + + ×
(1 + Ke)1 (1 + Ke)2 (1 + Ke)3 (1 + Ke)4 Ke – g (1 + Ke)4
MPS
PRICE EARNING RATIO: Price Earning Ratio =
EPS
Total Earnings Available For Equity Shareholde r
RETURN ON EQUITY (ROE): r = x 100
Total Equity Shareholde r' s Fund
Total Equity Shareholde r' s Fund
BOOK VALUE PER SHARE (BVPS): Book Value Per Share ( BVPS ) = Total Number Of Equity Share
RELATIONSHIP BETWEEN EPS, BVPS & ROE: EPS = Book Value Per Share x Return on Equity.
RELATIONSHIP BETWEEN GROWTH RATE (g), RETENTION RATIO (b) & RETURN ON EQUITY (r); g = b x r
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OVERVALUED & UNDERVALUED CONCEPT

Case Valuation Decision
If Current Market Price > Present Value Market Price Overvalued Sell
If Current Market Price < Present Value Market Price Undervalued Buy
If Current Market Price = Present Value Market Price Correctly Valued Hold
CAPM (CAPITAL ASSET PRICING MODEL)

Ke = Rf +  (Rm - Rf) Where, Rf = Risk Free Return; Rm = Market Returns; (Rm - Rf) = Market Risk Premium
HOLDING PERIOD RETURN

D  P1 - P0  D1 P1 - P0
Holding Period Return or Total Yield = 1 = + = Dividend Yield + Capital Gain Yield
P0 P0 P0
P1 - P 0
CAPITAL GAIN YIELD: Capital Gain Yield = x 100
P0
Dividend Per Share (D1 )

DIVIDEND YIELD ( RETURN ): Dividend Yield ( Return ) = x 100
Market Price Per Share (P0 )
D (1 - g)
NEGATIVE GROWTH RATE MODEL: P0 = 0
Ke  g
VARIOUS METHODS OF Ke CALCULATION :
D D
• Dividend Price Approach: Ke = 1 • Dividend Price + Growth Approach: Ke = 1 + g
P0 P0
EPS1
• Earning Price Approach: Ke =
P0
1
RELATIONSHIP BETWEEN KE & PE RATIO: Ke =
P/E Ratio
CALCULATION OF OPERATING COST WHEN OPERATING PROFIT MARGIN IS GIVEN

Operating Cost = 1 - Operating Profit Margin
Net Sales
ASSET TURNOVER RATIO (ATR): Asset Turnover Ratio = Decision: Higher the better
Total Asset
PRESENTATION OF INCOME STATEMENT

Sales xxx
-Operating Cost xxx
EBIT xxx
-Interest xxx
EBT xxx
-Tax xxx
EAT xxx
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-Pref. Dividend xxx

EFE xxx
-Equity Dividend xxx
Retained Earnings xxx
DECISION WHEN INVESTOR IS ALREADY HOLDING SHARES

Actual Po > Fair Po - Overvalued Sell ; Actual Po < Fair Po - Undervalued Hold
CALCULATION OF NPV DUE TO INVESTMENT IN A PROJECT

Net Present Value = Present Value Of Cash Inflows - Present Value Of Cash Outflows
Decision:
If NPV is positive: Accept the Project; If NPV is negative: Reject the Project; If NPV is zero: Indifferent Position
DUPONT ANALYSIS FOR RETURN ON EQUITY:

ROE = Net Profit margin x Total Assets Turnover ratio x Equity Multiplier
 Net Pr ofit   Sales   Equity 
 Sales  x  Total Assets  x  Equity Debt 
WALTER’S MODEL-PO CALCULATION

r
DPS (EPS – DPS)
Symbolically : Po = K + Ke
e Ke
WALTER’S MODEL-CALCULATION OF Ke
In this case we need to use quardratic equation for solving Ke.
b ± b2 - 4ac
A general quadratic equation can be written in the form ax2+ bx + c = 0 ; x =
2a
Example: 36.25Ke2 - 1.80Ke - .64 = 0
Here, a = 36.25;b=-1.80;c=-.64
b ± b2 4ac ( 1.8) ± (-1.8)2 4 × 36.25 × ( .64)

Ke = = = 16 %
2a 2 × 36.25
CALCULATION OF TOTAL ASSETSUSING DEBT AND EQUITY

If question is silent: Total Assets=Equity + Debt
TYPES OF MARKET IN CASE OF UNDERVALUED SHARE

Such type of market is known as "Weak form of market"as per EMH(Efficient Market Hypothetis"theory.
This is because market is not able to discount all the information.(Cash inflow)
 D0 (1 gn )   D0H1 (g c  gn ) 
H MODEL:  P0   r  g 
 n   r gn 
Where: gn = Normal growth rate long run; gc = current growth rate i.e. initial short term growth rate; H1 = Half life
growth rate; r = rate of return expected by the investor; D0 = Dividend received in the present year.
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COST TO SHAREHOLDER DUE TO MANAGING DIRECTOR POLICY

Cost to each Shareholder = P0 When MD's policy is not followed - P0 When MD's policy is followed
O
B
N
S
D VALUATION OF SECURITY : BOND
VALUE OF STRAIGHT COUPON BOND OR EQUAL COUPON BOND (REDEEMABLE BOND)

Interest Interest Interest
Maturity Value
Value Of Bond(B0) = + + .................+ +
(1  Yield)1 (1  Yield)2 (1  Yield)n (1  Yield)n
= Interest x PVAF ( Yield %, n years) + Maturity Value x PVF ( Yield %, n years)
Where n = Number of Years to Maturity
Annual Interest
VALUE OF PERPETUAL BOND OR IRREDEEMABLE BOND: Value Of Bond(B0) =
Yield
Maturity Value
VALUE OF ZERO COUPON BOND OR DEEP DISCOUNT BOND: Value Of Bond(B0) =
(1 + Yield)n
HOLDING PERIOD RETURN (HPR): Holding Period Return (R) or Total Return
I + (B1 - B0 )
= 1 or I1 + (B1 - B0 ) or Current Interest Yield + Capital Gain Yield
B0 B0 B0
Where B0 is the Price of bond as on today, and B1 is the price of the bond at the end of the holding period.
(B1 - B0 )
CAPITAL GAIN YIELD: Capital Gain Yield = x 100
B0
I1
INTEREST YIELD OR CURRENT YIELD: Current Yield = B Where I1= Interest To Be Paid at Year End 1
O
OVERVALUED AND UNDERVALUED BONDS

If Current Market Price < Present Value Market Price Undervalued Buy
If Current Market Price = Present Value Market Price Correctly Valued Hold
VALUE OF BOND WHEN INVESTOR IS ALREADY HOLDING BOND

If Current Market Price < Present Value Market Price Undervalued Hold
COST OF DEBT (Kd) / YIELD TO MATURITY (YTM) / REDEMPTION YIELD / INTERNAL RATE OF RETURN / MAR-
KET RATE OF INTEREST / PROMISED YTM / OPPORTUNITY COST OF DEBT
Symbolically : It can be calculated by using two method :

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Lower Rate NPV

• IRR METHOD : Kd = Lower Rate + x Difference in Rates
Lower Rate NPV – Higher Rate NPV
 Maturity Value – Bo 
Interest p.a   
 n 
• APPROXIMATION METHOD: Kd p.a=
Maturity Value  Issue Value
2
Where Bo is current value of bond in case of existing bond or issue price or new proceeds in case of new issue of
bond.
Annual Interest
KD OF PERPETUAL BOND: Yield or Kd =
Bo
DIRTY PRICE AND CLEAN PRICE: Dirty Price = Clean Price + Accrued Interest
TYPES OF BOND ON THE BASIS OF VALUE

There can be three types of Bond On the basis of Current Value:-
1. Discount Bond B0 < Face Value; 2. Face value Bond B0 = Face Value; 3. Premium Bond B0 > Face Value
BASIS POINT: 1 % = 100 basis points
EBIT
INTEREST COVERAGE RATIO: Interest Coverage Ratio =
Interest
CALCULATION OF Kd OF HALF YEARLY COUPON BOND
 Maturity Value – Bo 
Interest Per 6 Months   
 nx2 
Kd Of 6 Month =
Maturity Value  Bo
2
Now Kd p.a = Kd for 6 month x 2
FAIR CONVERSION VALUE AS ON TODAY [STOCK VALUE OF BOND]

Fair Conversion Value or Stock Value Of Bond
= Number Of Equity Shares Received on Conversion x Market Price Per Share prevailing at the time of conversion
DECISION WHETHER TO CONVERT OR NOT

SITUATION DECISION
• If value of Bond > Conversion Value Do not Convert
• If value of Bond < Conversion Value Convert
DOWNSIDE RISK [OR PREMIUM OVER STRAIGHT VALUE OF DEBENTURE]

Downside Risk
= Market Value Of Convertible Bond - Market Value Of Non Convertible Bond or Straight Coupon Bond
It should be further divided by Market Value Of Convertible Bond to calculate answer in %.
PREMIUM IN CASE OF CONVERTIBLE BOND

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Main Equation: In Amount: Actual Market Value of Convertible Bond - Fair conversion value of Bond
Actual Market Value of Convertibl e Bond - Fair conversion value of Bond
In %:
Fair conversion value of Bond
CONVERSION PARITY (EQUALITY) PRICE OF EQUITY SHARE

Actual Market Value Of Convertibl e Bond
Conversion Parity Price =
Conversion Ratio
CONVERSION PARITY PRICE (PREMIUM) OF EQUITY SHARE
IN (`): [Also Known As Conversion Premium Per Share]=Conversion Parity Price of Equity-Actual Market Price of
Equity
IN %: [Also Known As Ratio Of Conversion Premium]
Conversion Parity Price of Equity - Actual Market Price of Equity
=
Actual Market Price of Equity
FAVOURABLE INCOME DIFFERENCE PER SHARE

Coupon Interest From 1 Debenture - Conversion Ratio × Dividend Per Share
=
Conversion Ratio
Extra Initial Investment Conversion premium per share

PREMIUM PAYBACK PERIOD: = OR
Extra Annual Cash Inflow Favourable Income Differenti al per Share
FREDRICK MACAULAY 'S DURATION OF NORMAL COUPON BOND

1 Interest Interest Interest Maturity Value
Symbolically: Duration = [1 x +2x + .................n x +nx ]
1 2
Bo (1  Kd) (1  Kd) (1  Kd)n (1  Kd)n
1  YTM (1  YTM)  n (Coupon Rate - YTM)
Short Cut Formula: Duration = x
YTM Coupon Rate [(1  YTM)n - 1]  YTM
DURATION OF A ZERO COUPON BOND

For a zero coupon bond, the duration is simply equal to the maturity of the bond.
MODIFIED DURATION / SENSITIVITY / VOLATILITY

 Duration Of Bond 
Volatility or Modified Duration or Sensitivity [%] =  
 1  Kd 
Note: % Change in B0 = - Modified Duration x Change In Kd
CALCULATION OF EXPECTED VALUE OF BOND USING BETA: Expected B0 = Fair B0 x Beta
CALCULATION OF BOND VALUE WHEN ENTIRE INTEREST & PRINCIPAL AMOUNT IS RECEIVED AT THE END OF
Face Value(1  Coupon Rate)n

BOND LIFE: In such case our equation is: B0 =
(1  YTM)n
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WHEN CF RECEIVED IS NOT RE-INVESTED OR WHEN NPV ASSUMPTION IS NOT FOLLOWED

(Coupon Amount x n)  Face Value or Maturity Value
In such case our equation will be: B0 =
(1  Kd)n
WHEN CONVERSION IS OPTED AFTER FEW YEARS
Intt. Intt. Intt. Conversion Value
Value of bond if converted = + +.......................+ +
(1  Kd)1 (1  Kd)2 (1  Kd)n (1  Kd)n
Where :- Conversion Valuen = MPSn x No. of ES
1  Kd
DURATION OF PERPETUAL BOND: Duration of Bond(DOB) =
Kd
MODIFIED DURATION IN CASE OF HALF YEARLY BOND

Duration of Bond
Modified Duration = ; Where n = Frequency of coupon payment.
kd
1
n
CONVEXITY Convexity = Approximate modified convexity x ΔYTM2 x 100
B+ + B- -2B0
Approximate modified convexity:
2 x B 0 (Δy)2
B0 = Bond price; B- = Bond price when interest rate is incremented; B+ = Bond price when interest rate is
decremented;  y = change in yield to maturity
% change in B0 = (- volatility x  Y) + (Convexity x (  Y)2
Yield Curve
Yield Curve is the graphical representation of the relationship between Maturity and Yield to Maturity.
Yield to maturity is plotted on the Vertical Axis ( Y- axis ) and maturities on the horizontal axis ( X axis ) .
There are four main types of yield curve shapes:
(i)Normal(Rising) Yield Curve,(ii)Inverted(Falling) Yield Curve (iii) Flat Yield Curve (iv) Humped Yield Curve
A Normal Yield curve is one in which longer maturity bonds have a higher yield compared to shorter-term
bonds due to the risks associated with time. The yield curve usually has a positive slope. Generally, this reflects
the fact that most traders expect the economy to grow in the future.
An Inverted Yield curve is one in which the shorter-term yields are higher than the longer-term yields. . Under
unusual circumstances, long-term investors will settle for lower yields if they think the economy will slow or even
decline in the future. A negative yield curve has generally been considered a warning sign that the economy is
slowing and that a recession is likely.
A Flat Yield curve is observed when all maturities have similar yields. A flat curve sends signals of uncertainty
in the economy. This mixed signal can revert to a normal curve or could later result into an inverted curve.
A Humped Curve results when short-term and long-term yields are equal and medium-term yields are higher
than those of the short-term and long-term. Generally, these kinds of curves hint at overall uncertainty about the
future
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PREFERENCE SHARE VALUATION

XXXXXXXXXXXXXXXXXXXXXXXXX
VALUE OF REDEEMABLE PREFERENCE SHARES

Dividend Dividend Dividend Maturity Value
Value of Preference Share (PSC0) = + + ........... + +
(1  KP )1 (1  KP )2 (1  KP )n (1  KP )n
VALUE OF IRREDEEMABLE PREFERENCE SHARES

Annual Dividend
Value of Irredeemable Preference Shares(PSC0) =
KP
 Maturity Value – PSC0 

Annual Dividend   
 n 
COST OF REDEEMABLE PREFERENCE SHARE CAPITAL: Kp = Maturity Value  PSC0
2
Annual Dividend
COST OF IRREDEEMABLE PREFERENCE SHARE CAPITAL: KP = PSCO
Sometimes when relevant information is not given for calculation of KP then we simply use KP = Rate Of Prefer-
ence Dividend.
CONVERSION VALUE OF CONVERTIBLE PREFERENCE SHARE CAPITAL

Equation : Fair Conversion Value = Number of Equity Shares x MPS of Equity Share
PREMIUM IN CASE OF CONVERTIBLE PREFERENCE SHARE CAPITAL

Equation : Conversion Premium or Premium Over Conversion Value
= Market Value Of Convertible Preference Share Capital - Fair Conversion Value Of Preference Share Capital
It should be further divided by Fair Conversion Value Of Preference Share Capital to calculate answer in %.
XXXXXXXXXXXXXXXXXXXXX RIGHT SHARES VALUATION

THEORETICAL / FAIR MARKET PRICE AFTER RIGHT ISSUE
Existing MPS  Existing No. Of ES  Offer Pr ice  Right Share  NPV
MPS After Right Issue =
Existing No. Of ES  New No. Of Equity Shares Issued
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THEORETICAL VALUE OF RIGHT

ALTERNATIVE 1: Value of Right Per Share = Cum Right Price - Ex - Right Price
Value of Right Per Lot = Value Of Right Per Share x Lot Size
ALTERNATIVE 2: Value of Right Per Lot = Ex - Right Price - Offer Price
Value Of Right Per Lot
Value of Right Per Share =
Lot Size
Note: If we multiply the above right per share with no. of share per lot,we get value of right per lot.
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX SHARE BUYBACK

Market Value After Buyback
MPS AFTER BUY BACK:
Existing Share - Buyback Share
Earnings After Buyback
EPS AFTER BUY BACK:
Existing Share - Buyback Share
TOTAL NO. OF EQUITY SHARES AFTER BUY BACK: Existing No. Of ES - Buyback Shares
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
MUTUAL FUND
Net Assets Total Assets - Total External Liability

NET ASSET VALUE (NAV): NAV = =
Number Of Units Total Number Of Units
Where net assets of the scheme will normally be: Total Asset - Total External Liability = [ Market Value of
Investments + Receivables + Accured Income + Other Assets ] - [ Accured Expenses + Payables + Other Liabilities]
Expenses Incurred Per Unit Opening NAV + Closing NAV

EXPENSE RATIO: Expense Ratio= Where Average NAV =
Average NAV 2
[NAV1 - NAV0 ]+ Dividend Received + Capital Gain Received
HOLDING PERIOD RETURN (HPR): =
NAV0
RELATION BETWEEN INITIAL EXPENSE, RECURRING EXPENSE, DESIRED RETURN OF INVESTOR AND RETURN
OF MUTUAL FUND
Relationship Between Return Of Mutual Fund, Recurring Expenses , Initial Expenses and Return Desired By
Investors can be given by using following relation :
Return Required By Investors = (Return of Mutual Fund - Recurring Expenses)(1 - Initial Expenses)
TIME WEIGHTED RATEOF RETURN

TWROR = [(1 + HPR PERIOD 1)(1 + HPR PERIOD 2)...(1 + HPR PERIOD N)... -1] x 100
XXXXXXXXXXXXXXXXXXXXX
CORPORATE VALUATION
DIVIDEND YIELD VALUATION METHOD OR DIVIDEND CAPITALIZATION VALUATION METHOD

Dividend Per Share (DPS) Dividend Per Share (DPS)
Dividend Yield =  Market Price Per Share =
Market Price Per Share (MPS) Dividend Yield
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EARNING YIELD VALUATION METHOD OR INCOME OR EARNING CAPITALIZATION VALUATION METHOD

Earning Per Share (EPS) Earning Per Share (EPS)
Earning Yield = Market Price Per Share (MPS)  Market Price Per Share = Earning Yield
Future Maintainab le Profit
FUTURE MAINTAINABLE PROFITS (FMP): Value Of Business =
Relevant Capitaliza tion Rate
Calculation Of Future Maintainable Profits:
Average Past Year Profits xxxx
Add :
All Actual Expenses and Losses not likely to occur in future xxxx
All Profits likely to arise in Future xxxx
Less : All Expenses and Losses expected to arise in future (xxxx)
Less : All Profits not likely to occur in future (xxxx)
Future Maintainable Profits ( FMP ) xxxx
PRICE EARNING [P/E] RATIO VALUATION METHOD

MPS
Price Earning Ratio [ P/E Ratio ] = MPS = P/E Ratio x EPS
EPS
CASH FLOW STATEMENT (LIMITED COVERAGE)

PAT xx
(+)Depriciation xx
(-) Capital expenditure(Like purchase of furniture) xx
(-) Increase in working capital xx
(+) Decrease in working capital xx
Net Cash Flow xx
TREATMENT OF WORKING CAPITAL

Working capital = CA - CL
Working Capital is neither subject to depreciation nor tax.
ASSUMPTIONS TO BE TAKEN: (i) Introduction of WC :- Cash Outflow (ii) Release of WC :- Cash Inflow (iii)
Increase in WC :- Cash Outflow (iv) Decrease in WC :- Cash Inflow
WACC OR KO OR COST OF CAPITAL OR WEIGHTED AVERAGE COST OF CAPITAL

K0 = Ke x We + Kd x Wd + Kp x Wp + Kr x Wr
NOTE :- We + Wd + Wp + Wr = 1 NOTE :- If Silent, Kr = Ke NOTE :- Weights can be based on Book Value or Market
Value NOTE :- Kd = Intt. rate (1 - Tax) NOTE :- Ke = Rf + Beta (Rm - Rf)
DEBT EQUITY RATIO: Debt Equity Ratio = Debt / Equity
VALUE OF EQUITY AS PER RISK PREMIUM APPROACH

Actual Yield
Value of Equity = x Paid up value of share
e
Expected Yield (Adjusted)
Yield On ES (In Rupee)

Where, Actual Yield = x 100
Equity Share Capital
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VALUATION OF OVERALL COMPANY USING EQUITY AND DEBENTURE

Value Of Firm = Value Of Equity + Value Of Debt
CHOICE OF DISCOUNT RATE: Value Of Firm K0 ; Value Of Equity Ke ; Value Of Debt Kd
EQUATED ANNUAL LOAN INSTALMENT

Amount Of Loan
Equated Annual Instalment = Where, r % is the rate of interest.
PVAF (r %, n Years )
Net Asset
NET ASSET VALUATION METHOD: Net Asset Value Per Equity Shareholder =
Total Number Of Equity Share
Where Net Assets = [ Total Assets - Total External Liability]
Note : Total Asset and Total External Liability may be taken on the basis of Market Value,Liquidation Value or
Book Value as the case may be.
Note : If question is silent always use Market Value Approach.
Note : Total External Liabilities will include: 1. Long term loan, Debenture, Bond. 2. Preference Share Capital
[Since, we are calculating NAV for equity shareholder] 3. Accumulated preference dividend outstanding. 4. Cur-
rent Liabilities (Which includes proposed dividend)
HOW TO CALCULATE CAPITAL EMPLOYED

Capital employed can be calculated in two ways :
Liabilities side: Capital employed = Equity Share Capital + Preference Share Capital + Reserves - Fictitious Assets
+ Debentures + Long Term Loans
Assets Side: Capital Employed = Fixed assets (excluding Fictitious Assets) + Current assets – Current liabilities
CALCULATION OF NET REALIZABLE VALUE

Net Realisable Value = Equity Shareholders' Fund + Increase in Value of Asset - Decrease in Value Of Assets
INCREMENTAL VALUE WHEN COMPANY ADOPTS NEW STRATEGY

Incremental Value Of New Strategy = Value Of Company Under New Strategy - Value Of Company Under Old
Strategy
Debt
DEBT RATIO: Debt Ratio =
Equity  Debt
Debentures  Long Term Loan  Pr ef . Share Capital

CAPITAL GEARING RATIO: Capital Gearing Ratio =
Equity Share Capital  Re serves & Surplus
Decision:- Lower the Better
FIXED INTEREST AND FIXED DIVIDEND COVERAGE RATIO

PAT  Interest
Equation :- FIXED INEREST & FIXED DIVIDEND COVERAGE RATIO =
Interest  Pr ef . Dividend
Decision :- Higher the Better
ENTERPRISE VALUE (EV) - It is also a type of valuation technique.

Equation No.1: Balance sheet Approach.
Enterprise Value(EV) = Market value of Equity + Market value of debentures - Cash and cash Equivalent
For MAY 2022 Exam
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Note: Market value of Equity includes both Equity share capital & Reserve & Surplus. No need to take reserve &
surplus separately, When you are taking market value of Equity.
Equation No.2: Profit and Loss Account Approach
EBITDA (Earning Before Interest Tax Depreciation & Amortization) XXX
x EBITDA Multiple XXX
Capitalized Value XXX
Less: Debt XXX
Add: Surplus Funds XXX
Equity Value (Enterprise Value) XXX
EV / EBITDA MULTIPLE It is a ratio which measures Enterprise Value.

Enterprise Value
Equation :- EV/ EBITDA =
EBITDA
NOTE :- EBITDA stands for Earnings Before Interest, Tax, Depreciation & Ammortization.
Interest Rate
CALCULATION OF INTEREST RATES (%) : Equation :- Amount of Loan / Debt
Pr ofit After Tax - Profit Before Tax

CALCULTION OF TAX RATES (%):
Profit Before Tax
ROCE ROCE = EBIT/Capital Employed
DEBT TO CE RATIO Debt to CE Ratio : Debenture/Total Capital Employed x 100
CURRENT RATIO Current Ratio = Current Assets/Current Liabilities
DISCOUNTED CASH FLOW(DCF) APPROACH/ FREE CASH FLOW APPROACH FOR EQUITY
It is a method of evaluating an investment by estimating future cash flows and taking into consideration the
time value of money.
Note : How To Calculate Free Cash Flow For Equity :
EBDITA xxx
(-)Depreciation xxx
(-)Amortization xxx
(-)Interest xxx
EBT xxx
(-)Tax xxx
EAT xxx
+ Deprecciation xxx
+Amortization xxx
-Increase In Working Capital xxx
+Decrease In Working Capital xxx
-Capital Expenditure xxx
Free Cash Flow xxx
XXXXXXXXXXXXXXXXXXXXXXXX
ECONOMIC VALUE ADDED (EVA)
HOW TO CALCULATE EVA

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 EVA = Net Operating Profit After Taxes - Cost Of Capital Employed

 Where Net Operating Profit After Taxes [NOPAT] = EBIT(1 - Tax)
 Cost Of Capital Employed = Cost Of Capital x Capital Employed
 Cost Of Capital (K0) or Weighted Average Cost of Capital(WACC)= Ke x We + Kr x Wr + Kd x Wd + Kp x Wp
NOTE : In Calculating Operating Profit, interest is not deducted as interest is a non-operating items.
NOTE : Total Funds / Capital Employed includes : Equity Share Capital + Reserves + Debentures + Preference
Share Capital + Long Term Loan - Profit and Loss Account ( Dr.) - Fictitious Asset
Earning or Profit Before Interest and Tax [EBIT]
FINANCIAL LEVERAGE: Financial Leverage = Earning or Profit Before Tax [EBT]
NOTE : EBT = EBIT - Interest
EVA
CALCULATION OF MAXIMUM DPS AS PER EVA VALUE : Maximum DPS as per EVA value = No. Of E Shares
MVA : MEANING
 MVA (Market Value Added) may be defined as excess value of company in market over and above book value.
 MVA :- Two alternatives : (i) Equity Approach (ii) Overall Approach
MVA : EQUITY APPROACH: MVA = Value as per Market - Value as per books
Where, Value as per Market = MPS x No. of Equity Shares ;
Where,Value as per Books = Equity Shareholder's Fund (i.e. ESC + R & S - Accumulated loss etc.)
MVA : TOTAL APPROACH: MVA = Value as per Market - Value as per Books
Where, Value as per Market = MVof Equity + MV of PSC + MV of Debenture
Where,Value as per Books = Total Capital Empolyed
CALCULATION OF KD, KP, KR, KE:  Ke = Rf + Beta (Rm - Rf)  Kr = Ke (Assumed)  Kp = Rate of Dividend or
Refer Preference Share Chapter  Kd = Interest (1 - Tax ) or Refer Debenture Chapter
 NOTE :- If you are taking market value of equity, then no need to take reserves & surplus separately.
 NOTE :- If question is silent regarding Ke Calculation, simply assume Ke = Rate of Dividend.
TREATMENT OF RESERVES - INCLUSION AND EXCLUSION IN MARKET VALUE OF EQUITY

If book value of Equity Share Capital is used: Then we must add Reserve and Surplus amount because market
value of Equity includes all
XXXXXXXXXXXXXXXXXXXXXX MERGER & ACQUISITION
EPS of Target Firm (B Ltd)

HOW TO CALCULATE SER ON THE BASIS OF EPS: Share Exchange Ratio =
EPS of Acquiring Firm(A Ltd)
MPS of Target Firm (B Ltd)

HOW TO CALCULATE SER ON THE BASIS OF MPS: Share Exchange Ratio =
MPS of Acquiring Firm (A Ltd)
HOW TO CALCULATE SER ON THE BASIS OF NAV

Book Value Per Share of Target Firm (B Ltd)
Share Exchange Ratio =
Book Value Per Share of Acquiring Firm (A Ltd)
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HOW TO CALCULATE SER ON THE BASIS OF BVPS

Net Asset Value of Target Firm (B Ltd)
Share Exchange Ratio =
Net Asset Value of Acquiring Firm (A Ltd)
TOTAL NUMBER OF EQUITY SHARES AFTER MERGER: Equation :NA + NB x ER
EPS AFTER MERGER

Total Earning After Merger E  EB  Synergy Gain
EPS of the Combined Firm after Merger = = A
Total No. Of Equity Shares After Merger N A  NB  ER
MPS AFTER MERGER 1ST PREFERENCE : To be used when PE A+B is given or any hint regarding this is Given.
MPS of Combined Firm after Merger = EPSA+B x P/E RatioA+B or
Total Market Value After Merger
2ND PREFERENCE : MPS of Combined Firm after Merger =
Total No. Of Equity Shares After Merger
MVA  MVB  Synergy Gain (If Any)
=
NA  NB  ER
MARKET VALUE OF MERGED FIRM : 1ST PREFERENCE : MV (A+B) = EPSA+B x P/E RatioA+B x [NA+ NB x ER]
2ND PREFERENCE : MV (A+B) = MV A + MV B + Synergy
EQUIVALENT EPS OF B LTD. AFTER MERGER : Equation : EPS ( A + B ) x ER
EQUIVALENT MPS OF B LTD. AFTER MERGER : Equation : MPS ( A + B ) x ER
CALCULATION OF NEW NUMBER OF ES ISSUED BY A LTD. TO B LTD.: Equation : NB x ER
CALCULATION OF % HOLDING IN NEW COMPANY

Total No. Of A Ltd Shares
For A Ltd. :
Total No. Of A Ltd Shares  Total No. Of New Shares Issued To B Ltd
Total No. Of New Shares Issued To B Ltd
For B Ltd. :
Total No. Of A Ltd Shares  Total No. Of New Shares Issued To B Ltd
CALCULATION OF TOTAL EARNINGS AFTER MERGER WHEN SYNERGY IS EXPRESSED IN AMOUNT

 (Earning A  EarningB  Synergy Gain) 
Equation : EPSA+B =  
 NA  NB x ER 
CALCULATION OF TOTAL EARNINGS AFTER MERGER WHEN SYNERGY IS EXPRESSED IN %

 (Earning A  EarningB ) (1  Synergy Gain) 
 NA  NB x ER 
GAIN OR LOSS ON THE BASIS OF MPS

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A Ltd B Ltd
MPS After Merger xxx xxx [For B Ltd. we should use Equivalent]
MPS Before Merger xxx xxx
Gain/Loss xxx xxx
GAIN OR LOSS ON THE BASIS OF EPS

BASED ON EPS :
A Ltd B Ltd
EPS After Merger xxx xxx* [For B Ltd. we should use Equivalent]
EPS Before Merger xxx xxx
Gain/Loss xxx xxx
NOTE : In place of EPS and MPS we may also use total figure i.e Earnings and Market Value .
NOTE : If question is silent,always take either EPS or MPS as base depending upon the requirement or framing
of question.
MAXIMUM ER FOR A LTD. (BASE: EPS) : Maximum Exchange Ratio :

(i.e the Exchange Ratio at which EPS of Firm’s A shareholder before and after merger will be same )
E  E  Synergy
Equation: EPSA = A B
NA  NB  ER
Now by solving the above equation keeping Exchange Ratio constant we can find desired Exchange Ratio.
MINIMUM ER FOR B LTD. (BASE: EPS) : Minimum Exchange Ratio :

(i.e the Exchange ratio at which EPS of Firm ’s B shareholder before and after merger will be same)
E  E  Synergy
Equation: EPSB = A B x ER
NA  NB  ER
MAXIMUM ER FOR A LTD. (BASE: MPS IF PE A + B IS GIVEN) : Maximum Exchange Ratio :

(i.e the Exchange Ratio at which MPS of Firm ’s A shareholder before and after merger will be same)
 E  E  Synergy 
Equation :MPSA = P/E RatioA+B x  A B 
 NA  NB  ER 
Now by solving the above equation, keeping Exchange Ratio constant, we can find desired Exchange Ratio.
MINIMUM ER FOR B LTD. (BASE: MPS IF PE A + B IS GIVEN) : Minimum Exchange Ratio :

(i.e the Exchange ratio at which MPS of Firm ’s B shareholder before and after merger will be same)
 E  E  Synergy 
Equation: MPSB = ER x P/E RatioA+B x  A B 
 NA  NB  ER 
MAXIMUM ER FOR A LTD. (BASE: MPS IF PE A + B IS NOT GIVEN) : Maximum Exchange Ratio :
(i.e the Exchange Ratio at which MPS of Firm ’s A shareholder before and after merger will be same)
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 MPS A  NA  MPSB  NB  Synergy Gain 

Equation : MPSA =  
 No. of Equity Shares A  No. Of Equity SharesB  Exchange Ratio 
MINIMUM ER FOR B LTD. (BASE: MPS IF PE A + B IS NOT GIVEN) : Minimum Exchange Ratio :
(i.e the Exchange Ratio at which MPS of Firm ’s B shareholder before and after merger will be same)
 MPS A  NA  MPSB  NB  Synergy Gain 
Equation : MPSB = ER x  
 No. of Equity Shares A  No. Of Equity SharesB  ER 
CALCULATION OF NPV: IN CASE OF MERGER

PV Of Cash Flows Received By A Ltd From B Ltd xxx
Less: Cost of Acquisition Paid By A Ltd To B Ltd xxx
NPV Of A Ltd if B Ltd is acquired xxx
DECISION : If NPV is positive, A Ltd should takeover B Ltd.
CALCULATION OF SYNERGY IN TERMS OF EARNING :Equation: Merger Gain or Synergy Based On Earnings
= Total Combined Earning Of Merged Firm - [Earning Of A + Earning Of B]
CALCULATION OF SYNERGY IN TERMS OF MARKET VALUE Merger Gain or Synergy Based On Market Value
= Total Combined Market Value Of Merged Firm - [Market Value Of A + Market Value Of B]
NOTE : Synergy should be calculated in question only if asked.

NOTE : If Synergy is not given in question we should assume it to be zero.
TERMINAL VALUE CALCULATION

Valuation Of Equity - Constant Perpetual: P0 [Assuming Dividend is constant from year 4 onwards]
D1 D2 D3 D4 D 1 D
= + + + + 5x e,  5  is Terminal Value.
; Here,
1  Ke1 (1  Ke)2 (1  Ke)3 (1  Ke)4 Ke (1  Ke)4  Ke 
Valuation Of Equity - Growing Perpetual: P0 [Assuming Dividend is growing constantly from year 4 onwards]
D1 D2 D3 D4 D (1  g) 1  D4 (1  g) 
= + + + + 4 x ; Here,
e,   is Terminal Value
alue
1  Ke (1  Ke)2 (1  Ke)3 (1  Ke)4 Ke – g (1  Ke)4  Ke – g 
CASH TAKEOVER THROUGH BORROWED MONEY

 (EarningA  EarningB  Borrowed Amount Interest Rate  (1  Tax Rate) 
 NA 
CASH TAKEOVER THROUGH RETAINED EARNINGS

 (Earning A  EarningB  Cash Paid  Opportunity Cost Of Interest  (1 - tax) 
 NA 
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NET COST OF MERGER - IN CASE OF CASH TAKEOVER: Equation:Net Cost = Cash Paid to B Ltd. - MVB Received
NET COST OF MERGER - IN CASE OF SHARE TAKEOVER (TRUE COST)

Equation: Net Cost = MVA + B x % Holdings Given to B Ltd. - MVB Received
MPS BIFURCATION INTO VARIOUS PARTS

Market Price Per Share(MPS) = Earning Per Share (EPS) x Price Earning Ratio (PE Ratio) :
Earning For Equity Shareholde r Market Price Per Share
= x
No. of Equity Share Earnings Per Share
Now EPS can further be bifurcated into ROE & BVPS.
Return on Equity(ROE) x Book Value/Intrinsic Value Per Share :
Earning For Equity Shareholde r Equity Shareholde r' s Fund
= x
Equity Shareholde r' s Fund No. of Equity Shares
Where Equity Shareholder's Fund = Equity Share Capital + Reserves - P/L account ( Dr.)
Gross NPA Of A Ltd.

CALCULATION OF SER ON THE BASIS OF GROSS NPA : Equation: Swap Ratio =
Gross NPA Of B Ltd.
Gross NPA
GROSS NPA (%): Equation : GNPA Ratio = x 100
Gross Advance or Deposit Given By Bank
CAPITAL ADEQUACY RATIO (CAR) / CAPITAL RISK WEIGHTED ASSET RATIO (CRAR)
Total Capital
Equation : CAR or CRWAR or Total Capital To Risk Weight Asset Ratio =
Risky Weighted Assets
CALCULATION OF NUMBER OF EQUITY SHARES

EFE Market Value Equity Share Capital Equity Shareholde r' s Fund
(i) (ii) (iii) (iv)
EPS MPS Face Value BVPS
CALCULATION OF PURCHASE CONSIDERATION / COST OF ACQUISITION

Market Value Of Equity issued to various party xxx
Market Value Of Debentures issued to various party xxx
Market Value Of Preference Shares issued to various party xxx
Payment of Current Liability xxx
Payment of Unrecorded / Contingent Liabilities xxx
Any other expenses paid xxx
Less : Sale proceeds from sale of assets not required in business (xxx)
Less : Cash in hand and bank received (xxx)
Cost Of Acquisition xxx
PRESENT VALUE OF GROWTH OPPORTUNITY (PVGO)

 D1   EPS 
PVGO = Price of share with Growth - Price of share without Growth =   
 Ke  g   Ke 
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Note: When r > Ke: PVGO will be positive; When r < Ke: PVGO will be negative
Offer Pr ice  MPSB
PURCHASE PRICE PREMIUM: Equation: Purchase Price Premium =
MPSB
GROSS PROFIT RATIO : Equation: Gross Profit Ratio = Gross Profit/Sales x 100
INVENTORY TURNOVER RATIO : Equation: Inventory Turnover Ratio = COGS/Average Stock or Closing Stock
DEBTOR TURNOVER RATIO : Debtor Turnover Ratio = Net Credit Sales/Average Debtor or Closing Debtor
TREATMENT OF EPS(A+B) AND MPS(A+B) AFTER THE MERGER IN CASE OF CASH TAKEOVER
 EA  EB  Synergy - Opportunity cost of cash paid 
EPSA+B =   Cash Paid x Interest Rate x (1-tax)
 NA 
 MV  MVB  Synergy - cash paid 

MPSA+B =  A 
 NA 
TREATMENT OF CASH BALANCE WHEN WE CALCULATE VALUE OF FIRM USING DCF APPROACH
There will be no treatment of cash balance in such case: VF = VE + VD
VE = VF - VD
VD = This amount will be given in question; VF = It is received by discounting all future cash inflow annually
XXXXXXXXXXXXXXXXXXXXXXXXXXXX
PORTFOLIO MANAGEMENT
CALCULATION OF RETURN OF INDIVIDUAL SECURITY
Holding Period Return =

Price At The End  Price At The Beginning   Any Income
Price At The Beginning
STANDARD DEVIATION OF AN 'INDIVIDUAL SECURITY' : BASED ON PAST DATA
(Given Return  Average Return)2

Standard Deviation () =
n
Decision : Higher the S.D, Higher the Risk
Note : Standard Deviation can never be Negative. It can be 0 but not Negative.
STANDARD DEVIATION OF AN 'INDIVIDUAL SECURITY' : BASED ON FUTURE DATA

Standard Deviation () =  probabilit y  (Given Return  Expected Return) 2
Decision : Higher the S.D, Higher the Risk
VARIANCE: Variance = (Standard Deviation)2 = 2 Decision : Higher the variance, Higher the risk.
Standard Deviation
COEFFICIENT OF VARIATION(CV) : BASED ON PAST DATA: CV =
Average Return
Decision : Higher the CV, Higher the risk.
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Standard Deviation
COEFFICIENT OF VARIATION(CV) : BASED ON PROBABILITY: CV =
Expected Return
Decision : Higher the CV, Higher the risk.
RETURN OF PORTFOLIO : BASED ON PAST DATA

The Return of the portfolio is the weighted average return of individual security .
Return Of Portfolio = ARA x WA + ARB x WB Where, AR = Average Return
RETURN OF PORTFOLIO : BASED ON PROBABILITY

Return Of Portfolio = ERA x WA + ERB x WB Where, ER = Expected Return
Note : Sum of Weights used in Portfolio for different security will always be equal to 1 .
STANDARD DEVIATION OF THE PORTFOLIO CONSISTING OF TWO SECURITIES
Standard Deviation [σ A B ] = σ A2 WA2  σB2 WB2  2 σ A σB WA WB r A,B
Where , [σ A B ] = Standard Deviation of Portfolio consisting of Security A & B

σ A = Standard Deviation of Security A; σB = Standard Deviation of Security B
WA = Weight of Security A ; WA = Weight of Security B ;
rA,B= Coefficient of Correlation Between Security A and Security B
Covariance (A , B )
COEFFICIENT OF CORRELATION (rA, B) : Coefficient of Correlation between A & B : rA, B =
σ A  σB
COVARIANCE OF PORTFOLIO : BASED ON PAST DATA

Given ReturnA  Average ReturnA   Given ReturnB  Average ReturnB  dA  dB 
Coverience (A,B) = =
n n
COVARIANCE OF PORTFOLIO : BASED ON PROBABILITY

 Covariance (A , B) = Probabilty x (Given ReturnA - Expected ReturnA) x (Given ReturnB - Expected ReturnB)
=Probabilty x (dA x dB)
RANGE OF ‘r': Range of r is between -1 to +1
MEANING OF r = +1 : It is a Perfect Positive Correlated Portfolio.ÌPortfolio Risk will be Maximum.

Standard Deviation Of Portfolio will become (A+B) = A x WA + B x WB
It means two securities are moving in same direction.
MEANING OF r = -1 It is a Perfect Negative Correlated Portfolio.

Portfolio Risk will be minimum.Standard Deviation Of Portfolio will become (A+B) = A x WA - B x WB
It means two securities are moving in opposite direction.
MEANING OF r = 0 It is a No Correlated Portfolio.Portfolio Risk will be between minimum and maximum
range.Standard Deviation Of Portfolio will become (A+B) = σ2 A  W2A  σ2B  W2B
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STANDARD DEVIATION OF PORTFOLIO CONSISTING OF THREE SECURITIES
σ A2WA2 + σB2WB2 + σC2WC2

ABC =
+ 2σ A σB WA WB rA,B + 2σBσ CWBWC rB, C + 2σCσ A WCWA rC, A
When r = +1 we can use short cut formula σ ABC  σ A WA  σBWB  σCWC
STANDARD DEVIATION OF PORTFOLIO CONSISTING OF FOUR SECURITIES

 σ ABCD =
σ A2WA2 + σB2WB2 + σC2WC2 + σD2WD2

+ 2σ A σB WA WB rA ,B + 2σBσCWBWC rB,C + 2σCσDWCWD rC,D + 2σDσ A WDWA rD, A + 2σ AσCWA WC rA ,C
+ 2σBσDWBWD rB,D
When r = +1 we can use short cut formula σ ABCD = σ A WA  σBWB  σCWc  σDWD
STANDARD DEVIATION OF PORTFOLIO CONSISTING OF RISKY AND RISK FREE SECURITY

 σ Risky + Risk Free = σ Risky x WRisky
WHEN WE TAKE BORROWINGS FOR INVESTMENT IN STOCK MARKET

Let the additional amount to be borrowed be X .
 Return Of Portfolio = Market Return x (1 + X) - Risk Free Return Paid on Borrowing x X = Rm x (1 + X) - Rf x X
 Standard Deviation / Risk Of Portfolio = Standard Deviation of Market x (1 + X) = m x (1 + X)
CAPITAL ASSET PRICING MODEL (CAPM) BASED RETURN

BetaSecurity
 Equation:- CAPM Return = Rf + Beta (Rm – Rf) = Rf + BetaSecurity(Rm - Rf)
Market
Where Rf = Risk Free Return, Rm = Market Return
Note: Beta Of Market is always equal to 1
MARKET RISK PREMIUM: Market Risk premium = Rm - Rf
SECURITY RISK PREMIUM: Security Risk Premium = BetaSecurity(Rm - Rf)
HOW TO CALCULATE MARKET RETURN (Rm)

 Market means all the securities taken together. • In India Sensex or Nifty is denoted as market. • Market Return
is always calculated on total basis.
(Total P1  Total P0 )  Total Dividend
 Equation:- Rm =
Total P0
OVERVALUED AND UNDERVALUED CONCEPT

CASE VALUE TAKING CAPM BASE STRATEGY
If CAPM Return > Given Return Overvalued or Overpriced Sell
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If CAPM Return < Given Return Undervalued or Underpriced Buy

If CAPM Return = Given Return Correctly valued or Correctly priced Hold
HOW TO CALCULATE BETA OF SECURITY ?

We can calculate Beta of security in the following manner :
(i) % Change Formula (ii) Co-Variance Formula (iii) Regression Formula (iv) Correlation Formula
BETA CALCULATION USING % CHANGE FORMULA

Change in Security Return
Hence Beta may also be defined by using following relation : Beta =
Change in Market Return
This equation is normally applicable when two return data is given.
BETA CALCULATION USING CO-VARIANCE

Covariance between Security and Market Covariance (s,m)
Beta of an Asset or Security = =
Variance of the market σm2
BETA CALCULATION USING REGRESSION (COMPLETELY AVOID THIS CONCEPT FOR EXAM
Beta of Security   XY – nX Y Where 'X' represents Market Return and 'Y' represents Security Return.
2
 X2 – nX
rs,m  σs
BETA CALCULATION USING CORRELATION: Equation : Beta of Security =
σm
BETA OF PORTFOLIO: Beta of portfolio is weighted average Beta.
BETA OF MARKET: Beta of market is always assumed to be 1.

MERGER & ACQUISITIONMERGER & ACQUISITION
CALCULATION OF COVARIANCE OF A SECURITY WITH SAME SECURITY
Covariance of a security with same security will be Variance (Standard Deviation)2
CORRELATION OF A SECURITY WITH SAME SECURITY :Correlation of a security with same security will be 1.
CALCULATION OF PORTFOLIO RETURN WITH THE HELP OF Rm & BETA OF PORTFOLIO

Portfolio Return = Rm x Beta of Portfolio
Coupon Amount Re ceived

CALCULATION OF Rf RATE : Rf Rate = x 100
Investment Amount
SHARPE’S RATIO (REWARD TO VARIABILITY RATIO)

It means excess return per unit of total risk.Decision: Higher the Better
Rp  R f Rs  R
f
 or
p s
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TREYNOR’S RATIO (REWARD TO VOLATILITY RATIO)

It means excess return per unit of Beta.Decision: Higher the Better
Rp  R f Rs  R
Equation : or f
Bp Bs
Where, Rp = Return Of Portfolio ; Rs = Return Of Security; Bp = Beta Of portfolio ; Bs = Beta Of Security ;
σp =Standard Deviation Of Portfolio ; σs = Standard Deviation Of Security
JENSEN’S MEASURE (JENSEN’S ALPHA): It is the difference between actual return and CAPM return.
Equation : Actual Return - CAPM Return
Note: Actual Return will be given in question ; CAPM Return = Rf + Beta x ( Rm - Rf)
Decision : Higher & Positive : Outperformance ; Lower & Negative : Underperformance
Security Market Line (SML): Equation : SML Return = Rf + Beta (Rm - Rf)
s
CAPITAL MARKET LINE (CML): Equation: CML Return = R f   (Rm  R f )
m
CHARACTERSTIC LINE (CL) : Equation : Rs  a  Beta  Rm Where; a = intercept (Also known as Alpha)
Rm  R f
SLOPE OF SML : Equation : Slope of SML =
Beta of Market
Rm  R f
SLOPE OF CML : Equation : Slope of SML =
S.D. of Market
SLOPE OF CL : Equation : Slope of CL is Beta of security.
CALCULATION OF EXPECTED MPS WHEN PROBABILITY IS GIVEN

Equation : Expected MPS (P0) or Price = Price1 x Prob.1 + Price2 x Prob.2 + _ _ _ _ _ _
ARBITRAGE PRICING THEORY (APT) : Equation :APT = Rf + Beta x Risk Premium of each factor
Where Risk Premium = Actual Return - Expected Return
BETA IN CASE OF MERGER

Beta of merged company will be weighted average beta of individual company.
Equation: BetaA B  BetaA  WA  BetaB  WB
OPTIMUM WEIGHTS
In this concept, we will find such weights which will help us to minimize our portfolio risk.
B2  rA ,B   A  B
Equation WA = ; WB = 1 - WA
 A2  B2  2  rA ,B   A  B
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OPTIMUM WEIGHTS WHEN R = -1 : Alternative 1 : Same as above.

B
Alternative 2: Shortcut (Can be used in exam) WA =    ; WB = 1 - WA
A B
TREATMENT OF INFLATION RATE

When inflation rate rises: Revised Ke = Existing Ke + Rise in Inflation Rate
When inflation rate falls: Revised Ke = Existing Ke - Fall in Inflation Rate
CALCULATION OF BETA USING CAPM: Equation: CAPM Return = Rf + BetaS (Rm - Rf)
CAPM Re turn  Rf
Where BetaS=
Rm  R f
COVARIANCE CALCULATION USING BETA : Equation: Cov(A,B) = BetaA  BetaB  m2
COVARIANCE CALCULATION USING 'r' : Equation : Cov (A,B) = rA,B x A x B
COVARIANCE MATRIX : It is a presentation of covariance of each security with another security.
Format:
A B C
A COV(A,A) COV(A,B) COV(A,C)
B COV(B,A) COV(B,B) COV(B,C)
C COV(C,A) COV(C,B) COV(C,C)
Note: Cov(A,A) = Variance of A, and likewise.
HOW TO CALCULATE SYSTEMATIC RISK (IN %)

Equation : For a Security = BetaS2 x m2 ; For a Portfolio = BetaP2 x m2
HOW TO CALCULATE UNSYSTEMATIC RISK OF PORTFOLIO ?

Security Unsystematic Risk : Total Risks - Systematic Risks
Portfolio Unsystematic Risk : Alternative 1: Total Riskp - Systematic Riskp ;Alternative 2: USRA2 WA2 +USRB2 WB2
CALCULATION OF SR AND USR USING r2

Systematic Risk of a Security = rs,m2  s2 ; Unsystematic Risk of a Security = (1  rs,m2 )  s2
Extra Notes: SR is known as explained Variance and USR is known as unexplained variance.
Explained Variance
SR = rs,m2 x s2  rs,m2 =
Total Variance
BETA OF CASH : Beta of cash is always assumed to be zero.
MARKET ATTITUDE TOWARDS RISK : Equation: Rm  R f

m
Meaning: Excess Return of Market, per unit of Market Risk. Decision : Higher the Better.
HOW TO SELECT BEST MANAGER ? Manager who will give highest excess return (%), will be considered best.
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Actual Re turn  Fair Re turn

Excess % Return : x 100
Fair Re turn
Where; Actual Return will be given in question. Fair Return means CAPM Return.
COEFFICIENT OF DETERMINATION : r2 is known as Coefficient of Determination.
a  Y  b  XY  n(Y)2
r2 = [ same equation is also given in Miscellaneous Chapter ]
2
 Y  n(Y) 2
∑ (d Ad)
TRACKING ERROR : The Tracking Error is calculated as follows: Tracking Error =
n-1
where, d = Differential return ; Ad = Average differential return ; n = No. of observation
Higher the tracking error higher is the risk profile of the fund. If the funds outperform or underperform their
benchmark indices; it clearly indicates that of fund managers are not following the benchmark indices properly.
FOREIGN EXCHANGE
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HOME CURRENCY OR DOMESTIC CURRENCY

Country's Own Currency is known as Home Currency.
Example : For India " Rupee" is the domestic currency. ; For Japan "Yen" is the domestic currency. ; For Germany
"Euro" is the domestic currency.
FOREIGN CURRENCY
For a country, any Currency other than home currency is known as Foreign Currency.
Example : For India " US$" is the foreign currency. ; For Japan " ` " is the foreign currency. ; For Germany " ` "
is the foreign currency.
EXCHANGE RATE
Exchange Rate is the value of one currency for the purpose of conversion into another currency.
Exchange Rate is of two types : (a) Spot Exchange Rate (b) Forward Exchange Rate
Example : 1 $ = ` 70, It is an exchange rate.
SPOT RATE :Spot Rate is the rate applicable for immediate settlement.
FORWARD RATE :Forward Rate is the rate applicable for future settlement .
ONE WAY QUOTE :

Here Bid and Ask Rate is same thats why it is known as One-way Quote. Example : 1 $ = Rs. 42.50
TWO WAY QUOTE

Example : 1 $ = 47.6500 - 47.6595 ; In this quote 47.6500 is the bid rate and 47.6595 is the ask rate.
ASK RATE AND BID RATE : There are two types of rates in a foreign exchange quote :
(i) Bid Rate (Bank Buying Rate) : Bid Rate is the rate at which Bank Buys Left Hand Currency
(ii) Ask Rate (Bank Selling Rate / Offer Rate) : Ask Rate is the Rate at which Bank Sells Left Hand Currency .
NOTE: Ask Rate will always be greater than Bid Rate .
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NOTE: The quote of Bid and Ask Rate is given from the banker's point of view .
DIRECT AND INDIRECT QUOTE

Direct Quote : A direct quote is the home currency price for one unit foreign currency.
Example : The quote $ 1 = ` 44.00 is a direct quote for India.
Indirect Quote : An indirect quote is the foreign currency price of one unit of the home currency.
Example : The quote ` 1 = $ 0.0227 is an indirect quote for India.
HOW TO CONVERT DIRECT QUOTE INTO INDIRECT QUOTE AND VICE VERSA (ONE WAY QUOTE) ?
Direct Quotes can be converted into Indirect Quotes by taking reciprocals of each other, which can be
1 1
mathematically expressed as follows : Direct Quote = or Indirect Quote =
Indirect Quote Direct Quote
1
Example : 1 DM = Rs. 20 is a direct quote for India. ` 1 = DM is indirect quote for India
20
HOW TO CONVERT DIRECT QUOTE INTO INDIRECT QUOTE AND VICE VERSA (TWO WAY QUOTE) ?
Direct Quotes can be converted into Indirect Quotes by taking reciprocals of each other and then switching the
position.
Example: Direct Quote wih reference to India : 1 $ = ` 46.10 - 46.20.
1 1
Indirect Quote with reference to India : ` 1 = $ -$ or ` 1 = $ .02165 - $ .02170
46.20 46.10
EXCHANGE MARGIN
In case of Buying Rate Quoted by Bank :
Deduct Exchange Margin : i.e. Actual Buying Rate = Bid Rate (1 - Exchange Margin)
In case of Selling Rate Quoted by Bank :
Add Exchange Margin : i.e. Actual Selling Rate = Ask Rate (1 + Exchange Margin)
PURCHASE PRICE PARITY THEORY (PPPT) : CALCULATION OF SPOT RATE

PPP Theory is based on the concept of “Law of One Price” i.e. the price of the commodity shall be the same in
two markets.
A[Current Price in India]
Equation : Spot Rate (`/$ ) = B[Current Price in USA]
PURCHASE PRICE PARITY THEORY (PPPT) : CALCULATION OF FORWARD RATE

 1  Rupee Inflation 
As per PPP Theory we have : Forward Rate (Rupee/Dollar) =   x Spot Rate (Rupee/Dollar)
 1  Dollar Inflation 
Forward Rate (Rupee/Dol lar)  1  Rupee Inflation 

or = 
Spot Rate (Rupee/Dol lar)  1  Dollar Inflation 
NOTE : In the above calculation the rate of inflation should be taken proportionate to Forward period .
Case (i) : When Forward Period is less than one year :
Forward Rate (Rupee/Dollar)  1  Rupee Inflation Adjusted For Period 
=  
Spot Rate (Rupee/Dollar)  1  Dollar Inflation Adjusted For Period 
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Case (ii) : When Forward Period is more than one year:

n
Forward Rate (Rupee/Dollar)  (1  Rupee Inflation) 
=
Spot Rate (Rupee/Dollar)  (1  Dollar Inflation)n 
NOTE : If PPPT do not holds true then Arbitrage Opportunity will emerge .
INTEREST RATE PARITY THEORY (IRPT)

IRPT is based on the concept that investment opportunity in any two given country will always be same.
Forward Rate (Rupee/Dol lar) 1  Rupee Interest Rate
Equation: =
Spot Rate (Rupee/Dol lar) 1  Dollar Interest Rate
NOTE : In the above calculation the rate of interest should be taken proportionate to Forward period .
Case (i) : When Forward Period is less than one year:
Forward Rate (Rupee/Dollar)  1  Rupee Interest Adjusted For Period 
=  
Spot Rate (Rupee/Dollar)  1  Dollar Interest Adjusted For Period 
Case (ii) : When Forward Period is more than one year :
n
Forward Rate (Rupee/Dollar)  (1  Rupee Interest) 
=
Spot Rate (Rupee/Dollar)  (1  Dollar Interest)n 
DETERMINATION OF PREMIUM & DISCOUNT AS PER PPPT

Higher Rate of Inflation in one country (as compared to the other country) results in discount of currency of that
country and vice-versa.
DETERMINATION OF PREMIUM & DISCOUNT AS PER IRPT

Higher Rate of Interest in one country (as compared to the other country) results in discount of currency of that
country and vice-versa.
LEADING TECHNIQUE : Leads means advancing the timing of payment or receipt.
LAGGING TECHNIQUE : Lags means postponing the timing of payment or receipt.
PREMIUM AND DISCOUNT

Forward Rate  Spot Rate 12
Rate of Premium or Discount of Left Hand Currency is given by: x x100
Spot Rate Forward Period
TRANSACTION RISK / LOSS / EXPOSURE

Amount paid or received Before Exchange Rate Change xxx
Amount paid or received After Exchange Rate Change xxx
Transaction Loss or Gain Due To Currency Fluctuation xxx
CALCULATION OF EXPECTED EXCHANGE RATE USING PROBABILITY

Expected Exchange Rate (ER): ER1  Pr ob.1  ER2  Pr ob.2  ER3  Pr ob.3  .....................
Always remember: Sum of probability to be equal to 1.
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INTEREST RATE DIFFERENTIAL : NO ARBITRAGE

Interest Rate Differential is just another name of premium or discount of one currency in relation to another
currency i.e.
FR[Rupee/D ollar] - SR[Rupee/D ollar] 12
= x x 100 = Interest Rate of Rupee - Interest Rate of Dollar
SR[Rupee/D ollar] Forward Period
SQUARING UP THE POSITION / HOW TO CLOSE OR COVER A POSITION

Buy position should be closed by taking a sell position and vice - versa.
FOREIGN EXCHANGE ACCOUNTS

• Exchange Position Account : All purchases and sales whether spot or forward are recorded in this account.
• Cash Position (Nostro Account) : All the items related to Spot (Cash) transaction are recorded in this account
Contributi on
CONTRIBUTION TO SALES RATIO : Contribution to Sales Ratio = x 100
Sales
DECISION : Higher the C/S Ratio better the situation
CALCULATION OF GAIN OR LOSS DUE TO BANK STRIKE

Amount paid or received before bank's strike xxx
Amount paid or received after bank's strike xxx
Gain or Loss due to bank strike xxx
CALCULATION OF NET EXPOSURE USING FORWARD RATE AND SPOT RATE

Net Exposure, we mean advantage of using Forward Contract over Spot Contract .
Equation : Net Exposure = Net Cash Flow x Forward Rate - Net Cash Flow x Spot Rate
= Net Cash Flow x (Forward Rate - Spot Rate) = Net Cash Flow x Swap Points
DECISION : A positive Net Exposure indicates benefit of Forward Rate over Spot Rate.
MID RATES : Mid rate is the average of ask rate and bid rate.
TYPES OF EXCHANGE RATE : There can be four types of Exchange Rates :

(i) Spot Rate : of today, quoted by bank, as on today.
(ii) Forward Rate : of future date, quoted by bank, as on today.
(iii) Expected Rate : of future date, estimated by company's management.
(iv) Spot Rate of maturity : quoted by bank, on maturity. This rate will be known only on maturity.
INTERNATIONAL FISHER EFFECT (IFE)It analyses the relationship between the Interest Rates and the Inflation.
As per IFE we have (1 + Money Interest Rate ) = (1 + Real Interest Rate) (1 + Inflation Rate)
GAIN OR LOSS DUE TO EXPORT BILL

Amount received under forward contract under an export bill xxx
Amount which could have received at today's value of export bill xxx
Gain or Loss xxx
AGGRESSIVE V/S DEFENSIVE APPROACH

When we enter into a forward contract, it indicates defensive approach.
When we remain unhedged, it indicates an aggressive approach.
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EXTERNAL COMMERCIAL BORROWINGS

When a domestic company borrows from foreign countries (in foreign currency), then such borrowing is known
as ECB.
INTER BANK RATES : The rate which are quoted among the authorised dealers i.e. from one bank to another is
called "Inter Bank Rates".
MERCHANT RATES : The rate quoted by banks to their non bank customers are called "Merchant Rates".
CANCELLATION OF FORWARD CONTRACT : CUSTOMER CONTACTED THE BANK ON DUE DATE

• Action : A forward contract can be cancelled by entering into a reverse contract i.e. sale contract by purchase
contract and purchase contract by sale contract.
• Applicable Rate : At Spot Rate prevailing on Due Date
• Settlement Of Gain or Loss : Customer will be entitled for both Profit and Loss .
CANCELLATION OF FORWARD CONTRACT : CUSTOMER CONTACTED THE BANK BEFORE DUE DATE
• Action : A forward contract can be cancelled by entering into a reverse contract i.e sale contract by purchase
contract and purchase contract by sale contract .
• Applicable Rate : At Forward Rate prevailing as on today for due date
• Settlement Of Gain or Loss : Customer will be entitled for both Profit and Loss .
EXTENSION OF FORWARD CONTRACT : CUSTOMER CONTACTED THE BANK BEFORE DUE DATE OR CUSTOMER
CONTACTED THE BANK ON DUE DATE
Extension involves two steps : (i) Cancellation Of Original Contract (ii) Entering into a new contract
CANCELLATION AFTER DUE DATE

• Action : A forward contract can be cancelled by entering into a reverse contract i.e. sale contract by purchase
contract and purchase contract by sale contract.
• Applicable Rate : At Spot Rate prevailing on the Date when customer came for cancellation.However , As per
FEDAI Rule 6 a forward contract which remains overdue more than 3 days after due date shall stand automati-
cally cancelled within 3 working days after the maturity date.So in this case 3rd Day Rate will be applied if
customer did not contacted till 3 days after due date.
SWAP LOSS
Rules as per FEDAI :
Bank will sell spot xxx
Bank will buy nearest month forward xxx
Swap Loss xxx
NOTE : Swap Loss is calculated by bank taking inter bank rate. In other words, while calculating swap loss, one
bank deals with another bank.
NOTE : It may be noted that when one bank deals with another bank, exchange margin is not applicable. Ex-
change Margin is applicable only when one bank deals with customer.
INTEREST ON OUTLAY OF FUND

Rules as per FEDAI : Cancel after due date
Bank will buy at cover rate xxx
Bank will sell at Spot xxx
Difference xxx
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Interest will be calculated on difference.

Rules as per FEDAI : Early Delivery
Bank will buy at original contract xxx
Bank will sell spot xxx
Difference xxx
Interest will be calculated on difference.
NOTE : Swap Loss is calculated by bank taking inter bank rate. In other words, while calculating swap loss, one
bank deals with another bank.
NOTE : It may be noted that when one bank deals with another bank, exchange margin is not applicable. Ex-
change Margin is applicable only when one bank deals with customer.
NOTE : This interest shall be calculated for the period from the due date of maturity of the contract and the actual
date of cancellation of the contract or 3 working days whichever is earlier.
MEANING OF COVER RATE

Whenever a branch enters into forward contract with any customer, the bank takes an opposite position in
inter bank to hedge its position . This position is known as covering and the rate is known as cover rate.
EXTENSION AFTER DUE DATE

It involves two steps :(i) Cancellation after due date. (ii) New contract will be entered for the extended period.
DELIVERY AFTER DUE DATE : It involves two steps :

(i) Cancellation after due date. (ii) Now deliver the currency at spot rate prevailing on the date of delivery.
CALCULATION OF PREMIUM (OR DISCOUNT) ON AN AVERAGE RATE

12 Forward Rate  Spot Rate
Equation: Forward Rate  Spot Rate x x 100 ; Where, Average Rate =
Average Rate Forward Period 2
SPREAD
The difference between Ask and Bid Rates is called the Spread, representing the profit margin of the dealer .
In Rs.:Spread = Ask Rate - Bid Rate In %: Spread = Ask Rate - Bid Rate / Bid Rate
SUB CURRENCY ( SELECTED )

COUNTRY CURRENCY SUB-CURRENCY
France 1 Euro = 100 cents
India 1 Rupee = 100 paise
Japan 1 Yen = 100 cen
Pakistan 1 Rupee = 100 paisa
Switzerland 1 Franc = 100 centimes
United States 1 Dollar = 100 cents
United Kingdom 1 Pound = 100 pence
TYPES OF INTEREST RATE QUOTATION : There are two types of Interest Rate Quotations :
(i) Fixed Rate Of Interest (ii) Floating Rate Of Interest like LIBOR,MIBOR etc
EXPORT RATE AND IMPORT RATE : EXPORT RATE : BID RATE ; IMPORT RATE : ASK RATE
POSITION TAKEN IN FORWARD CONTRACT ON THE BASIS OF EXPECTATION
If we expect a currency to rise in future : Buy that Currency.
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If we expect a currency to fall in future : Sell that Currency.
FEDAI RULE FOR ROUNDING OFF THE PERIOD

According to FEDAI:
(i) If foreign currency is at a premium: Round Off to lower month
(ii) If foreign currency is at a discount: Round Off to higher month
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INTERNATIONAL FINANCIAL MANAGEMENT
INTERNATIONAL CAPITAL BUDGETING

Two approaches:(a)Home Currency Approach (b)Foreign Currency Approach
HOME CURRENCY APPROACH

Step 1 : Compute Foreign Currency Cash Flows
Step 2 : Convert Foreign Currency Cash Flows into Home Currency Cash Flows by using Estimated Spot Rate or
Forward Rate
Step 3 : Calculate Home Currency Discount Rate .
Step 4 : Calculate Home Currency NPV by discounting Home Currency Cash Flows by Home Currency Discount
Rate
FOREIGN CURRENCY APPROACH

Step 1 : Compute Foreign Currrency Cash Flows .
Step 2 : Compute Foreign Currency Discount Rate .
Step 3 : Compute Foreign Currency NPV by Discounting Foreign Currency Cash Flows by Foreign Currency Dis-
count Rate .
Step 4 : Convert Foreign Currency NPV into Home Currency NPV by using Spot Rate.
NOTE: NPV arrived at both Home Currency Approach and Foreign Currency Approach will be same.
NOTE: Calculation of Discount Rate:(1+ Risk Adjusted Discount Rate )=( 1+ Risk Free Rate )( 1+ Risk Premium )
NOTE: Risk Adjusted Discount Rate in Domestic Country and Foreign Country will be different.
NOTE: It is generally assumed that Risk Premium attached to any project will be same both in Domestic Country
and Foreign Country Approach.
NPV (NET PRESENT VALUE)

Equation : Net Present Value (NPV) = Present Value Of Cash Inflows - Present Value Of Cash Outflows
DECISION :NPV > 0 Accept the Proposal, NPV = 0 Indifference Point, NPV < 0 Reject the Proposal
NOTE: If question has not said specifically that which evaluation technique should be used, we will always
prefer NPV Method.
Present Value Of Inflows
PI OR PROFITABILITY INDEX Equation: Profitability Index (PI)  Present Value Of Outflows
DECISION: PI > 1 Accept the Proposal, PI = 1 ; Indifference Point, PI < 1 Reject the Proposal
PAY BACK PERIOD / PAY OFF PERIOD / CAPITAL RECOVERY PERIOD : IN CASE OF EVEN CASH FLOWS
Payback Period is the period within which the total cash inflows from the project equals the cost of the project.
Initial Investment
Payback Period =
Annual Cash Inflows
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DECISION: The project with the lower payback period will be preferred.
PAY BACK PERIOD / PAY OFF PERIOD / CAPITAL RECOVERY PERIOD : IN CASE OF UNEVEN CASH FLOWS
Remaining Amount
Equation : Payback Period = Completed Years +
Available Amount
DECISION : The project with the lower payback period will be preferred.
ADR / GDR / International Issues

Many companies raise fund from foreign countries for financing their investment activities.
Some important issues are:
(i) ADR (ii) GDR (iii) Euro Convertible Bond (iv) FCCB (Foreign Currency Convertible Bond) (v) Masala Bond
Total Amount Raised Through GDR

NUMBER OF GDR OR ADR CALCULATION : Equation:
Issue Price Of One GDR
D0 (1  g)
COST OF GDR OR ADR : Equation:
KGDR  g
UNEQUAL LIFE OF PROJECT :

If two projects have unequal life, then the two projects are not comparable. To make them comparable we will
use Equivalent Annual Value Concept for each project by applying the following formula :
NPV or Present Value Of Cash Outflow or Present Value Of Cash Inflow
Equation:
PVAF( K %, n years)
Where K % = Discount Rate and n = Total Life of the project
CALCULATION OF OVERALL BETA / FIRM BETA / ASSET BETA / PROJECT BETA : WITHOUT TAX
Overall Beta or Firm Beta or Asset Beta or Project Beta :
 Equity  Debt
= Equity Beta x   + Debt Beta x Debt + Equity
 Debt  Equity 
CALCULATION OF OVERALL BETA / FIRM BETA / ASSET BETA / PROJECT BETA : WITH TAX
Overall Beta or Firm Beta or Asset Beta or Project Beta :
 Equity  Debt (1 – tax)
= Equity Beta x   + Debt Beta x
 Debt(1 - tax)  Equity  Debt (1 – tax)  Equity
LEVERED FIRM AND UNLEVERED FIRM

If a company finances its investments and projects completely with Equity then the company is known as
Unlevered Firm.
If a company finances its investments and projects both with Equity and Debt then the company is known as
Levered Firm.
KE, KD, KO CALCULATION : WITHOUT TAX

Alt. 1 : K0 = Risk Free Rate + BetaOverall (Market Return - Risk Free Return)
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Alt. 2 : K0 = Cost of Equity x Weight of Equity + Cost of Debt x Weight of Debt = Ke x We + Kd x Wd

Where , Ke = Risk Free Rate + Equity Beta (Market Return - Risk Free Rate) = Rf + BEquity (Rm - Rf)
Kd = Rf + BDebt (Rm - Rf)
KE, KD, KO CALCULATION : WITH TAX

K0 = Cost of Equity x Weight of Equity + Cost of Debt x Weight of Debt = Ke x We + Kd x Wd
Where , Ke = Risk Free Rate + Equity Beta (Market Return - Risk Free Rate) = Rf + BEquity (Rm - Rf)
Kd = Interest (1 - Tax)
KO OF UNLEVERED FIRM : Cost Of Capital = Cost Of Equity
OB OF UNLEVERED FIRM :Overall Beta For Unlevered Firm = Equity Beta
ADJUSTED PRESENT VALUE :

Adjusted Net Present Value is the project 's NPV after considering the effect of financing .
How to Calculate Adjusted NPV:
Step 1 : Compute NPV of the project on the assumption that it is fully financed by Equity Shareholders .This would
mean that you would discount the cash flows at cost of equity. This is called Base Case NPV .
Step 2 : Compute the issue cost . Issue costs are the costs that the firm has to incur to raise the money. It will
always be normally incurred in Year 0 and it represents an Outflow .
Step 3 : Compute the present value of the tax shield / saving on interest. This is achieved by discounting the tax
saving at the pre tax cost of debt or interest rate before tax .
Step 4 : Adjusted Net Present Value = Base Case NPV - Issue Costs + Present Value of Interest Tax Shield/Saving
SENSITIVITY OF EXCHANGE RATE :

 Given Exchange Rate Exchange rate at which NPV is 0 
 Sensitivity(%)   Given exchange rate  x100

XXXXXXXXXXX FUTURES
INTRODUCTION Future contract is nothing but a forward contract covered under forex.
SEGMENT OF STOCK MARKET

There are two type of market which exist in Stock Exchange : (i) Cash Market (ii) Future Market
PROFIT OR LOSS UNDER STOCK MARKET : LONG POSITION

POSITION ACTUAL PRICE ON EXPIRATION PROFIT/LOSS
Long Increase Profit
Long Decrease Loss
PROFIT OR LOSS UNDER STOCK MARKET : SHORT POSITION

POSITION ACTUAL PRICE ON EXPIRATION PROFIT/LOSS
Short Increase Loss
Short Decrease Profit
From the above analysis we can conclude that :

• If Price rises then the Buyer of the Future Contract Gains and Seller Of the Future Contract Losses.
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• If Price falls then the Buyer of the Future Contract losses and Seller Of the Future Contract Gains
HOW TO SETTLE A POSITION : LONG

Long Position is settled by taking Short Position at the time of settlement
HOW TO SETTLE A POSITION : SHORT

Short Position is settled by taking Long position at the time of settlement.
TYPES OF POSITIONS IN STOCK MARKET

• Long Position : If a person buys or holds an asset, he is said to be in a Long Position.
• Short Position : If a person sells an asset, he is said to be in a Short Position.
POSITION DETERMINATION ON THE BASIS OF EXPECTATIONS

If the price is expected to Increase : Buy If the price is expected to Decrease : Sell
LOT SIZE : In 'Derivative' chapter, 'lot size' concept is applicable.This lot size is determined by SEBI/NSE/BSE.
TYPES OF DERIVATIVES IN INDIA :(i) Stock Futures (ii) Index Futures (iii) Commodity Futures (iv) Currency Futures
FAIR FUTURE PRICE (FFP) : WHEN DIVIDEND INCOME IS NOT GIVEN

Equation : Fair Future Price = Current Market Price x ert
Where, r = risk free interest rate p.a with continuous compounding ; t = time to maturity expressed in years
(Number of Days/365 or Number of Months/12)
FAIR FUTURE PRICE (FFP) : IN CASE OF DIVIDEND INCOME

Equation : Fair Future Price =[CMP - PV of Dividend Income] x ert
Where, r = risk free interest rate p.a with continuous compounding; t = time to maturity expressed in years
(Number of Days/365 or Number of Months/12)
FAIR FUTURE PRICE : WHEN INCOME IS EXPRESSED IN %

Equation : FFP = CMP x e(r - y) x tWhere, y = dividend yield expressed in % p.a.
NOTE : Dividend Yield is always given or calculated on a per annum basis.
FFP : WHEN STORAGE COST IS GIVEN : Equation: FFP = [CMP +PV of Storage Cost] x ert
FFP : WHEN STORAGE COST IS EXPRESSED IN %:Equation:FFP = CMP x e(r - s) x tWhere,S = Storage Cost p.a in %
FFP : WHEN CONVENIENCE YIELD IS GIVEN IN % : It is the % return which is given in case of commodity.
Equation : FFP = CMP x e(r - c) x t Where, C = Convenience Yield
FFP : IN CASE CONVENIENCE YIELD IS EXPRESSED IN AMOUNT : FFP = [CMP - Convenience Yield] x ert
WHAT IS THE FUNDA OF FFP ?

Basic Principle While Calculating Fair Future Price :
(i) Cost : If Given In ` : Add in CMP ; If Given In % : Add in rate
(ii) Dividend : If Given In ` : Deduct in CMP ; If Given In % : Deduct in rate
WHEN ARBITRAGE IS POSSIBLE ? The Actual Future price is the price that is prevailing in the market. The
Theoretical Fair Future Price is the price which is calculated by using compounding technique. If Actual Future
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Price (AFP) is not equal to the Fair Future Price (FFP) arbitrage opportunity will emerge.
HOW TO CALCULATE ARBITRAGE PROFIT ? : IF AFP > FFP

DECISION :
CASE VALUATION BORROW/INVEST CASH FUTURE
MARKET MARKET
Actual Future Value > Fair Future Value Overvalued Borrow Buy Sell
HOW TO CALCULATE ARBITRAGE PROFIT ? IF AFP < FFP

DECISION :
CASE VALUATION BORROW/INVEST CASH FUTURE
MARKET MARKET
Actual Future Value < Fair Future Value Undervalued Invest Sell* Buy
* here we are assuming that arbitrageur holds one share in cash market.
COST OF CARRY CONCEPT : Difference between Future Price and Cash Price is known as 'Cost of Carry'.
Equation : Cost of Carry = Future Price - Cash Price
INDEX HEDGING POSITION TO BE TAKEN

If you have taken a long position on any security: Take short position in Index.
If you have taken a short position on any security: Take long position in Index.
INDEX HEDGING VALUE OF POSITION : FOR COMPLETE HEDGING

Extent Of Hedging or Total Value to be hedged or Value of Perfect Hedge: Existing Beta Of The Stock x
Value Of Transaction or Value Of Exposure or Current Value Of Portfolio which requires hedging
PARTIAL HEDGING : Partial Hedging = CV x EB x % which you want to hedge.
HEDGING USING INDEX : WHEN BETA IS INCREASED OR DECREASED [CASE OF PARTIAL HEDGE]
Assumed: Long Position Security
Decrease the Beta: • Sell Nifty • CV x (EB - DB) ; Increase the Beta: • Buy Nifty • CV x (DB - EB)
DETERMINATION OF NUMBER OF CONTRACT OF INDEX FUTURE TO BE TAKEN

Value Of Total Index Future Position
Equation:
Value Of One Index Future Contract
BETA OF CASH AND CASH EQUIVALENT :Beta of Cash & Cash equivalent is always assumed to be zero.
s
HEDGE RATIO CALCULATION UNDER FUTURE CONTRACT : Equation: Hedge Ratio = rs,f x
f
Where, s = S.D of Spot Price ; f = S.D of Future Price ; rs, f = Coefficient of correlation between Spot Price &
Future Price
WHEN INITIAL MARGIN AMOUNT IS NOT GIVEN IN QUESTION

Equation : Daily Absolute Change + 3 x Standard Deviation
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MEANING OF CONTANGO/ BACKWARDATION : Basis = Spot Price - Future Price

Basis: Types
Positive: Backwardation Inverted Market ; When Spot Price > Future Price
Negative: Contango Market ; When Spot Price < Future Price
Zero: Convergence ; When Spot Price = Future Price
NOTE: Basis will approach zero towards the expiry of the contract, i.e. on expiry cash and future price will
become equal. This process of the basis approaching to zero is known as convergence.
HOW TO CALCULATE E TO THE POWER OF ANY NUMBER FROM A CALCULATOR

Note : How to solve ab in calculator ?
Step 1 : 12 times of a
Step 2 : - 1
Step 3 :  b
Step 4 : + 1
Step 5 :  = for 12 times
Note : Value of e = 2.71828; Note : Value of Log e = .4343
OPTIONS
XXXXXXXXXXXXX
TYPES OF OPTION CONTRACT: (i) Call Options Contract (ii) Put Options Contract
TYPES OF PARTIES Call Option : (i) Call Writer / Call Seller (ii) Call Holder / Call Buyer
Put Option : (i) Put Writer / Put Seller (ii) Put Holder/Put Buyer
MEANING OF BUYER AND SELLER IN THIS CHAPTER

Buyer and Seller is determined from the view point of right.
The person who has a right under a contract is known as Buyer. The right may be Right to Buy (Call Buyer) or
Right to Sell (Put Buyer).
The person who is giving or selling the right is known as Seller. He may be Call Seller or Put Seller. They have no
right but an obligation to perforn their contract if buyer decides to exercise their right .
OPTION PREMIUM / OPTION VALUE / OPTION PRICE

When the buyer buys a right (either the right to buy or the right to sell) he has to pay the seller a price. This is
called Option Premium.
The premium payable by the buyer to the seller is a one - time deposit non refundable non-adjustable amount.
Option Premium is cost from the viewpoint of holders(buyers) and income from the viewpoint of writers
(sellers).
CALL BUYER V/S CALL SELLER

CALL BUYER CALL SELLER
Pay Premium Receive Premium
Purchase Right Sell Right
Buy Share Sell Share
PUT BUYER V/S PUT SELLER

PUT BUYER PUT SELLER
Pay Premium Receive Premium
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Purchase Right Sell Right

Sell Share Buy Share
IN / OUT / AT THE MONEY OPTION : CALL

MARKET SCENARIO IN/OUT/AT
• Cash Market Price as on expiry > Strike Price In the Money
• Cash Market Price as on expiry < Strike Price Out Of The Money
• Cash Market Price as on expiry = Strike Price At The Money
NOTE: The above position is reversed for the Writer of the Option .
IN / OUT / AT THE MONEY OPTION : PUT

MARKET SCENARIO IN/OUT/AT
• Cash Market Price as on expiry > Strike Price Out Of The Money
• Cash Market Price as on expiry < Strike Price In the Money
• Cash Market Price as on expiry = Strike Price At The Money
NOTE : The above position is reversed for the Writer of the Option .
BREAKDOWN POINT FOR CALL OPTION

Breakeven price is the market price at which the option parties neither makes a profit nor incur any losses.
Break-Even Market Price for Buyer and Seller of Call Option: Exercise Price + Option Premium
BREAKDOWN POINT FOR PUT OPTION

Breakeven price is the market price at which the option parties neither makes a profit nor incur any losses.
Break-Even Market Price for Buyer and Seller of Put Option: Exercise Price - Option Premium
MAXIMUM LOSS AND MAXIMUM PROFIT : FOR CALL

Call Buyer maximum loss will be the amount of premium paid.
Call Seller maximum profit will be equal to the amount of premium received.
Call Buyer maximum profit will be unlimited.
Call Seller maximum loss will be unlimited.
MAXIMUM LOSS AND MAXIMUM PROFIT : FOR PUT

Put Buyer maximum loss will be the amount of premium paid.
Put Seller maximum profit will be equal to the amount of premium received.
Put Buyer maximum profit will be equal to Strike Price - Premium Paid.
Put Seller maximum loss will be Strike Price - Premium Received.
MEANING OF LONG POSITION AND SHORT POSITION

Long Call means Call Buyer Long Put means Put Buyer
Short Call means Call Seller Short Put means Put Seller
POSITION TO BE TAKEN AS PER EXPECTATION : FOR CALL

EXPECTATION CALL
• If Expected Market Price As On Expiry > EP or If Market will go up Buy Call
• If Expected Market Price As On Expiry < EP or If Market will go down Sell Call
• If Expected Market Price As On Expiry = EP or If Market will remain same No action
POSITION TO BE TAKEN AS PER EXPECTATION : FOR PUT

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EXPECTATION CALL
• If Expected Market Price As On Expiry > EP or If Market will go up Sell Put
• If Expected Market Price As On Expiry < EP or If Market will go down Buy Put
• If Expected Market Price As On Expiry = EP or If Market will remain same No action
PROFIT / LOSS : FOR CALL BUYER

 Profit : When Cash Market Price As On Expiry > Strike Price
In such case Call Buyer will exercise the Option.
Net Profit = Cash Market Price As On Expiry - Strike Price - Option Premium
 Loss : When Cash Market Price As On Expiry < Strike Price
In such case Call Buyer will not exercise the option.
His loss is limited to the amount of Call Premium i.e. Loss = Amount Of Premium Paid.
PROFIT / LOSS : FOR CALL SELLER The position of Call Seller will just be opposite of Call Buyer.
PROFIT / LOSS : FOR PUT BUYER

 Profit : When Cash Market Price As On Expiry < Strike Price
In such case Put Buyer will exercise the option .
Net Profit = Strike Price - Cash Market Price as on expiry - Option Premium
Loss : When Cash Market Price As On Expiry > Strike Price
In such case Put Buyer will not exercise the Option.
His Loss will be limited to the amount of premium.
PROFIT / LOSS : FOR PUT SELLER The position of Put Seller will just be opposite of Put Buyer.
RULE OF EXERCISING : FOR CALL BUYER

IF Cash Market Price as on expiry > Exercise Price Call Buyer Will Exercise
IF Cash Market Price as on expiry < Exercise Price Call Buyer Will Not Exercise
RULE OF EXERCISING : FOR CALL SELLER

It may be noted that under Option Chapter, Call Seller has no right to exercise. It is the buyer who has a right
whether he wants to exercise or not.
RULE OF EXERCISING : FOR PUT BUYER

IF Cash Market Price as on expiry > Exercise PricePut Buyer Will Not Exercise
IF Cash Market Price as on expiry < Exercise PricePut Buyer Will Exercise
RULE OF EXERCISE : FOR PUT SELLER It may be noted that under Option Chapter, Put Seller has no right to
exercise.It is the buyer who has a right whether he wants to exercise or not.
FAIR OP AS ON EXPIRY : FOR CALL

Value(Premium) of Call Option at expiration :Maximum of (Cash Market Price As On Expiry - Strike Price , 0)
FAIR OP AS ON EXPIRY : FOR PUT

Value(Premium) of Put Option at expiration :Maximum of (Strike Price - Cash Market Price As On Expiry, 0)
FAIR OP BEFORE EXPIRY (I.E. AT THE TIME OF ENTERING INTO THE CONTRACT) : FOR CALL
Equation : OP of Call as on today = CMP as on today - PV of EP
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FAIR OP BEFORE EXPIRY (I.E. AT THE TIME OF ENTERING INTO THE CONTRACT) : FOR PUT
Equation : EP x e-rt - CMP as on today = OP of Put as on today
RISK NEUTRAL APPROACH : DETERMINATION OF FAIR OP : FOR CALL

Equation : OP of Call as on Today:
[Fair OP of call as on Expiry at high price x P + Fair OP of call as on Expiry at low price x (1 - P)] x e-rt
where, P = Probability of High Price ; 1 - P = Probability of Low Price
HOW TO CALCULATE PROBABILITY ?
Spot Price (1  Interest Rate)  Lower Price 1  r  d 

Alternative 1: P = Alternative 2: P =  
Higher Price - Lower Price  ud 
Where, P1 and P2 are the probability of price increase and price decrease.
S = Current Market Price; S1 = Higher Price ; S2 = Lower Price
C1 = Fair/Value/Premium of Call Option as on expiry at Higher Price i.e Max [ S1 - Exercise Price , 0]
C2 = Fair/Value/Premium of Call Option as on expiry at Lower Price i.e Max [ S2 - Exercise Price, 0]
NOTE: In place of nc (normal compounding) we could have used cc (continuous compounding) as per the require-
ment of question.
OPTION STRATEGY : STRADDLE Straddle can be of two types :

1. Long Straddle : • Buying a Call and a Put with the same strike price and the same exipry date.
• In Long straddle the investor will have to pay premium on the call as well as on put option contract.
2. Short Straddle : • Selling a Call and a Put with the same strike price and the same exipry date.
• In Short straddle the investor will receive premium on the call as well as on put option contract.
• If question is silent always assume Long Straddle.
HEDGE TECHNIQUE : OP CALCULATION : FOR CALL

Equation : Fair OP of call as on today = x CMP - Borrowing ; where  Delta
C1  C2
HEDGE TECHNIQUE : DELTA CALCULATION :   S  S
1 2
C1 = Fair OP of call as on expiry at high price.; C2 = Fair OP of call as on expiry at low price. ; S1 = High Price
S2 = Low Price
1 1
HEDGE TECHNIQUE : BORROWING CALCULATION : Amount of Borrowings : B = (S2 - C2) or (S1 - C1)
1r 1r
Where r = rate of interest adjusted for periods
BSM (BLACK & SCHOLES MODEL) : FOR CALL : Equation : OP of call as on today : CMP x N(d1) - EP x e-rt x N(d2)
 Current Market Price  2

ln    [r  .50  σ ]  t
 Exercise Price 
HOW TO CALCULATE D1 AND D2 ? d1 = ; d2 = d1 - x t
σ t
Where, σ = Standard Deviation; t = remaining life to expiration of the option in terms of year; r = continuous
compounded risk free annual rate of return; ln = Natural Log
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BSM : FOR PUT

rt 
Equation : Value/Premium Of Put : Strike Pice x 1  N(d2 )  e  - Current Market Price x 1  N(d1)

NOTE : We can also use PCPT Model,provided Value of Call is either given or it is already calculated.
BSM : FOR CALL :WHEN DIVIDEND AMOUNT IS GIVEN In this case, we will use Adjusted CMP in place of CMP.
Equation : Adjusted CMP = CMP - PV of Dividend Income
Where Adjusted Current Market Price = Current Market Price - Present Value Of Dividend Income
AMERICAN OPTION AND EUROPEAN OPTION (THEORETICAL CONCEPT)

European Option : When an option can be exercised only on the expiry date, it is called a European Option.
American Option : When an option can be exercised on or before the expiry date, it is called an American
Option.
NOTE : The concept of EUROPEAN & AMERICAN OPTION is only Theoretical and no practical relevance.
NOTE : PE means European Put; CE means European Call; PA means American Put; CA - means American Call
HOW PROFIT AND LOSS IS SETTLED PRACTICALLY IN OPTION CONTRACT ?

If you pay OP : (Buyer) and OP rises : Profit ; and OP falls : Loss
If you receive OP : (Seller) and OP rises : Loss ; and OP falls : Profit
COMPONENT OF OP PREMIUM : FOR CALL

Two Components: (i) Intrinsic Value = Maximum of [CMP Today - EP,0] (ii) Time Value = [OP - IV ]
COMPONENT OF OP PREMIUM : FOR PUT

Two Components: (i) Intrinsic Value = Maximum of [EP - CMP Today, 0] (ii) Time Value = OP - IV
PCPT (PUT CALL PARITY THEORY) Equation: As per PCPT we have :

OP Of Call As On Today + Present Value of Strike Price = OP of Put As On Today + Current Market Price
Condition: Both Call and Put Option should have same exercise price and same maturity.
DECISION ON THE BASIS OF FAIR AND ACTUAL PREMIUM

If Actual Premium > Fair Premium : It is advisable to take seller position
If Actual Premium < Fair Premium : It is advisable to take buyer position
OPTION GREEKS Greeks are a collection of statistical values.

(i)Delta ( Sensitivity to Change in Price of the Underlying Asset ) :
Change in Option Premium
It is calculated as : Delta Δ 
Change in Price of Underlying Asset
Delta of a Call Option is always positive and Delta of a Put Option is always negative
Change in Delta
(ii)Gamma ( Sensitivity to Change in Delta ): It is calculated as : Gamma 
Change in Price of Underlying Asset
(iii)Theta ( Sensitivity to Change in Time to Expiry ) : It is calculated as : Theta 
Change in Time to Expiry
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(iv)Rho ( Sensitivity to Change in Interest Rate ) : It is calculated as : Rho 
Change in Rate of Interest
(v)Vega ( Sensitivity to Change in Volatility of Asset Price ) :
It is calculated as : Vega 
Change in Volatility of Price
INTEREST RATE FUTURES
TYPES OF INTEREST RATE FUTURES CONTRACT POSITION?

There are two types of Interest Rate Futures contract position :
(a) Long Position in IRF (b) Short Position in IRF
HOW TO DECIDE POSITION INTEREST RATE FUTURES ?

Case (I) : if we expect rise in interest rate : Take short position in bond.
Case (II) : If we expect fall in interest rate : Take long position in bond.
HOW TO SETTLE CURRENCY FUTURE CONTRACT ?

There are two ways : (a) Cash Settlement (b) Delivery Settlement
CHEAPEST TO DELIVER : Profit of seller of futures = (Futures Settlement Price x Conversion factor) - Quoted
Spot Price of Deliverable Bond
Loss of Seller of futures = Quoted Spot Price of deliverable bond - (Futures Settlement Price x Conversion
factor)
That bond is chosen as CTD bond which either maximizes the profit or minimizes the loss.
VALUE AT RISK
HOW TO CALCULATE VAR:(a)Relative VAR (%):Z-Value x SD(b)Absolute VAR (Amount):Z- Value xSDxAsset Value
CONVERSION OF VAR FROM ONE CONFIDENCE LEVEL TO ANOTHER

lf at 99%, VAR is 30290, then calculate Var at 95% and 90%.
Solution: VAR at 95%= 30290

2.33
x1.64  21320 ; VAR at 90%= 30290 x1.28  16640
2.33
 VAR99% 
Equation conversion: VAR 95%  Z XZ95% 
 99% 
ASSUMPTION OF NUMBER OF DAYS:

Yearly = 250 Days ; Half Yearly = 125 Days ; Monthly = 20 days ; Weekly = 5 days
CONVERSION OF TIME PERIOD : Equation : Daily VAR x Re vised Time Period
HOW TO CONVERT S.D. FROM ONE PERIOD TO ANOTHER? :S.D. of n days = S.D. Daily x n Days
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CALCULATION OF VAR OF PORTFOLIO :Equation :  A B   A2  B2  2 A B rA ,B
REDUCTION OF RISK DUE TO DIVERSIFICATION Benefit of Diversification = (VARA  VARB )  (VARA B )
CONVERSION OF RETURN FROM ONE PERIOD TO ANOTHER Return p.a. = Return Daily x 250
HOW TO CALCULATE VAR? [WHEN RETURN IS GIVEN]

In Relative terms : [Return - Z-Value X S.D.] In Absolute Terms : [Return - Z-Value X S.D.] X Asset Value
X  X
CALCULATION OF PROBABILITY : Step 1 First calculate Z value : Z =   
 
Where, X = Profit / Loss amount given in question X = Mean; = Standard deviation.
Step 2 Now use table to locate probability against the Z value calculated.
Step 3 Thus the probability the company shall be in financial difficulty is 50% - above calculated probability
MONEY MARKET OPERATION
CALCULATION OF YIELD (RETURN)

Face Value - Selling or Issue Price 12 or 360 or 365
Effective Interest /Yield p.a = × × 100
Selling or Issue Price Maturity Months or Days
EFFECTIVE RATE OF INTEREST : Effective Rate of Interest is the annual equivalent rate of interest calculated in
case when interest is compounded more than once in a year.
 r m
Effective Rate of Interest =  1    1 , Where m is the number of times interest is compounded every year..
 m
MISCELLANEOUS
PORTFOLIO REBALANCING TECHNIQUE

Portfolio Rebalancing means rebalancing our portfolio at a regular interval.
There are three policies of portfolio rebalancing :
• Buy And Hold Policy, • Constant Mix Policy, and • Constant Proportion Portfolio Insurance Policy (CPPI).
BUY & HOLD STRATEGY : The initial mix that is bought is held. This is basically a ‘do nothing’ policy. No
constant ratio is required to be maintained in this policy.
CONSTANT MIX STRATEGY

In this case Ratio of Equity & Debt is to be maintained at each interval and hence portfolio is rebalanced.
PPI STRATEGY [CONSTANT PROPORTION PORTFOLIO INSURANCE]

Investment in stocks or equity is to be maintained in the following manner :
m (Portfolio Value – Floor Value) where m stands for multiplier
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Floor Value & m will be given in question.
MOVING AVERAGE : It is a statistical concept based on averaging technique.

Two popular types are : (i) Simple Moving Average (ii) Exponential Moving Average
SIMPLE MOVING AVERAGE (SMA)
Example : Calculate the Simple moving average, when time period is 3 and the closing prices are 25, 85, 65,
45, 95, 75, 15, 35
Solution :
Average A3 = (25 + 85 + 65) / 3 = 58.3333 ; A4 = (85 + 65 + 45) / 3 = 65 ; A5 = (65 + 45 + 95) / 3 = 68.3333 ;
A6 = (45 + 95 + 75) / 3 = 71.6667 ; A7 = (95 + 75 + 15) / 3 = 61.6667 ; A8 = (75 + 15 + 35) / 3 = 41.6667
EXPONENTIAL MOVING AVERAGE (EMA)

Equation :EMA = EMA yesterday + a x [ Price Today - EMA Yesterday ]
Where a = Smoothing Constant / Multiplier. It will be normally given in question .If not given than it can be
calculated by using a = 2/(N+1) where N is the number of items in the average.
When using the formula to calculate the first point of the EMA, you may notice that there is no value available
to use as the previous EMA.The starting EMA will be given in question directly.
ELASTICITY OF DEMAND
The Price Elasticity of Demand (commonly known as just price elasticity) measures the rate of response of
quantity demanded due to a price change.
The formula for the Price Elasticity of Demand (PEoD) is:
Price Elasticity Of Demand = (% Change in Quantity Demanded)/(% Change in Price)
GEOMETRIC MEAN : If we are given two variables ‘a and b’ : Geometric Mean = 2 a b
If we are given two variables ‘a, b and c’ : Geometric Mean = 3 a  b  c
CUT OFF POINT (BASED ON STATISTICS

1. Find out the “excess return to beta” ratio for each stock under consideration.
2. Rank them from the highest to the lowest.
3. Proceed to calculate Cut Off Point Of Security (Ci) for all the stocks according to the ranked order using the
N (R – R )  β
σ2m  i f i
2
σei
i1
following formula: Ci 
N β2
1  σ2m  i
2
i1 σ ei
Where σ2ei = variance of a stock’s movement that is not associated with the movement of market index i.e.
stock’s unsystematic risk.
The highest Ci value is taken as the cut-off point i.e. C*.It is the cut off rate.Security with C* value and the
securities before this security are to be included in the portfolio and others are rejected.
4. The next step is to calculate weights.For this purpose we have to calculate Zi.
βi  Ri  R f 
Zi =   C* 
σ2ei  βi 
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By using Zi ,weights are calculated.
RUN TEST (BASED ON STATISTICS)

Step-1: First Calculate Mean Value of r & Standard Deviation in the following manner :
2n1n2 2n1n2 (2n1n2 n1 n2 )
Mean Value Of r = + 1 ; Standard Deviation =
n1 + n2 (n1 + n2 )2 (n1 + n2 1)
Here n1 refers to total number of positive changes ;n2 refers to total number of negative changes.
Step-2: Calculate Standard Lower & Upper Limit in the following manner :
The Standard Lower limit = Mean Value Of r - Table Value x SD
The Standard Upper limit = Mean Value Of r + Table Value x SD
Step-3: Decision:If our value of r lies within the standard lower limit and standard upper limit,the randomness is
there i.e the market is weakly efficient,otherwise it is not weakly efficient.
Here r refers to number of times sign changes
Note:Table Value or Degree Of freedom should be selected in following manner :n1+n2-1
AUTO CORRELATION TEST : It is a statistical Concept. The Value of auto-correlation range from -1 to +1.
A value between 0 to 1 : Positive Correlation A value between -1 to 0 : Negative Correlation
Note: Positive: Two variables are moving in some direction. They are related to each other. [It means they are
strong form] Negative: Two Variables are moving in opposite direction. They are related to each other. [It means
they are Weak Form]
 XY  nXY
How to do Auto Correlation best? 1. b (Slope) (Beta) : b = 2. Y = a + b X  a = Y -b X
 X2  n(X)2
a  Y  b  XY  n(Y)2
3. r2 [Coefficient of Determination] : =
 Y2  n(Y)2
STOCK MARKET
HOW INDEX POINTS ARE CALCULATED

Computing index of next day requires the index value and the total market capitalization of the previous day
and is computed as follows:
Today' s Market Capitalisa tion
Index Value =  Yesterday' s Index Point
Yesterday' s Market Capitalisa tion
Example : If the market capitalization of 10 securities ( considered to be the index ) as at the beginning of
01.04.2008 amount to Rs. 5 crores is taken as base and equated to 100 and at day end market capitalization
amounts to Rs. 5.50 crores, then the index at the end of 01.04.2008 will be 110 .
Closing Market Capitaliza tion 5.50
i.e Opening Index   100   110
Opening Market Capitaliza tion 5.00
If at the end 02.04.2008 , the market capitalization is Rs. 6.30 crores , then the index value would be 126.
Closing Market Capitaliza tion 6.30
Opening Index   110   126
Opening Market Capitaliza tion 5.50

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The Best CA/CMA Final

SFM CHALISA FOR MAY-22

TIME VALUE OF MONEY

FUTURE VALUE OF A SINGLE CASH FLOW / COMPOUNDING TECHNIQUE

PRESENT VALUE OF CASH FLOW UPTO PERPETUITY/INFINITY / FOREVER-WITH GROWTH

VALUATION OF SECURITY : EQUITY

Total Earnings Available for Equity Shareholde rs

Total Dividend Paid To Equity Shareholde r

Dividend Per Share

RELATIONSHIP BETWEEN RETENTION RATIO & PAYOUT RATIO

Dividend Per Share

UNEQUAL GROWTH RATE/VARIABLE GROWTH RATE CONCEPT

OVERVALUED & UNDERVALUED CONCEPT

CAPM (CAPITAL ASSET PRICING MODEL)

HOLDING PERIOD RETURN

Dividend Per Share (D1 )

CALCULATION OF OPERATING COST WHEN OPERATING PROFIT MARGIN IS GIVEN

PRESENTATION OF INCOME STATEMENT

-Pref. Dividend xxx

DECISION WHEN INVESTOR IS ALREADY HOLDING SHARES

CALCULATION OF NPV DUE TO INVESTMENT IN A PROJECT

DUPONT ANALYSIS FOR RETURN ON EQUITY:

WALTER’S MODEL-PO CALCULATION

b ± b2 4ac ( 1.8) ± (-1.8)2 4 × 36.25 × ( .64)

CALCULATION OF TOTAL ASSETSUSING DEBT AND EQUITY

TYPES OF MARKET IN CASE OF UNDERVALUED SHARE

COST TO SHAREHOLDER DUE TO MANAGING DIRECTOR POLICY

VALUE OF STRAIGHT COUPON BOND OR EQUAL COUPON BOND (REDEEMABLE BOND)

OVERVALUED AND UNDERVALUED BONDS

VALUE OF BOND WHEN INVESTOR IS ALREADY HOLDING BOND

Symbolically : It can be calculated by using two method :

Lower Rate NPV

TYPES OF BOND ON THE BASIS OF VALUE

BASIS POINT: 1 % = 100 basis points

CALCULATION OF Kd OF HALF YEARLY COUPON BOND

FAIR CONVERSION VALUE AS ON TODAY [STOCK VALUE OF BOND]

DECISION WHETHER TO CONVERT OR NOT

DOWNSIDE RISK [OR PREMIUM OVER STRAIGHT VALUE OF DEBENTURE]

PREMIUM IN CASE OF CONVERTIBLE BOND

CONVERSION PARITY (EQUALITY) PRICE OF EQUITY SHARE

FAVOURABLE INCOME DIFFERENCE PER SHARE

Extra Initial Investment Conversion premium per share

FREDRICK MACAULAY 'S DURATION OF NORMAL COUPON BOND

DURATION OF A ZERO COUPON BOND

MODIFIED DURATION / SENSITIVITY / VOLATILITY

CALCULATION OF EXPECTED VALUE OF BOND USING BETA: Expected B0 = Fair B0 x Beta

Face Value(1  Coupon Rate)n

WHEN CF RECEIVED IS NOT RE-INVESTED OR WHEN NPV ASSUMPTION IS NOT FOLLOWED

MODIFIED DURATION IN CASE OF HALF YEARLY BOND

PREFERENCE SHARE VALUATION

VALUE OF REDEEMABLE PREFERENCE SHARES

VALUE OF IRREDEEMABLE PREFERENCE SHARES

 Maturity Value – PSC0 

CONVERSION VALUE OF CONVERTIBLE PREFERENCE SHARE CAPITAL

PREMIUM IN CASE OF CONVERTIBLE PREFERENCE SHARE CAPITAL

XXXXXXXXXXXXXXXXXXXXX RIGHT SHARES VALUATION

THEORETICAL VALUE OF RIGHT

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX SHARE BUYBACK

Net Assets Total Assets - Total External Liability

Expenses Incurred Per Unit Opening NAV + Closing NAV

TIME WEIGHTED RATEOF RETURN

DIVIDEND YIELD VALUATION METHOD OR DIVIDEND CAPITALIZATION VALUATION METHOD

EARNING YIELD VALUATION METHOD OR INCOME OR EARNING CAPITALIZATION VALUATION METHOD