FM formulas to learn

May 8, 2026

This document contains a collection of financial management formulas essential for learning and understanding key concepts in investment appraisal and decision-making. It outlines the cost of preference shares, utilizing the formula Kd = Dp / P0. The cost of debt is detailed, including non-tradeable debt (bank loan) with Kd = i(1-t), irredeemable debt represented by Kd = i(1-t) / P0, and the yield-to-maturity method for redeemable debt. The section on project appraisal and risk introduces probability analysis, showing how to calculate the total present value (PV) of cash flows by considering different scenarios and their joint probabilities, ultimately leading to the calculation of the Expected Net Present Value (ENPV). Furthermore, the document covers investment decisions, defining Return on Capital Employed (ROCE) as Average annual profit from investment x 100 / Initial investment. It also presents formulas for calculating average investment, distinguishing between profit before interest and tax (PBIT) and profit after depreciation. The document then delves into investment appraisal using Discounted Cash Flow (DCF) methods, providing the formula for Present Value (PV) = FV X (1+r)^-n and Net Present Value (NPV) as the PV of cash inflows minus the PV of cash outflows. The concept of perpetuity is defined as 1/r, and the Internal Rate of Return (IRR) is presented using a formula that involves net present values at different discount rates, noting its calculation can be done via Excel. Visual aids illustrate cash flow patterns, emphasizing the need for total cash flows for each year in IRR calculations.

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May 8, 2026