Need an all-in-one list with the **Corporate Finance** formulas included in the CFA® Level 1 Exam? We have compiled them for you here. The relevant formulas have been organized and presented by chapter. In this section, we will cover the following topics —** Capital Budgeting, Cost of Capital, Measures of Leverage, and Working Capital Management**.

**1. Capital Budgeting**

*Net present value (NPV)*

NPV = \sum_{t=0}^n \frac {CF{_t}}{(1+r){^t}}

CF{_t} = After-tax cash flow at time t

r = Required rate of return for the investment

*Internal Rate of Return (IRR)*

\sum_{t=0}^N \frac {CF{_t}}{(1+IRR){^t}} = 0

*Average Accounting Rate of Return**(AAR)*

AAR = \frac {Average~net~income}{Average~book~value}

*Profitability Index (PI)*

PI = \frac {PV~of~future~cash~flows}{Initial~Investment} = 1+ \frac {NPV}{Initial~Investment}

**2. Cost of Capital**

*Weighted Average Cost of Capital (WACC)*

WACC = w{_d}r{_d} (1 - t) + w{_p}r{_p} + w{_e}r{_e}

w{_d} = Proportion of debt that the company uses when it raises new funds

r{_d} = Before-tax marginal cost of debt

t = Company’s marginal tax rate

w{_p} = Proportion of preferred stock the company uses when it raises new funds

r{_p} = The marginal cost of preferred stock

w{_e} = Proportion of equity that the company uses when it raises new funds

r{_e} = Marginal cost of equity

*Tax Shield*

Tax~shield = Deduction × Tax~rate

*Cost of Preferred Stock*

r{_p} = \frac {D{_p}}{P{_p}}

P{_p} = Current preferred stock price per share

D{_p} = Preferred stock dividend per share

r{_P} = Cost of preferred stock

*Cost of Equity**(Dividend discount model approach)*

r{_e} = \frac {D{_1}}{P{_0}}+g

P{_0} = Current market value of the equity market index

D{_1} = Dividends expected next period on the index

r{_e} = Required rate of return on the market

g = Expected growth rate of dividends

*Growth Rate*

g = \bigg( 1- \frac {D}{EPS} \bigg) \times ROE

\frac {D}{EPS} = Assumed stable dividend payout ratio

ROE = Historical return on equity

*Cost of Equity**(Bond yield plus risk premium)*

r{_e} = r{_d} + Risk~Premium

Risk~premium = the additional yield on a company’s stock relative to its bonds

*Capital Asset Pricing Model (CAPM)*

E (R{_i}) = R{_F} + β{_i} [E (R{_M}) - R{_F}]

β{_i} = The return sensitivity of stock i to changes in the market return

E(R{_M}) = The expected return on the market

E(R{_M}) − R{_F} = The expected market risk premium

R{_F} = Risk-free rate of interest

*Beta of a Stock*

β{_i} = \frac {Cov (R{_i}, R{_M})}{Var (R{_M})}

R{_M} = Average expected rate of return on the market

R{_i} = Expected return on an asset i

Cov = Covariance

Var = Variance

*Pure-play Method Project Beta**(De-lever)*

β{_{Unlevered(Comparable)}} = \frac {β{_{Levered,~Comparable}}}{\bigg[1+\bigg((1-t{_{Comparable}}) \frac {D{_{Comparable}}}{E{_{Comparable}}}\bigg)\bigg]}

t = Tax rate

D = Debt

E = Equity

*Pure-play Method for Subject Firm**(Re-lever)*

β{_{Levered,~Project}} = {β{_{Unlevered,~Comparable}}}{\bigg[1+\bigg((1-t{_{Project}}) \frac {D{_{Project}}}{E{_{Project}}}\bigg)\bigg]}

*Adjusted CAPM**(for country risk premium)*

E(R{_i}) = R{_F} + β{_i} [E (R{_M}) - R{_F} + Country~risk~premium]

*Country Risk Premium*

CRP = Sovereign~yield~spread \times \Big(\frac {\sigma~of~equity~index~of~the~developing~country}{\sigma~of~sovereign~bond~market~in~terms~of~the~developed~market~currency}\Big)

σ = Standard deviation

*Break Point*

Break~point = \frac {Amount~of~capital~at~which~the~source’s~cost~of~capital~changes} {Proportion~of~new~capital~raised~from~the~source}

**3. Measures of Leverage**

*Degree of Operating Leverage*

Degree~of~Operating~Leverage = \frac {Percentage~change~in~operating~income}{Percentage~change~in~units ~sold}

*Degree of Financial Leverage*

Degree~of~Financial~Leverage = \frac {Percentage~change~in~Net~Income}{Percentage~change~in~EBIT}

*Degree of Total Leverage*

Degree~of~Total~Leverage = \frac {Percentage~change~in~Net~Income}{Percentage~change~in~number~of~Units~Sold}

*Return on Equity (ROE)*

Return~on~Equity = \frac {Net~Income}{Shareholders’~Equity}

*The Breakeven Quantity of Sales*

Q{_{Breakeven}}= \frac {F + C}{P - V}

P = Price per unit

V = Variable cost per unit

F = Fixed operating costs

C = Fixed financial cost

Q = Quantity of units produced and sold

*Operating**Breakeven Quantity of Sales*

Q{_{Operating~Breakeven}}= \frac {F}{P - V}

P = Price per unit

V = Variable cost per unit

F = Fixed operating costs

**4. Working Capital Management**

*Current Ratio*

Current~Ratio = \frac {Current~assets}{Current~liabilities}

*Quick Ratio*

Quick~Ratio = \frac {Cash + Receivables + Short–term~marketable~investments}{Current~liabilities}

*Accounts Receivable Turnover*

Accounts~Receivable~Turnover= \frac {Credit~sales}{Average~receivables}

*Number of Days of**Receivables*

Number~of~days~of~receivables = \frac {365}{Accounts~receivable~turnover}

*Inventory Turnover*

Inventory~Turnover = \frac {Cost~of~goods~sold}{Average~Inventory}

*Number of Days of Inventory*

Number~of~days~of~Inventory = \frac {365}{Inventory~turnover}

*Payables Turnover*

Payables~Turnover~Ratio = \frac {Purchases}{Average~accounts~payables}

*Number of Days of Payables*

Number~of~days~of~Payables = \frac {365}{Payables~turnover~ratio}

*Net Operating Cycle*

Net~operating~cycle = Number~of~days~of~inventory+ Number~of~days~of~receivables - Number~of~days~of~payables

*Yield on a Bank Discount Basis (BDY)*

r{_{BD}} = \frac {D}{F} \times \frac {360}{t}

D = Dollar discount, which is equal to the difference between the face value of the bill (F) and its purchase price (P0)

F = Face value of the T-bill

t = Actual number of days remaining to maturity

r{_{BD}} = Annualized yield on a bank discount basis

*Effective Annual Yield (EAY)*

EAY = ( 1 + HPR){^{\frac {360}{t}}} - 1

*Holding Period Return*

HPR = \frac {(Cashflow~ending~value - Beginning~value + Cashflow~received)}{Beginning~value}

*Cost of Trade Credit*

Cost~of trade~credit = \Bigg( 1+\frac {\%Discount}{1 - \%Discount} \Bigg){^{\frac {360}{Number~of~days~past~discount}}} - 1

*Cost of Borrowing*

Cost~of~borrowing = \frac {Interest + Dealer’s~commission + Other~costs}{Loan~amount - Interest}

**Follow the links to find more formulas on Quantitative Methods, Economics, Alternative Investments, Financial Reporting and Analysis, Portfolio Management, Equity Investments, Fixed-Income Investments, and Derivatives, included in the CFA® Level 1 Exam.**