Finance Formulas Sheet

A finance formulas sheet is an indispensable tool for anyone working with financial calculations, whether they are students, professionals, or individuals managing their personal finances. This sheet, often organized in a readily accessible format like a spreadsheet or a printed guide, compiles commonly used formulas across various areas of finance, streamlining the process of solving problems and making informed decisions.

One of the most fundamental sections typically included is Time Value of Money (TVM). This section houses formulas related to present value (PV), future value (FV), payment (PMT), interest rate (r), and number of periods (n). It enables calculations for investments, loans, and annuities. For example, the future value of a lump sum investment can be determined using the formula: FV = PV * (1 + r)^n. Understanding TVM is crucial for evaluating investment opportunities and planning for retirement.

Another vital component is Investment Appraisal. This section contains metrics used to evaluate the profitability and feasibility of potential investments. Key formulas include Net Present Value (NPV), which calculates the difference between the present value of cash inflows and outflows; Internal Rate of Return (IRR), which determines the discount rate at which NPV equals zero; and Payback Period, which estimates the time required for an investment to recover its initial cost. These formulas help in deciding which projects to undertake and allocating capital efficiently.

Ratio Analysis is also commonly featured, covering liquidity, profitability, solvency, and efficiency ratios. Liquidity ratios, such as the Current Ratio (Current Assets / Current Liabilities), assess a company's ability to meet short-term obligations. Profitability ratios, like the Profit Margin (Net Income / Revenue), measure a company's ability to generate profits. Solvency ratios, such as the Debt-to-Equity Ratio (Total Debt / Total Equity), evaluate a company's long-term financial stability. Efficiency ratios, such as Inventory Turnover (Cost of Goods Sold / Average Inventory), measure how efficiently a company manages its assets. Understanding these ratios provides insights into a company's financial health and performance.

Furthermore, a comprehensive formulas sheet might include sections dedicated to Bond Valuation and Stock Valuation. Bond valuation formulas help determine the fair price of a bond based on its coupon rate, maturity date, and yield to maturity. Stock valuation formulas, such as the Dividend Discount Model (DDM), estimate the intrinsic value of a stock based on its expected future dividends. These sections are essential for investors looking to make informed decisions about fixed-income and equity investments.

Finally, formulas related to Statistics and Probability are often included, particularly those used in financial modeling and risk management. This may include measures of central tendency (mean, median, mode), measures of dispersion (standard deviation, variance), and probability distributions (normal distribution, binomial distribution). These tools enable analysts to assess risk, forecast future performance, and make data-driven decisions. By having all these formulas readily available in a single document, users can save time, reduce errors, and gain a deeper understanding of financial concepts, leading to better financial planning and decision-making.