CA Final Paper 2
Advanced Financial Management Formulas
Complete AFM formula cheat sheet for CA Final May 2026. Covers Valuation, Derivatives, Forex, and Portfolio Management.
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1 Valuation Formulas
| Formula Name | Formula | Notes |
|---|---|---|
| DCF Value | V = CF₁/(1+r)¹ + CF₂/(1+r)² + ... + CFₙ/(1+r)ⁿ | Sum of discounted future cash flows |
| Gordon Growth Model | P₀ = D₁ / (Ke - g) | D₁ = Next dividend, Ke = Cost of equity, g = Growth rate |
| Two-Stage DDM | P₀ = Σ D₀(1+g₁)ᵗ/(1+Ke)ᵗ + Pₙ/(1+Ke)ⁿ | High growth phase + stable phase |
| Enterprise Value | EV = Market Cap + Debt - Cash | Total firm value |
| Equity Value | Equity = EV - Net Debt | Value to shareholders |
| EV/EBITDA Multiple | EV / EBITDA | Enterprise value to earnings ratio |
| Free Cash Flow to Firm | FCFF = EBIT(1-t) + Dep - CapEx - ΔNWC | Cash available to all investors |
| Free Cash Flow to Equity | FCFE = FCFF - Int(1-t) + Net Borrowing | Cash available to equity holders |
2 Cost of Capital
| Formula Name | Formula | Notes |
|---|---|---|
| CAPM | Ke = Rf + β(Rm - Rf) | Rf = Risk-free, β = Beta, Rm = Market return |
| Cost of Debt (Post-tax) | Kd = r × (1 - t) | r = Interest rate, t = Tax rate |
| WACC | WACC = Ke(E/V) + Kd(D/V)(1-t) | Weighted average cost of capital |
| Unlevered Beta | βu = βL / [1 + (1-t)(D/E)] | Asset beta (no debt) |
| Levered Beta | βL = βu × [1 + (1-t)(D/E)] | Equity beta with debt |
| Cost of Equity (Earnings) | Ke = (EPS/MPS) + g | Earnings yield approach |
| Cost of Preference | Kp = Dividend / Net Proceeds | Pref dividend / Issue price |
3 Derivatives Basics
| Formula Name | Formula | Notes |
|---|---|---|
| Call Option Payoff | Max(S - K, 0) | S = Spot, K = Strike |
| Put Option Payoff | Max(K - S, 0) | K = Strike, S = Spot |
| Put-Call Parity | C + PV(K) = P + S | C = Call, P = Put, S = Spot, K = Strike |
| Forward Price | F = S × e^(r×t) | Continuous compounding |
| Forward Price (Dividend) | F = (S - PV of Div) × e^(r×t) | Asset paying dividends |
| Futures Price | F = S(1 + r)ᵗ | Discrete compounding |
| Cost of Carry | F = S + Carrying Cost - Convenience Yield | Storage + Interest - Benefits |
| Delta (Call) | Δ = N(d₁) | Change in option price per unit change in stock |
| Hedge Ratio | HR = (Cu - Cd) / (Su - Sd) | Binomial model hedge ratio |
4 Black-Scholes Model
| Formula Name | Formula | Notes |
|---|---|---|
| Call Option Value | C = S×N(d₁) - K×e^(-rt)×N(d₂) | Black-Scholes Call |
| Put Option Value | P = K×e^(-rt)×N(-d₂) - S×N(-d₁) | Black-Scholes Put |
| d₁ | d₁ = [ln(S/K) + (r + σ²/2)t] / (σ√t) | S=Spot, K=Strike, r=Rate, σ=Volatility, t=Time |
| d₂ | d₂ = d₁ - σ√t | Adjusted for volatility |
Remember: N(d) is the cumulative standard normal distribution. For exams, N(d) tables are provided.
5 Foreign Exchange
| Formula Name | Formula | Notes |
|---|---|---|
| Interest Rate Parity | F/S = (1 + rₐ) / (1 + rᵦ) | Forward rate relation to interest rates |
| IRP (Continuous) | F = S × e^((rₐ - rᵦ)×t) | Continuous compounding |
| Purchasing Power Parity | F/S = (1 + iₐ) / (1 + iᵦ) | Forward rate relation to inflation |
| Forward Premium/Discount | Premium = [(F - S)/S] × (12/n) × 100 | Annualized forward premium % |
| Cross Rate | A/C = (A/B) × (B/C) | Derive rate through common currency |
| Swap Points | Swap = Forward - Spot | Difference between forward and spot |
6 Portfolio Management
| Formula Name | Formula | Notes |
|---|---|---|
| Portfolio Return | Rp = Σ wi × Ri | Weighted average of returns |
| Portfolio Variance (2 assets) | σp² = w₁²σ₁² + w₂²σ₂² + 2w₁w₂σ₁σ₂ρ₁₂ | ρ = Correlation coefficient |
| Sharpe Ratio | (Rp - Rf) / σp | Excess return per unit risk |
| Treynor Ratio | (Rp - Rf) / βp | Excess return per unit systematic risk |
| Jensen's Alpha | α = Rp - [Rf + βp(Rm - Rf)] | Actual vs CAPM expected return |
| Information Ratio | (Rp - Rb) / Tracking Error | Active return vs benchmark |
| Beta | β = Cov(Ri, Rm) / Var(Rm) | Systematic risk measure |
| Correlation | ρ = Cov(A,B) / (σA × σB) | Co-movement measure |
7 Mergers & Acquisitions
| Formula Name | Formula | Notes |
|---|---|---|
| Synergy Value | VAB - (VA + VB) | Combined value minus standalone values |
| Exchange Ratio | ER = (Offer Price) / (Acquirer's MPS) | Shares offered per target share |
| Post-Merger EPS | Combined Earnings / Combined Shares | EPS after merger |
| Maximum Price | VA + Synergy | Max acquirer should pay |
| Minimum Price | VB (standalone) | Min target should accept |
| Gain to Acquirer | Synergy - Premium Paid | Net benefit to buyer |