MAFF cheat sheet

Time value of money: PV = FV / (1 + r)^n; FV = PV × (1 + r)^n; for m compounding periods per year divide r by m and multiply n by m.

Effective annual rate: EAR = (1 + r_nominal/m)^m − 1; continuous compounding gives EAR = e^r − 1.

Annuity present value: PV = PMT × [1 − (1 + r)^−n] / r; perpetuity PV = PMT / r; growing perpetuity PV = PMT₁ / (r − g), valid only when r > g.

Net present value is the sum of discounted cash flows minus initial outlay; accept a project when NPV > 0, which adds value to shareholders.

Internal rate of return sets NPV to zero; IRR and NPV rankings can conflict when project scale or cash-flow timing differs, so prefer NPV for mutually exclusive projects.

Nominal cash flows must be discounted at a nominal rate and real cash flows at a real rate; mixing them is a common computational error.

Cash flow versus accounting profit: non-cash charges such as depreciation are added back, and capital expenditure plus working-capital investment are deducted.

Statistical tools: coefficient of variation = standard deviation / expected return; covariance and correlation describe joint movement, with correlation bounded between −1 and +1.

Balance sheet identity: Assets = Liabilities + Equity; the statement is a snapshot at a point in time, unlike the flow-based income statement.

Current ratio = current assets / current liabilities; quick ratio excludes inventory and prepaid items from current assets.

DuPont decomposition: ROE = net profit margin × asset turnover × financial leverage, where leverage = average total assets / average equity.

Cash flow from operations under the indirect method starts with net income and adjusts for non-cash items and changes in working capital accounts.

Revenue recognition under accrual accounting records revenue when performance obligations are satisfied, not when cash is collected; unearned revenue is a liability.

Capitalizing versus expensing: capitalizing an outlay spreads cost over future periods, raising current profit and assets but lowering later profit through depreciation.

Inventory methods: in rising prices FIFO gives higher ending inventory and higher profit than LIFO; LIFO liquidation can distort margins.

Quality-of-earnings red flags include rising days sales outstanding, growing accruals relative to cash flow, and repeated one-time charges excluded from adjusted earnings.

Weighted average cost of capital: WACC = (E/V) × r_e + (D/V) × r_d × (1 − tax rate), using market-value weights.

Capital asset pricing model: r_e = r_f + β × (market risk premium); beta measures sensitivity of the stock to market returns.

Free cash flow to the firm = EBIT × (1 − tax rate) + depreciation − capital expenditure − increase in net working capital; discount at WACC.

Free cash flow to equity is discounted at the cost of equity; it equals FCFF minus after-tax interest plus net borrowing.

Gordon growth valuation: value = FCF₁ / (WACC − g) or D₁ / (r − g); the growth rate must be below the discount rate and sustainable long term.

Relative valuation multiples (P/E, EV/EBITDA, P/B) must be applied to comparable companies and adjusted for growth, risk, and capital structure differences.

Modigliani–Miller: without taxes capital structure is irrelevant; with taxes debt creates a tax shield worth approximately tax rate × debt, offset by financial distress costs.

In capital budgeting use incremental after-tax cash flows, ignore sunk costs and allocated overhead, and include opportunity costs of assets already owned.

Bond price and yield move inversely; for a given yield change, longer maturity and lower coupon imply greater price sensitivity (higher duration).

Macaulay duration is the weighted average time to cash flows; modified duration ≈ Macaulay duration / (1 + y/m) and estimates percentage price change per yield change.

Convexity adjusts duration estimates: percentage price change ≈ −D_mod × Δy + ½ × convexity × (Δy)².

Spot, forward, and par rates are linked by no-arbitrage relationships; a forward rate f(1,2) ≈ (1+s₂)² / (1+s₁) − 1.

Equity valuation models: dividend discount model for stable payers, residual income for firms with negative free cash flow, and multiples for relative comparisons.

Preferred stock is a hybrid: it ranks above common equity in liquidation, usually pays a fixed dividend, and typically carries no voting rights.

Credit risk measures include yield spread over the benchmark, credit ratings, and recovery rates; spread widening signals deteriorating credit conditions.

Market efficiency forms: weak (prices reflect past prices), semi-strong (all public information), and strong (all information including private).

Portfolio expected return is the weighted average of asset expected returns; portfolio variance depends on weights, individual variances, and pairwise covariances.

Diversification benefit grows as correlation falls; with correlation of +1 there is no risk reduction, and with −1 a zero-variance combination may exist.

Capital allocation line combines the risk-free asset with the tangency portfolio; the Sharpe ratio = (portfolio return − risk-free rate) / standard deviation.

Systematic risk cannot be diversified and is measured by beta; unsystematic risk is diversifiable and is not compensated in equilibrium.

Value at risk at a confidence level states a loss threshold not expected to be exceeded over a horizon with a given probability; it says nothing about losses beyond that threshold.

Risk-adjusted measures: Treynor ratio uses beta, Jensen's alpha is excess return over CAPM prediction, and the information ratio uses tracking error.

Rebalancing to target weights controls drift in risk exposure; strategic asset allocation sets long-run policy weights, tactical allocation makes short-term deviations.

Behavioral biases affecting portfolios include loss aversion, overconfidence, anchoring, and herding; awareness of them supports disciplined rebalancing.

Fiduciary duty requires placing client interests above the employer's and one's own; it governs disclosure, suitability, and conflicts of interest.

Material nonpublic information must not be used or passed on; the mosaic theory permits acting on public information plus nonmaterial nonpublic pieces.

Independence and objectivity are compromised when gifts, travel, or entertainment from issuers could reasonably be expected to impair judgment.

Fair dealing requires disseminating recommendations to all clients simultaneously; selective pre-release to favored clients violates the standard.

Performance presentation must be fair, accurate, and complete; misleading benchmarks, cherry-picked periods, and unverifiable claims are prohibited.

Conflicts of interest must be disclosed to clients and employers, and referral fees or soft-dollar arrangements require written disclosure.

Supervisors must establish compliance procedures and respond to violations; knowing failure to act on a subordinate's breach is itself a violation.

Client confidentiality applies to current, former, and prospective clients, except where disclosure is required by law or client permission is obtained.