💼Finance, Accounting & Microecon

Finance, Accounting & Microeconomics Formula Sheet

Interest payments on corporate debt are tax-deductible, creating an interest tax shield that lowers the effective after-tax cost of debt.

Essential corporate finance, financial accounting, and microeconomics equations for business majors, CPA/CFA prep, and MBA core courses.

High-Yield Formulas

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Fundamental Accounting & Free Cash Flow

Assets = Liabilities + Equity, FCF = EBIT(1 - t) + D&A - CapEx - ΔNWC

When to use: Balance sheet balancing and DCF corporate valuation.

⚠️ Exam Trap: An increase in Net Working Capital (ΔNWC > 0) is a cash outflow (subtract it).

Time Value of Money & Net Present Value (NPV)

PV = CF / (1 + r)ᵗ, NPV = -C₀ + Σ [ CFₜ / (1 + r)ᵗ ]

When to use: Capital budgeting: accept a project when NPV > 0 (or IRR > WACC).

⚠️ Exam Trap: Match the discount rate r to the cash flow period (divide annual r by 12 for monthly).

Weighted Average Cost of Capital (WACC)

WACC = (E/V)·Rₑ + (D/V)·R_d·(1 - T_c)

When to use: Calculating the hurdle discount rate for firm valuation.

⚠️ Exam Trap: Multiply the cost of debt R_d by (1 - T_c) because interest is tax-deductible.

DuPont Return on Equity (3-Step ROE)

ROE = (Net Income / Sales) × (Sales / Assets) × (Assets / Equity)

When to use: Decomposing ROE into Profit Margin × Asset Turnover × Financial Leverage.

⚠️ Exam Trap: Use average Assets and average Equity across the year when comparing to Net Income.

Liquidity Ratios (Current & Quick Acid-Test)

Current Ratio = CA / CL, Quick Ratio = (Cash + AR) / CL

When to use: Evaluating short-term solvency without relying on slow-moving inventory.

⚠️ Exam Trap: Exclude Inventory and Prepaid Expenses from the numerator of the Quick Ratio.

Price Elasticity of Demand (Midpoint)

E_d = (%ΔQ) / (%ΔP) = [(Q₂ - Q₁)/((Q₂+Q₁)/2)] ÷ [(P₂ - P₁)/((P₂+P₁)/2)]

When to use: Determining whether demand is elastic (|E_d| > 1) or inelastic (|E_d| < 1).

⚠️ Exam Trap: When demand is inelastic (|E_d| < 1), raising price increases total revenue.

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Interest payments on corporate debt are tax-deductible, creating an interest tax shield that lowers the effective after-tax cost of debt.