Free CFA Level 2 formula sheet
Pick the right valuation model, match cash flows to rates, and test it with three worked exercises.
Free public activities · No account required
Find your formula
Try 3 exercises12 of 12 selected formulas
Equity valuation
Free cash flow to the firm
FCFF = NI + NCC + Interest × (1 - T) - FCInv - WCInv
Calculator check
80 + 20 + 10 × 0.75 - 30 - 5 = 72.5 currency units.
Variables, assumptions & common error
- Variables and units
- NI: net income; NCC: noncash charges; FCInv: fixed-capital investment; WCInv: operating working-capital investment.
- When it applies
- All amounts are currency flows for the same period; financing cash is excluded from operating working capital.
- Common error
- FCFF belongs to all capital providers; value it with WACC, not the cost of equity.
Equity valuation
Free cash flow to equity
FCFE = FCFF - Interest × (1 - T) + Net borrowing
Calculator check
72.5 - 10 × 0.75 + 5 = 70 currency units.
Variables, assumptions & common error
- Variables and units
- Net borrowing: debt issued less principal repaid; other terms are same-period currency flows.
- When it applies
- Financing assumptions must be consistent with projected leverage and the equity discount rate.
- Common error
- Do not subtract principal repayments again when net borrowing already includes them.
Equity valuation
Residual income
RI1 = NI1 - r × B0
Calculator check
16 - 0.10 × 120 = 4 currency units.
Variables, assumptions & common error
- Variables and units
- NI1: next-period net income; r: equity charge; B0: beginning equity book value.
- When it applies
- Use beginning book value and an income measure consistent with clean-surplus valuation.
- Common error
- A positive accounting profit can still produce negative residual income.
Equity valuation
Justified forward P/E
P0 / E1 = Payout ratio / (r - g)
Calculator check
0.40 / (0.10 - 0.04) = 6.6667 times.
Variables, assumptions & common error
- Variables and units
- E1: next-year earnings per share; payout ratio: D1/E1; r/g: equity return/growth decimals.
- When it applies
- A constant-growth dividend model with positive sustainable earnings and r > g.
- Common error
- Trailing P/E uses E0 and needs the growth adjustment. Check which earnings date the vignette supplies.
Valuation multiples
Enterprise value from equity value
EV = Equity value + Debt + Preferred + NCI - Cash
Calculator check
500 + 160 + 0 + 20 - 80 = 600 currency units.
Variables, assumptions & common error
- Variables and units
- NCI: non-controlling interests; all components are consistent currency values.
- When it applies
- Use market values where available; ensure the EBITDA denominator consolidates the same businesses.
- Common error
- Do not compare a consolidated EBITDA with an EV that omits material non-controlling interests.
Currency economics
Covered interest-parity forward rate
F(d/f) = S(d/f) × (1 + rd × T) / (1 + rf × T)
Calculator check
1.20 × 1.04 / 1.02 = 1.2235 domestic currency per foreign unit.
Variables, assumptions & common error
- Variables and units
- S/F: domestic currency per foreign unit; rd/rf: simple annual domestic/foreign rates; T: years.
- When it applies
- Matched borrowing/lending conventions, no transaction costs, and a covered no-arbitrage relation.
- Common error
- Reversing the currency quote reverses the rate ratio. This is not a forecast of the future spot rate.
Derivatives
Forward price with no income
F0 = S0 × (1 + r)^T
Calculator check
80 × 1.05 = 84 currency units.
Variables, assumptions & common error
- Variables and units
- S0: spot price; r: annual effective financing rate; T: years.
- When it applies
- No storage costs, dividends or convenience yield; frictionless cash-and-carry.
- Common error
- A fair delivery price at inception is not the current value of an existing forward contract.
Derivatives
One-period binomial hedge ratio
Δ = (Cu - Cd) / (Su - Sd)
Calculator check
(20 - 0) / (120 - 80) = 0.5 units of underlying per option.
Variables, assumptions & common error
- Variables and units
- Cu/Cd: option payoffs in up/down states; Su/Sd: corresponding underlying prices.
- When it applies
- Two possible terminal states, with a nonzero underlying price difference.
- Common error
- Delta is the replicating share quantity here; it is not the probability of an up move.
Fixed income
Expected credit loss
ECL = PD × LGD × EAD
Calculator check
0.02 × 0.40 × 1,000,000 = 8000 currency units.
Variables, assumptions & common error
- Variables and units
- PD: default probability; LGD: loss fraction conditional on default; EAD: exposure in currency.
- When it applies
- A simplified single-horizon model with consistent timing and no extra discounting convention.
- Common error
- Loss given default is one minus recovery rate under these simplified assumptions.
Quantitative methods
Regression coefficient t-statistic
t = (b_hat - b0) / SE(b_hat)
Calculator check
(0.80 - 0.50) / 0.10 = 3 standard errors.
Variables, assumptions & common error
- Variables and units
- b_hat: estimated coefficient; b0: null value; SE: estimated standard error in the same units.
- When it applies
- Choose a valid standard-error estimator and the correct reference degrees of freedom.
- Common error
- A t-statistic alone is not a p-value; specify the tail and significance level before deciding.
Alternative investments
Direct-capitalization value
V = Stabilized NOI / Capitalization rate
Calculator check
120,000 / 0.06 = 2000000 currency units.
Variables, assumptions & common error
- Variables and units
- NOI: annual net operating income before financing; cap rate: annual decimal capitalization rate.
- When it applies
- A stabilized property and a cap rate consistent with its income and risk.
- Common error
- Do not substitute equity cash flow after debt service for property NOI.
Equity valuation
Two-stage dividend discount value
V0 = D1/(1+r) + [D2 + V2]/(1+r)^2; V2 = D3/(r-g)
Calculator check
2 / 1.10 + (3 + 3.12 / 0.06) / 1.10^2 = 47.2727 currency units per share.
Variables, assumptions & common error
- Variables and units
- D1/D2/D3: dated dividends; V2: terminal value at time 2; r: cost of equity; g: growth after time 2.
- When it applies
- A two-year explicit forecast followed by constant growth with r > g.
- Common error
- Terminal value belongs at the last explicit forecast date, and uses the next dividend.
Try it here - no account needed
Three worked practice exercises
Three original exercises, separate from the level samples. Open explanations freely; written answers are self-reviewed, not graded.
Saved in this tab when storage is available. Responses are not uploaded.
Completed
0 / 3
MCQ correct
0 / 0
Completion is not an exam score.
- Question 1 of 3Model selectionMultiple choice
Case facts
A valuation forecast supplies cash flow after debt interest and net borrowing. The analyst wants equity value directly.
Which rate most appropriately discounts these equity cash flows?
Answer and explanations
Identify the claimant first: cash flow to equity pairs with cost of equity. Matching a familiar formula to the wrong cash-flow definition is a model-selection error.
- A: Equity bears residual risk beyond the contractual debt claim.
- B - correct: FCFE is discounted at the required equity return.
- C: WACC pairs with FCFF, not FCFE.
- Question 2 of 3Residual incomeMultiple choice
Case facts
Beginning book value per share is 50, forecast EPS is 7 and the equity charge is 10%.
What is forecast residual income per share?
Answer and explanations
Residual income = 7 - 5 = 2 per share. Positive net income is not enough; the calculation deducts the equity opportunity cost.
- A - correct: 7 - 0.10 × 50 equals 2.
- B: 5 is the equity charge, not residual income.
- C: This ignores the capital charge.
- Question 3 of 3Forward quote directionMultiple choice
Case facts
Spot is 1.50 domestic units per foreign unit. One-year simple domestic and foreign interest rates are 4% and 2%.
Under covered parity, which forward is closest?
Answer and explanations
Keep the domestic-per-foreign quote fixed, then place the domestic financing factor in the numerator. Covered parity is a no-arbitrage relation, not a spot-price prediction.
- A: This reverses the interest-rate ratio for the specified currency quote.
- B: This ignores the interest-rate differential.
- C - correct: 1.50 × 1.04 / 1.02 is approximately 1.5294.
Keep this checklist handy
What to do, at a glance
01Check the model
- Match the formula to the requested output.
- Read its assumptions before substituting numbers.
- Use your official exam-year outline for full coverage.
02Check the inputs
- Use decimal rates: 25 bp = 0.0025.
- Match rate periods, currencies and cash-flow dates.
- Round the final result, not intermediate steps.
03Use the reference
- Selected 2026 coverage; not a complete syllabus.
- Free HTML: no separate downloadable formula-sheet PDF.
- Browser printing is available for personal reference.
Put one idea into practice.
Try it first. Check the reasoning. Pick your next task.
Quick answers
Does this replace the official curriculum?
No. This is selected independent practice, not a complete syllabus or official exam. Check your exam-year outline.
Are these the official CFA formula sheets?
No. These are independent selected equations with original examples. The linked official outlines establish study scope, not endorsement or verification of these examples.
Can I sign up from this preview?
Yes. Sign up to create your account and practice in the app. Public exercises remain available without an account; answers from this preview are not transferred.
Sources
Selected 2026 teaching content. Official sources do not endorse or verify these examples.
MiloPrep is an independent study resource, not affiliated with or endorsed by CFA Institute. CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.