FINANCIAL MANAGEMENT’s FORMULAE

CHAPTER 1: FINANCIAL MANAGEMENT AND FINANCIAL OBJECTIVES

1) Total shareholder return = (P1-P0+D1)

P0
Where,
P0 – share price at the beginning of the period
P1 – share price at the end of the period
D1 – dividend paid
*a measure which combines the increase in share price and dividend paid

2) Earnings per share (EPS) = PAT-preference share dividend

No. of ordinary shares
*calculated by dividing the net profit or loss attributable to shareholders with weighted
average number of ordinary shares

3) Return on capital employed (ROCE) = PBIT

Capital employed
Capital employed = total assets-current liability / equity+long term liability

4) Asset turnover = Sales revenue

Capital employed

5) Return on equity = Earnings attributable to equity shareholder

Shareholders’ equity
*compares net profit after tax with equity shareholder has invested in the firm

6) Gearing ratio = Debt or Debt

Debt+Equity Equity
*concerns with how much the company owes in relation to its size and whether it is
getting into heavier debts or improving situation
Financial gearing – the amount of debt finance a company uses relative to its equity
finance

7) Dividend yield = Dividend per share

Ex-div market price per share
*the return a shareholder is currently expecting on the shares of a company

8) P/E ratio = Total market value of equity

Total earnings
*reflects market’s appraisal of the share’s future prospect

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Aini Deraman / FM / JD’19
 FINANCIAL MANAGEMENT’s FORMULAE

CHAPTER 3: FINANCIAL MARKETS, MONEY MARKETS AND INSTITUTIONS

1) Certificate of deposit
The value of the CD on maturity = Face value x [1 + (Coupon rate x Days to
maturity/365)]

2) Commercial paper
Yield on commercial paper = No. of days in year x (Selling price – Purchase price)
Days held Purchase price

CHAPTER 4: WORKING CAPITAL

tgk →
soalan
360 days
1) Net working capital = CA - CL

2) Cash operating cycles = Inventory + Trade receivables – Trade payables

Inventory turnover period = Average inventory x 365
Cost of sales

Trade receivables collection period = Trade receivables x 365 days

Sales revenue

Trade payables payment period = Trade payables x 365

Purchases

3) Current ratio = CA

#
CL

our 4) Quick ratio = CA-Inventory

CL

5) Inventory turnover = Cost of sales

Average inventory

6) Sales revenue/net working capital ratio = Sales revenue

-
-
Receivables + Inventory – Payables

invested it will generate

workig capital
.

I
.

Every is
in
* →

revenue $ X
sales
=
.

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 FINANCIAL MANAGEMENT’s FORMULAE

CHAPTER 5: MANAGING WORKING CAPITAL

1) Economic order quantity (EOQ)

EOQ = √2COD
Ch
Where,
Co – cost of placing one order
Ch – holding cost per unit of inventory for one period
D – demand for one period
Q – pre-order quantity

2) Total inventory cost = Purchase cost + Holding cost + Ordering cost

Purchase cost = Purchase cost per unit x D

I
Holding cost = Ch x [(Q/2) + Buffer inventory]

Ordering cost = CO x (D/Q)

QtB#r .

3) Other formula
→ Reorder level = Maximum usage x Maximum lead time

I
-
-

Maximum inventory level = Reorder level + Reorder quantity – (Minimum

usage x Minimum lead time)

[
Minimum inventory level = Preorder level – ( Average usage x Average lead
time)

* Average inventory = Buffer inventory + (Reorder amount/2)

-
-

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Aini Deraman / FM / JD’19
 FINANCIAL MANAGEMENT’s FORMULAE

CHAPTER 6: WORKING CAPITAL FINANCE

remember assumption they

→ on
1) Baumol’s model
→ meee
-

Q = √2CS
i
Where,
Q – total amount to be raised to provide for S
C – cost incurred selling the securities
- co
=
costofsellyse.es
.mg?feri↳ get
.
$
S – annual cash received
i – interest forgone for not investing the cash →
cost of holding .

*it is used to calculate the optimum cash balances in the same form as the EOQ formula
for inventory management

2) Miller-Orr model

buy =
outflow
Return point = Lower + (1 x Spread) daily sell = inflow -

3 ✓
3
Spread = 3 x √(3 x Transaction x Variance)
4 Interest → daily
Variance = Standard deviation2

If the cash balances reach an upper limit (maximum level) the firm needs to buy

I
sufficient securities to return the cash balance to a normal level (return point).

When the cash balance reaches a lower limit (minimum level), the firm needs to sell
securities to bring back the balance to the return point.

see C g

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Aini Deraman / FM / JD’19
 FINANCIAL MANAGEMENT’s FORMULAE

CHAPTER 7: INVESTMENT DECISIONS

PB 'll CE
1) -
ROCE

deep ..pn
Average annual profit from investment x 100
Initial investment CF -

→
Average annual profit from investment x 100
Average investment
- Average investment = Initial outlay + Scrap value
2
*profit is after depreciation but before interest and tax (PBIT)

→ CF
CHAPTER 8: INVESTMENT APPRAISAL USING DCF METHODS
① = profit
1) Present value (PV) = FV X (1+r)-n
puhtedep =
Tj
-

2) Net present value (NPV) = PV of cash inflows - PV of cash outflows

-

3) Perpetuity = 1
r afb a)Noah
-

- .

4) Internal rate of return (IRR) = a + NPVa (b-a)

excel
needed
-

NPVa - NPVb =
-

year
Yeo Total of every
"

CF
Year
o p e
'

( - 8 3

8 d
c-

Prepared by: FM-G (July - December 2019)

Aini Deraman / FM / JD’19
 FINANCIAL MANAGEMENT’s FORMULAE

CHAPTER 9: ALLOWING FOR INFLATION AND TAXATION

1) Fisher formula
(1+i) = (1+r) (1+h)
i – nominal interest rate
r – real interest rate
h – inflation rate

2) NPV layout
Year 0 1 2 3 4
Sales X X X
Costs (X) (X) (X)
Operating cash flow X X X
Taxation (X) (X) (X)
Capital expenditure (X)
Scrap value X

I-7AT#
-

Tax relief (W1) X X X

med Working capital (W2) (X) (X) (X) X X
4 Net cash flows
DF (post-tax)
(X)
X
X
X
X
X
X
X
X
X
TAD PV (X) X X X X
t NPV X

Workings
eg purchase
:
1. Tax relief
31
on
- Reducing balance
December
Year TAD Tax relief (%) Timing

I
2010 .
(%)

Itqnthaauaihnin
0 Cost Based on the
year you pay tax
Last year
tie year of *cannot claim CA in year of
purchase
.
disposal because we claim
BA/BC
41=20 "

J.io#en.gReHIFt
- Straight line
TAD = Costs
Years

2. Working capital
Year
1
I
WC Requirement
WC Incremental
a
(a)
Timing
0
2 b a-b 1

WC at the
Assume = recover Prepared by: FM-G (July - December 2019)
end of
.

year Aini Deraman / FM / JD’19

 FINANCIAL MANAGEMENT’s FORMULAE

CHAPTER 10: PROJECT APPRAISAL AND RISK

1) Probability analysis (risk) Joint propability
-
(a) (b) (c) (d) (a) + (b) (b) x (d)
p Year PV of Prob PV of Prob Total PV Joint PV x NPV
Y1 Y2 JP
ppkit
.

Prob
PV of CF xxx x xxx x
1
xxx x
xxx x

PV of CF xxx x xxx x
2
xxx x
xxx x

PV of CF xxx x xxx x
3
xxx x
xxx x
1.00
Sum of PV xx
Initial outlay -xx
ENPV xx

→ sensitivity
2) Sensitivity analysis (uncertainty)
- using
sees
risk
Selling price as
.

Net present value of project %

Present value of revenue

Operating cost
Net present value of project %
Present value of operating cost

Capital expenditure
Net present value of project %
Present value of capital expenditure

=
Sales volume
Net present value of project %
Present value of contributions

Taunt
Cost of capital
IRR – Discount factor %
Discount factor
current
Prepared by: FM-G (July - December 2019)
Aini Deraman / FM / JD’19
 replacement
find vhichyeqpel.net
fused
-

FINANCIAL MANAGEMENT’s FORMULAE

CHAPTER 11: SPECIFIC INVESTMENT DECISIONS benefit

NPI
1) Equivalent annual cost (EAC) = NPV of cost
Annuity factor for the life of the project project
that have
2) Probability index (PI) = PV of cash inflows = NIV ( different
Initial
'

Initial cash outflows lives

problem :

CHAPTER 12: SOURCES OF FINANCE

&
1) Repayment on loan
whyweneeden.rs?ifNPVpwjeet
it will
different
biased
lives

Annual payment = Amount of loan/Total annuity factor

obviously life
-
- -

*
wards longer
2) The split between interest and capital repayment

Balance b/f Interest (%) Annual Balance c/f

payment
Principal amount (P) Px% (X) A
A Ax% (X) B

3) Conversion value (CV) and Conversion premium (CP)

CV = Conversion ratio x MV per share

(CP = Current MV – Current CV ) nnent MV -

CV
)
Example:
“1 new equity shares at a price of $3.20 per share for every three shares held” or “1 for 3
at an issue price of $3.20”
Current MV per share = $4.00

4) Theoretical ex rights price (TERP)

Example:
3 (existing no. of @$4.00 (current MV of $12.00
shares) share)
1 (new no. of shares) @$3.20 (right issue price) $3.20
4 $15.20

TERP = $15.20
4
= $3.80

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Aini Deraman / FM / JD’19
 FINANCIAL MANAGEMENT’s FORMULAE

CHAPTER 14: THE COST OF CAPITAL →

Have Tax EFFECT
1) Cost of equity (Ke)
Dividend Growth Model =
Ke = D0 (1+g) + g
P0
D1 = D0 (1+g)
Growth (g)
Historical
g = n √current dividend - 1
past dividend
Gordon growth model
g = br
Where,
b (retention rate) = PAT – dividend
PAT
r (ROCE) = PBIT or PAT
CE E

Capital Asset Pricing Model (CAPM)

Ke = Rf + Be (Rm-Rf)
Where,
Rf – risk free rate of return
Be – beta equity
Rm – market rate of return
Rm-Rf – risk premium

2) Cost of preference share (Kf)

Kf = D0
P0

3) Cost of debt (Kd)

Non-tradeable debt (bank loan)
Kd = i (1-t)

Irredeemable debt
Kd = i (1-t)
P0 method
-

Kd = a + NPVa
iedomah
Redeemable debt – YTM method
(b-a)
NPVa - NPVb

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 FINANCIAL MANAGEMENT’s FORMULAE

Example:
Year Cash flows DF (a) PV DF (b) PV
0 Market value
1 - 10 i (1-t)
10 Redemption value
NPV a NPV b

Redemption value
If convertible debt, redemption value is higher of conversion value or
normal redemption value
i. Conversion value – convert the debt to shares
ii. Normal redemption value – redeem the debt at par value or at
premium

4) Weighted average cost of capital (WACC)

WACC = (Ve x Ke) + (Vf x Kf) + (Vd x Kd)
Ve + Vf + Vd

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 FINANCIAL MANAGEMENT’s FORMULAE

CHAPTER 15: GEARING AND CAPITAL STRUCTURE

1) Financial gearing
debt
⑤ eoraedinaefershaTRE
Prior charge capital =

Equity capital (including reserves) Equity

Prior charge capital
Total capital employed*
*either including or excluding non-controlling interest, deferred tax, deferred
income

⑤ Based on market value;

MV of prior charge capital
MV of equity + MV of prior charge capital ::::h
mm n.FI#iIea .

← 2) Operating gearing = Contribution contribution f

tmv of only
-
PBIT

going!ed business risk share

.

,3) Interest cover ratio = PBIT

PBM ! )
No reserve
¥r%
cost a Interest
(

ago:÷÷:-p
4) P/E ratio = Market price per share
Earnings per share

5) Dividend cover = Earnings per share

Dividend per share

CHAPTER 16: CAPITAL STRUCTURE

1) Degeared – need to know proxy company’s business risk, Ba by removing their financial
risk
financialrisk of
Ba = Be x ( Ve
Ve + Vf + Vd(1-t)
) =
Ba
= remove

proxyco
-

ask of
include financial
2) Regeared – to find new Be of our company
Be = Ba x (Ve + Vf + Vd(1-t)) Ba
-

win new
Ve =
our company
get Be -
-

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Aini Deraman / FM / JD’19
 until forever
perpetuity CF
.

= same

Basic DVM =
Valjean (shpahnece =
FINANCIAL MANAGEMENT’s FORMULAE
pv of future dividend that

CHAPTER 17: BUSINESS VALUATION

SH expected to get .

1) Current market capitalization = Share price x No. of shares

#
2) Asset valuation bases = Tangible NCA + CA – CL
*intangible asset should be excluded unless they have a market value (patents,
-

dividend
PV of future
- -

copyrights)
asset
-
q -
X intangible
unless hare

&
3) Dividend valuation model
→ P0 = D0 (1+g)
reliable MV a

minority
mu
reliable
goingidaennfd goodwill no
x
.

cannot
-

Ke – g ←
= not tangible I
growth selloff .

in be
4) Earnings until perpetuity
_y
,
P/E ratio

Yount Yo!
gdahemt.TT#eEarmgisY'ooent
'
'

MV of share price = P/E ratio x EPS

constant in f
I £ routs )
y

ongoing;F¥j
'

question Earning yield

-

MV of share price = EPS (1+g)

parent
Tiedt .
Earning yield – g
I.
-
ke g
- -

5) Discounted cash flows PV of

future dividend
J
.

Cash flows after interest payments and tax – discount factor at cost of equity (Ke)
-

Cash flows before interest payments and tax – discount factor at WACC
4 tax

Kew#c
} tax before interest
after interest
Cf =

DF a

value of the
company ,

Npv =

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Aini Deraman / FM / JD’19
 FINANCIAL MANAGEMENT’s FORMULAE

CHAPTER 19: FOREIGN CURRENCY RISK

1) Forward market
Example:
Spot exchange rate = 1.9615+/- 0.0003 pesos to the dollar
3 months fwd exchange rate = 1.9605+/-0.0007 pesos to the dollar

Receipt
“Receipt 1m peso sales, received in 3 months using forward rate”
Sales value = 1 million pesos
‘Sell peso buy dollar’ rate 1.9612

Payment
“Paying 1m peso invoice, received in 3 months using forward rate”
Payment value = 1 million pesos
‘Buy peso sell dollar’ rate 1.9598

2) Money market
Receipt
i. Borrow in foreign currency
X= Receipt amount
(1 + Borrowing rate in FC)

ii. Convert at spot rate

A= X
‘Sell FC buy HC’ rate

iii. Deposit in home currency

Receipt amount = A x (1 + Deposit rate in HC)

Payment
i. Deposit in foreign currency
X = Payment amount
(1 + Deposit rate in FC)

ii. Convert at spot rate

A= X
‘Buy FC sell HC’ rate

iii. Borrow in home currency

Payment amount = A x (1 + Borrowing rate in HC)

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Aini Deraman / FM / JD’19
 "

rm→#
¥ ¥ sell RM
i

option right to sell R

@ rate
put
=

to
call option =
right buy $ @ rate
=

interest option
" "
insurance
=

interest @ 2%
peut =
right to pay

lust @ n°1
fat right to receive in
= .

coHa
cost
I reduce
=

1-
 FINANCIAL MANAGEMENT’s FORMULAE

3) Purchasing power parity theory (PPPT)

S1 = S0 x (1 + hc)
(1 + hb)
Where,
S1 – expected spot rate
S0 – current spot rate
hc – expected inflation rate in country c (foreign country)
hb – expected inflation rate in country b (investor’s country)

4) Interest rate parity theory (IRPT)

F0 = S0 x (1 + ic)
(1 + ib)
Where,
F0 – forward rate
S0 – current spot rate
ic – interest rate in country c (overseas country) up to the future date
ib – interest rate in country b (base country) up to the future date

5) International Fisher formula

(1 + ia) = (1 + ha)
(1 + ib) (1 + hb)
Where,
Ia – nominal interest rate in country a
ib – nominal interest rate in country b
ha – inflation rate in country a
hb – inflation rate in country b

6) Four way equivalence

Diff. in interest rates IRP Difference in spot

between 2 countries T rate and forward rate

Diff in inflation rate Diff in spot rate and

between 2 countries PPPT expected spot rate
PPP
PPP
PPP
PPP
PPP
PPP
PPP
PPP
PP

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Aini Deraman / FM / JD’19