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AFM. Resources. Useful Formulas

The document provides an overview of important formulas and equations used in advanced financial management exams and analysis. It lists formulas for calculating the Modigliani-Miller proposition with taxes, the capital asset pricing model, asset beta, the growth model, Gordon's growth approximation, the weighted average cost of capital, the Fisher formula, purchasing power parity, interest rate parity, a two asset portfolio, the modified internal rate of return, the Black-Scholes option pricing model, and the put call parity relationship. It also includes additional formulas for working capital, inventory days, receivable days, payable days, cash operating cycle, accounting rate of return, cost of equity, annuity discount factor, perpetuity, internal rate of

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74 views4 pages

AFM. Resources. Useful Formulas

The document provides an overview of important formulas and equations used in advanced financial management exams and analysis. It lists formulas for calculating the Modigliani-Miller proposition with taxes, the capital asset pricing model, asset beta, the growth model, Gordon's growth approximation, the weighted average cost of capital, the Fisher formula, purchasing power parity, interest rate parity, a two asset portfolio, the modified internal rate of return, the Black-Scholes option pricing model, and the put call parity relationship. It also includes additional formulas for working capital, inventory days, receivable days, payable days, cash operating cycle, accounting rate of return, cost of equity, annuity discount factor, perpetuity, internal rate of

Uploaded by

Anonymous Me
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Advanced Financial Management

Useful Formulas and Equations

FORMULAS GIVEN IN EXAMS

Modigliani and Miller Proposition 2 (with tax)

K e = ki e + (1-T) (ki e – k d) (V d / V e)

The capital asset pricing model

E (ri) = Rf + Bi (Rm – Rf)

Where (Rf) is risk free rate; (Bi) is Beta equity and (Rm) is market rate.

The asset beta formula

B a = {(V e) / (V e + V d (1 – T)} x B e + {V d (1 - T) / (V e + V d (1 – T)} x B d

The Growth model

P0 = {Do (1+g)} / (re – g)

Where Do is the current dividend; re is the shareholder’s required return and g is the growth rate.

Gordon’s growth approximation

G = b re

Where b is the proportion of earnings retained and r is the rate of return the company can earn.

The weighted average cost of capital

WACC = {(V e) / (V e + V d)} x K e + {(V d) / (V e + V d)} x K d (1 – T)

Where V e is value of equity; V d is value of debt; K e is cost of equity; K d is cost of debt and T
is the prevailing tax rate.
The Fisher formula

(1 + i) = (1 + r) (1 + h)

Where (i) is the actual cost of capital; (r) is the real cost of capital and (h) is the inflation rate.

Purchasing power parity

S1 = S0 x (1 + h c) / (1 + h b)

Interest rate parity

F0 = S0 x (1 + i c) / (1 + i b)

Two asset portfolio

Sp = (w2a s2a + w2b s2b + 2 wa wb rab sa sb) (1/2)

Modified internal rate of return

MIRR = (PV R / PV I) (1 / n) (1 + re) – 1

The Black-Scholes option pricing model

C = Pa N (d1) – Pe N (d2) e-rt

d1 = {ln (Pa / Pe) + (r + 0.5s2) t} / (s √t)

d2 = d1 - s √t

The put call parity relationship

p = c – Pa + Pe e-rt

OTHER IMPORTANT FORMULAS (NOT GIVEN IN EXAMS)

Working capital = Account receivables + Cash + Inventory – Account payables

Receivable days = (Average receivables / Revenue) x 365 days

Inventory days = (Average inventory / Cost of sales) x 365 days

Raw material days = (Average raw material / Raw material purchases) x 365 days

Finished goods days = (Average finished goods / Cost of sales) x 365 days

Work in progress days = (Average work in progress / Cost of production) x 365 days
Payable days = (Average payables / Purchases) x 365 days

Cash operating cycle = Inventory days + Receivable days – Payable days

Accounting rate of return = (Average profits / Average book value) x 100

Market value of irredeemable debt = Interest per annum / Debt holder’s required rate of return

Cost of equity = {D0 (1 + g) / P0} + g

Annuity discount factor = {1- (1 + r) –n} / (r) [Where r = discount rate; n = number of periods]

Perpetuity = 1 / r [Where r = discount rate]

IRR = L + {(NL) / (NL – NH)} (H – L) [Where L is the lower discount rate; H is the higher
discount rate; NL is the net present value at lower discount rate and NH is the net present value
at higher discount rate.

Interest yield = (Annual interest payment / Market value of debt) x 100

Cum div market value = Ex div market value + Dividend about to be paid

Hedging efficiency = (Profit on one deal / Loss on other deal) x 100

Total risk = Systematic risk + Unsystematic risk

Operating gearing = Fixed costs / Variable costs

Gross profit margin = (Gross profit / Revenue) x 100

Operating profit margin = (Operating profit / Revenue) x 100

Net profit margin = (Net profit / Revenue) x 100

Return on capital employed = (PBIT / Equity + Liabilities)

Asset turnover = (Revenue / Total assets)

Return on capital employed = Asset turnover x Operating profit margin

Current ratio = Current assets / Current liabilities

Quick ratio (Acid test) = (Current assets – Inventories) / Current liabilities

Gearing = Debt / Equity

Gearing = Debt / (Debt + Equity)

Price earnings (PE) ratio = Market price / Earnings per share


Earnings yield = Earnings per share / Market price

Dividend yield = (Dividend per share / Market price) x 100

Dividend cover = Earnings per share / Dividend per share

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