Financial Management Formulas

FS CHAPTERCALCULATION FORMULA COMMENTS

AVERAGE ANNUAL PROFITS BEFORE INTERST AND TAX x 100 RETURN ON CAPITAL EMPLOYED/ACCOUNTING RATE OF RETURN
2 ROCE/ARR
INITIAL CAPITAL COSTS
OR
ROCE/ARR AVERAGE ANNUAL PROFITS BEFORE INTERST AND TAX x 100 RETURN ON CAPITAL EMPLOYED/ACCOUNTING RATE OF RETURN
AVERAGE CAPITAL INVESTMENT
2
AVERAGE CAPITAL INVESTMENT INITIAL INVESTMENT+RESIDUAL VALUE
2

3 COMPOUNDING F=P(1+r)^n
F=future value, P=initial investment(present value), r=interst rate, n=number of time periods

3 PRESENT VALUE P=F(1+r)^-n

F=future value, P=present value, r=interst rate, n=number of time periods

DISCOUNTING ANNUITIES PV = Annual cash flow x annuity factor (AF)

3 ANNUITY FACTOR 1- (1+r)^-n
r

DISCOUNTING PERPETUITIES PV = Annual cash flow x perpetuity factor

3 PERPETUITY FACTOR Perpetuity factor = 1/r
GROWING PERPETUITY FACTOR Growing perpetuity factor = 1/(r-g) g=growth rate (expressed as a decimal)

INTERNAL RATE OF RETURN NL L=lower discount rate, H=higher discount rate

3 IRR = L + ——— (H – L) NL=NPV at the lower discount rate
NL – NH NH=NPV at the higher discount rate

꙳* 4 FISHER FORMULA/MONEY RATE OF RETURN (1 + i) = (1 + r)(1 + h) r=real rate of return, h=inflation rate, i=money cost of capital

4 COST OF CAPITAL Cost of borrowing x (1- tax rate)

EQUIVALENT ANNUAL COST PV of costs where n is the length of the replacement period in years
4
Annuity factor for year n

PROFITABILITY INDEX NPV

5
Initial Investment

SENSITIVITY MARGIN NPV x 100 the lower the sensitivity of an input variable, the more sensitive the project NPV is to changes in that
6
PV of cash flows under consideration input variable

6 EXPECTED VALUE EV = Σ p x where x=future outcome and p=probability of outcome occuring

CURRENT RATIO Current Assets

7
Current Liabilities

QUICK RATIO (ACID TEST) Current Assets - Inventory

7
Current Liabilities

WORKING CAPITAL CYCLE Raw materials holding period x

Less: payables payment period (x)
WIP holding period x
7
Finished goods holding period x
Receivables collection period x
Working Capital Cycle x

CASH OPERATING CYCLE RATIOS Inventory x 365

7
Cost of sales

RAW MATERIAL INVENTORY HOLDING PERIO Raw material inventory x 365

7
 7
Material usage

WIP HOLDING PERIOD Work-in-progress inventory held x 365

7
Production cost

FINISHED GOODS INVENTORY HOLDING PERI Finished good inventory held x 365
7
Cost of good sold

TRADE RECEIVABLES DAYS Trade receivables x 365

7
Credit sales

TRADE PAYABLES DAYS Trade payables x 365

7
Credit purchases

WORKING CAPITAL TURNOVER Sales revenue

7
Net working capital

TRADE RECEIVABLES BALANCE Trade receivables days x credit sales

7
365

8 ECONOMIC ORDER QUANTITY (EOQ) √ 2CoD/Ch where Co=cost per order, D=annual demand and Ch=cost of holding one unit for one year

ANNUAL HOLDING COSTS Ch x EOQ/2

8
ANNUAL ORDERING COSTS Co x D/EOQ

9 RECEIVABLES - FINANCE COST Receivable balance x Interest (overdraft) rate

9 RECEIVABLES BALANCE Sales x (Receivables days/365)

9 ANNUAL COST OF DISCOUNT (1 + (discount/amount left to pay))^nos of periods-1 where no. of periods = 365 or 52 or 12

where Co=the brokerage cost of making a securities trade or borrowing, D=the total amount of net
10 THE BAUMOL CASH MANAGEMENT √ 2CoD/Ch new cash needed for transactions over the entire period, or the excess cash available to invest in
short term securities and Ch=opportunity cost of holding cash (equals the rate of return generated by
marketable securities or the cost of borrowing in order to hold cash)

lower limit - must be given by the question, upper limit= lower limit + spread, return point = lower
10 MILLER-ORR Spread = 3((3/4 x transaction cost x variance of cash flows)/interest rate)^1/3
limit +1/3 x spread

13 FUTURE SPOT RATES S1 = S0 x (1+Hc)/(1+Hb) S1=future spot rate, S0=todays rate, Hc=inflation of foreign currency, Hb=inflation of home currency

13 FORWARD RATES F0 = S0 x (1+ic)/(1+ib) F0=forward rate, S0=current rate, ic=interest rate in counter currency, ib=interest rate in base currency

15 THEORETICAL EX-RIGHTS PRICE (TERP) Market value of shares arlready in issue + proceeds from new share issueIn theory, the share price after the rights issue
number of shares in issue after the rights issue (total new number of shares)

15 VALUE OF A RIGHT TERP - issue (subscription) price

15 VALUE OF A RIGHT PER EXISTING SHARE (TERP - issue price)/no. of shares needed to obtain a right

17 DIVIDEND VALUATION MODEL re = D/Po re=shareholders' required return, D=constant dividend from year 1 to infinity, Po=ex div market
WITH NO GROWTH IN DIVIDENDS priceof a share (ex = after dividend paid)

17 EX-DIV SHARE PRICE Cum-div share price - dividend due

꙳* 17 DVM re = (Do(1+g)/Po) + g Do=current dividend, D1=dividend in 1 years' time, g=constant rate of growth in dividends
WITH DIVIDEND GROWTH AT A FIXED RATE re = (D1/P0) + g

17 ESTIMATING GROWTH g = ((Do/Dn)^1/n) -1 Dn=dividend n years ago, n=number of years of growth

17 EARNINGS RETENTION MODEL g=bre b=earnings retention rate, b=(earnings-dividends)/earnings

(GORDON'S GROWTH MODEL) re=accounting rate of return, ARR=profit/investment
17 ESTIMATING THE COST OF PREFERENCE SHA kp=D/Po kp=cost of the preference share, D=constant annual preference dividend, Po=ex div market price of a share

17 IRREDEEMABLE DEBT kd=I/MV kd=debt holders' required rate of return, MV=ex-int market price of the loan note
kd(1-T)=I(1-t)/MV I=annual interest starting in 1 year's time, Kd(1-T)=cost of debt to the company, T=rate of corporation tax

17 NON-TRADEABLE DEBT Cost to company = interst rate x (1-T)

17 WEIGHTED AVERAGE COST OF CAPITAL (WAC WACC=[Ve/(Ve+Vd)]ke + [Vd/(Ve+Vd)]'kd(1-T) Ve and Vd are the market values of equity and debt

17 WACC (Ke x Ve) + (Kp x Vp) + (kd(1-T) x Vd)

Total MV

17 CAPM E(ri) = Rf + Bi[E(rm)-Rf] Bi=the entity's 'beta factor' - a meausre of systematic risk of investment relative to the market
E(rm)-Rf=equity risk premium E(ri)=required rate of return of the investor, Rf=risk-free rate of return, E(rm)=expected average return on the market

19 ROCE PBIT x 100

Capital employed

19 CAPITAL EMPLOYED Total assets - Current Liabilities or

Equity + Long-term debt

19 ROE Profit after tax and preference dividends x 100

Ordinary share capital and reserves

19 PROFIT MARGIN Profit x 100 can be calculated using any profit figure, e.g. gross profit or operating profit
Revenue

19 INTEREST COVER OPBIT

Debit interest

19 EPS Profit after interest, tax and preference share dividends

Number of ordinary shares in issue

19 PE ratio Share price

EPS

19 DPS Total dividend

Total number of shares issued

19 DIVIDEND COVER Profit available for ordinary shareholders

Dividend for the year

19 DIVIDEND YIELD DPS x 100

Market price per share

19 TSR DPS + change in share price x 100

Share price at start of period

19 INTEREST YIELD Interest x 100

Market value of debt

20 MARKET CAPITALISATION OF PUBLIC COMPAN Current share price x number of shares in issue

20 PE RATIO METHOD Value per share = EPS x P/E ratio post tax earnings, after preference share dividends but before ordinary dividends

20 TOTAL VALUE OF EQUITY Total earnings x P/E ratio adjust for one-off items, directos' salaries and synergies

20 EARNINGS YIELD METHOD Value per share = EPS x 1/earnings yield

Total value of equity = Total earnings x 1/earnings yield
Total value of equity = (earnings x (1+g))/(earnings yield -g)