FINANCE questions

1

Financial Management Formula Sheet

Financial Ratios: Liquidity Ratios:

Current Ratio = CA / CL

Quick (or Acid-Test) Ratio = (CA – Inventory) / CL Leverage Ratios:

Total Debt Ratio (“Debt-to-Assets Ratio”) = TD/TA

Debt/Equity = TD / TE

Equity Multiplier = TA / TE = 1 + D/E

Long-term debt ratio = LTD / (LTD + TE) Coverage Ratios:

Times Interest Earned = EBIT / Interest

Cash Coverage = (EBIT + Depreciation) / Interest

Times burden covered = EBIT / [interest + principal repayment / (1- tax rate)] Asset Management Ratios:

Inventory Turnover = Cost of Goods Sold / Inventory

Days’ Sales in Inventory = 365 / Inventory Turnover Receivables Turnover = Sales / Accounts Receivable Days’ Sales in Receivables (Collection period) = 365 / Receivables Turnover Alternatively: collection period = Account Receivable / Credit sales per day Total Asset Turnover = Sales / Total Assets Fixed Asset Turnover = Sales / NFA

Profitability:

2

Gross Profit Margin = (Sales – COGS) / Sales Operating Profit Margin = Operating profits / Sales Net Profit Margin = Net Income / Sales

Return on Assets (ROA) = Net Income / Total Assets Return on Equity (ROE) = Net Income / Total Equity

Du Pont Identity:

ROE=ROA*EM ROE=NPM*TAT*EM

Market Value Measures:

PE Ratio = Price per share / Earnings per share Market-to-book ratio = market value per share / book value per share

Management of Growth: g* = R * P * A * T_hat where: g* is sustainable growth rate P is net profit margin R is retention ratio A is total asset turnover T_hat is equity multiplier defined as “Assets/Equity based on beginning of period Equity”) Time Value of Money: Compounding: FV = PV*(1 + k)n Discounting: PV = FV / (1 + k)n PV = Present value, what future cash flows are worth today FV = Future value, what cash flows are worth in the future k = interest rate, rate of return, or discount rate per period – typically, but not always, one year n = number of periods – typically, but not always, the number of years Relevant/Free Cash Flows: Free Cash Flow (FCF) = OCF – net capital spending (NCS) – changes in NWC

3

Operating Cash Flow (OCF) = EBIT + depreciation – taxes NCS=NFAending-NFAbeginning+Depreciation Changes in NWC=NWCending-NWCbeginning After-tax salvage = salvage – t*(salvage – book value) Capital Budgeting Decision Rules: NPV (Net present value) = PV of the future expected cash flows -- initial investment outlay BCR (Benefit Cost Ratio) = ABS (PV of cash inflows / PV of cash outflows) Stock Valuation Model based on constant dividend growth assumption:

where: P0 is stock price at time zero D0 is last dividend paid R is required rate of return g is expected growth rate in future dividends Cost of Capital: CAPM : 𝐸(𝑅) = 𝑅& + 𝛽 ∗ (𝑅* − 𝑅&) Where : E(R) is required rate of return (or cost of equity)

Rf is the risk-free rate of return Rm is market rate of return (Rm – Rf) is Market risk premium β is Systematic risk of asset

DDM (Dividend Discount Model): Estimate cost of equity based on stock valuation model

g-R D

g-R g)1(D

P 100 = +

=

4

where: P0 is stock price at time zero D0 is last dividend paid R is required rate of return (or cost of equity) g is expected growth rate in future dividends Weighted Average Cost of Capital: WACC = (1-t)*KDWD + KEWE Where: WACC is weighted average cost of capital

WD = D/(D + E), WE =E/(D + E). t: tax rate KD: cost of debt KE: cost of equity Asset Beta vs. Equity Beta: βA = E/V * βE Where: βA is asset beta

βE is equity beta E market value of equity

V is enterprise value; E=D+E (where D is market value of debt)

g P D

g P

g)1(D R

Rfor solve and rearrange g-R

D g - R g)1(D

P

0

1

0

0

10 0

+=+ +

=

= +

=