Project 1 Financial Analyses, Interpretation, and Presentation

Ratio Formula

Accounting Equation, aka Balance Sheet Equation

Assets = Liabilities + Shareholders' Equity

Income Statement: Retail Net Revenues - Cost of Goods Sold = Gross Profit/Margin - Operating Expenses = Operating Income - Non-Operating Income, Expenses, Gains,

& Losses = Net Income before tax - Tax = Net Income

Statement of Retained Earnings Retained Earnings, beginning balance +/- Prior Period Adjustment +/- Change in Accounting Principle = Retained Earnings, adjusted balance + Net Income - Dividends declared = Retained Earnings, ending balance

Statement of Shareholders' Equity Shareholders' Equity, beginning balance + additional equity issuance +/- change in Retained Earnings = Shareholder's Equity, ending balance

Statement of Cash Flows Cash flows from Operating Activities +/- Cash flows from Investing Activities +/- Cash flows from Financing Activities = change in Cash

balance

Earnings per share (Net Income - Pref Stk dividends) / Shares outstanding Price to earnings ratio Market share price / Earnings per share Enterprise value Market capitalization + Interest Bearing Debt - Cash Enterprise value multiplier Enterprise value / Earnings before interest + taxes Market to Book Ratio Market value per share / Book value per share Market Capitalization Market price per share X Shares outstanding Return on Common Equity Net income / Common equity Return on investment Net Income + Interest X (1 - tax rate) / (Equity + long-term debt) Return on owner’s equity Net income /Average Owner’s Equity Return on Total Assets Net Income + Interest X (1 - tax rate) / Total assets Dupont formula Net Income/Equity =

(Net Income/Sales) X (Sales/Assets) X (Assets/Equity) Dupont formula States that ROE can be computed as: Profit margin X Total asset

turnover X Equity Multiplier Economic Value Added (EVA) EBIT X (1 - t) - WACC X Capital Invested OR

Equity X (ROE - Ke)

Financial Ratios & Formulas

Financial Statement Formulas

Market Performance Ratios

Gross profit margin Gross Profit / Net Sales or Revenues Net Profit margin Net Income after tax / Net Sales Operating profit margin Operating profit / Net Sales EBIT return on Assets (EROA) EBIT / Average Total Assets Pre-tax Income to Sales Pretax income / Net sales Pre-tax return on assets Pretax income / Total assets Pre-tax return on common equity Pre-tax / Common equity Return on Assets Net Income / Total Assets Return on Equity Net income / Average Total Equity OR

(Net Income/Sales) (Sales/Assets) (Assets/Equity)

Total asset turnover Net Sales / Average Total Assets Accounts Receivables turnover Net Sales / Average Accounts Receivable Average Collection Period 365 days/Receivables turnover ratio Inventory turnover Cost of Goods Sold / Average Inventory Days sales in payables Average Accounts and Expenses Payable

/(Operating expenses / 365) Days sales in inventory 365 days / Inventory turnover ratio Debt-free Working Capital Turnover Sales / Debt-free Working Capital Capital intensity Average Total assets /Net Sales Working capital turnover Sales / (Current assets - current liabilities)

Cash Cash / Average Current Liabilities Current cash debt coverage Net Cash Provided by Operating Activities /

Average Current Liabilities Current ratio Current Assets / Current Liabilities Quick or Asset Test ratio Quick Assets (Cash & equivalents + S-T investments + Receivables)/

Current Liabilities Interest-bearing Debt to Equity Interest-bearing debt / Total equity Dividend payout Dividends Per Share/ Earnings per Share Dividend payout ratio Dividends Paid / Net Income Net Cash Flow from Operating Activities (NCFOA)

Net Income + Depreciation and Amortization

Rule of 72 Time to Double Your Money = 72/interest rate Working capital Total Current Assets - Total Current Liabilities

Total debt to total assets Total Liabilities / Total assets Total debt to total equity Total Liabilities / Total Equity Total equity to total assets Total equity / Total assets Equity Multiplier Total Assets / Total Equity

Debt Ratios

Profitability Ratios

Asset Utilization / Turnover Ratios

Short-term Solvency / Liquidity Ratios

Long-term debt to equity Long-term Liabilities / Total Equity Times interest earned aka Interest coverage ratio

Operating income* / Interest expense

Cash coverage Operating income* + depreciation + amortization / Interest Fixed charge coverage (Net Income before taxes + Interest charges + long-term lease

payments) / (Interest charges + Long-term lease payments)

present value of $1 (lump sum) pv = fv (factor ) n, i

future value of $1 (lump sum) fv = pv (factor) n, i

Present Value of Annuity (ordinary) PV = Payment (Factor) n, i

Future Value of Annuity (ordinary) FV = Payment (Factor) n, i

An Annuity Due has the word "Due" as a subscript to the word Annuity

Present Value of an AnnuityDue PVDue = Payment (Factor) n, i

Note: if you don't have an AnnuityDue table, use an ordinary Annuity table & multiply the Factor by 1 + Interest rate

Future Value of an AnnuityDue FV = Payment (Factor) n, i (1 + interest rate)

Profit Equation Selling Price (# units sold) – Variable Costs (# units sold) – Total Fixed Costs

Total Contribution Margin Contribution Margin per Unit * Units Sold

Contribution Margin per unit Selling Price per Unit - Variable Costs per Unit

Variable Cost per Unit Total Variable Costs / Units Sold Contribution Margin Ratio (Selling Price – Variable Costs) / Selling Price Break-Even Point (BEP) in Units Fixed Costs / Contribution Margin Break-Even Point in $ Fixed Costs / Contribution Margin Ratio Break Even Total Revenues - (Total Variable Costs + Total Fixed Costs) = 0 Target Income Selling Price (# units) – Variable Costs (# units) – Total Fixed Costs =

Target income Target Cost per Unit ((Quantity *Price) – fixed costs – profit required) / Quantity Margin of Safety (MOS) Actual Sales – BEP = (#units * sales price) - BEP Martin of Safety Ratio Actual Sales – BEP = (#units * sales price) - BEP

OR Expected Sales – Break Even Sales OR Margin of Safety / Expected Sales

Overhead Rates Using One Cost Pool Total Overhead / Total Labor Hours Overhead Rates Using Two Cost Pools Rate1 = Type1 Overhead / Type1 Labor Hours

OR: Rate2 = Type2 Overhead / Type2 Labor Hours

Lower case letters (pv & fv) denote present and future values of $1 (a lump sum)

CAPITAL letters (PV & FV) denote Present & Future values of an Annuity (a series of payments)

Management Accounting Formulas

Time value of money formulas

Allocating Joint Costs Joint cost allocated to product A = [Sales value of A / (Sales value of A + Sales value of B)] x Joint Costs

And: Joint cost allocated to product B = [Sales value of B / (Sales value of A + Sales value of B)] x Joint Costs

Full Price with Markup = Price + Markup

Full Price with Markup = Price + Markup Price = Variable Costs + (Fixed Costs/Unit)

Market = (Markup Rate) (Price) Profit maximizing price Total contribution margin - Fixed Costs

Incremental Profit or Loss Incremental Revenue – Incremental Cost

Incremental Cost per Unit Sum of Variable Costs / units produced

Incremental Costs for Additional Units (Incremental Cost per Unit) * Additional Units Produced

Total Budget = Total Costs Total Variable Costs + Total Fixed Costs

Estimate of Variable Cost Change in Cost / Change in Activity

Estimate of Variable Cost (Cost at its highest level of Activity - Cost at its lowest level of Activity) / (# units at highest level of Activity - # units at lowest level of Activity)Estimate of the total cost for a given

activity level Total cost = Fixed cost + (Variable cost per unit x Activity level in units)

Rule of 72 = time to double your money TDM = 72 / interest rate

Present Value of $1 (lump sum) PV=FVn/(1 + i)n

Future Value of $1 (lump sum) FVn =PV x (1 +i) n

Future value with compounding more than annually: FVn = PV * (1 + i/m )m * nFuture value with continuous compounding FV∞ = PV * e

i * n

Future value with general growth rate FVn = PV* (1 + g ) n

Holding period return HPR = [(1 + r1) (1 + r2) …(1 + rn)] - 1 Hamada equation βL = βU * [1 + (1 – Tc)*(D/S)]

Net present value

Internal rate of return

Internal rate of return factor Net Initial Investment / Annual Cash Flow Modified Internal rate of return FVprofits = PVcosts (1 + MIRR)

N

Discounted cash flow Cash Flow/ (1 + r)^n Beta Bu = BL / {1 + [(1-t)(Wd/We)]}

BR = Bu{1+[(1-t)(Wd/We)]} Build-up Method ke = Rf +(RPm) +RPs + Rpu

Capitalization rate Discount rate - long-term growth rate

Finance Formulas

Capital Asset Pricing Model (CAPM) RS = Rrf + (RM – Rrf)*βE Modified CAPM ke = Rf + B(RPm) + RPs + Rpu Valuation formula Kd = Marginal borrowing rate (1 - marginal tax rate) Weighted average cost of capital (WACC)

WSRS + WDRD Weighted average cost of capital with TAX impact

WSRS + WDRD(1-T)

Weighted average cost of capital with TAX impact and Preferred Stock

WSRS + WDRD(1-T) + WPSRPS

Interest rate parity: US$ to Euro F(euro/$) = S(euro/$) (1 + Reurorf)/ (1 + R $

rf) Cost of Preferred Stock RPS = (DPS / PPS) Cost of Equity with Flotation costs RS = (D1 / (P0 *(1 –F))) + g Purchasing power parity Pdollar = S(dollar/euro) * Peuro Dividends Paid Out NI – (ws * Capital Budget) Dividend growth Rs = (D1 / P0) + g Bond yield plus risk premium Rs = YLTD + Equity Risk Premium Profit from ownership of a Call option Profitlong call = - Co + Max(S-X, 0) Profit from ownership of a Put option Profitlong put = - Po + Max(X-S, 0) Break even point for a Call option S = X + Co Break even point for a Put option S = X – Po Black Scholes Option Pricing model

B = Beta A coefficient used to modify a rate of return variable. BL Levered beta BU Unlevered beta BR Relevered beta C Call premium e Exponential item

EBIT Earnings before interest and taxes EBITDA Earnings before interest, taxes, depreciation, and amortization

g Long-term rate of growth K Option striking price KE Discount rate of common equity capital

(cost of common equity capital).Kd After-tax cost of debt ln Natural log N Cumulative standard normal distribution

NCF Net cash flow r or RF Risk free interest rate (investments free of default risk)

Finance Abbreviations Defined

RPm Equity risk premium for the market (return that is > risk free rate)

RPS Risk premium for small stock premium that is > RPm (average size stock)

s Standard deviation S Current stock price t Tax rate, or Time Until Option Exercise

We Weight of common equity in capital structure Wd Weight of debt in capital structure

Prepared by Dr. Sherri L. Levin, MBA, CFE, CPA; Last updated 1/25/2020