FORMULA SHEET
SHORT-TERM SOLVENCY RATIOS
Current ratio = Current assets ÷ Current liabilities
Quick ratio = (Current assets – Inventory) ÷ Current liabilities
Cash ratio = Cash ÷ Current liabilities
FINANCIAL LEVERAGE RATIOS
Total debt ratio = Total debt ÷ Total assets = (Total assets – Total equity) ÷ Total assets
Debt-equity ratio = Total debt ÷ Total equity
Equity multiplier = Total assets ÷ Total equity = 1 + debt-equity ratio
Times interest earned = Earnings before interest and taxes ÷ Interest
Cash coverage = (Earnings before interest and taxes + depreciation + amortization) ÷ Interest
TURNOVER RATIOS
Inventory turnover = Cost of goods sold ÷ Inventory
Days sales in inventory = 365 ÷ Inventory turnover
Receivables turnover = Sales ÷ Receivables
Days’ sales in receivables= 365 ÷ Receivables turnover
Total asset turnover = Sales ÷ Total assets
Days in inventory = Days in period ÷ Inventory turnover
PROFITABILITY MEASURES
Profit margin = Net income ÷ Sales
Return on assets = Net income ÷ Total assets
Return on equity = Net income ÷ Total equity
EBITDA margin = EBITDA ÷ Sales
MARKET VALUE RATIOS
Price-to-earnings ratio = Market price per share ÷ Earnings per share
Market-to-book ratio = Market price per share ÷ Book value per share
Market capitalization = Market price per share x Shares Outstanding
Enterprise Value (EV) = Market capitalization + Market value of interest bearing debt – cash
EV Multiple = EV ÷ EBITDA
DUPONT IDENTITY
Net Income Sales
ROA =
Sales Total assets
ROA = Profit margin x Total asset turnover
Net Income Sales Total assets
ROE =
Sales Total assets Total equity
ROE = Profit margin x Total assets turnover X Equity multiplier
COMPOUNDING AND DISCOUNTING
FV = PV(1 + r)t FV
PV =
(1 + r)t
Effective annual rate FV of Ordinary Annuity
APR m (1 + r)t − 1
EAR = (1 + ) −1 FV = CF [ ]
m r
PV of Ordinary Annuity FV of Annuity Due
1 − (1 + r)−t (1 + r)t − 1
PV = CF [ ] FV = CF(1 + r) [ ]
r r
PV of Annuity Due PV of Ordinary Perpetuity
1 − (1 + r)−t CF
PV = CF(1 + r) [ ] PV =
r r
0
PV of Perpetuity Due General asset valuation
n
CF(1 + r) CFt
PV = V= ∑
r (1 + r)t
t=1
Value of Bond Value of Preference Share
1 − (1 + R B )−n Face Value Dp
𝑉𝐵 = Coupon [ ]+ 𝑃𝑃 =
RB (1 + R B )n RP
Value of Ordinary Share: Constant growth CF1 CFT
NPV = ( +⋯+ )−I
D0 (1 + g) D1 (1 + r)1 (1 + r)T
𝑉𝐸 = =
RE − g RE − g
Average Return Standard Deviation of Returns
∑𝑛 R
̅ = 𝑡=1 𝑡
R ̅)2
∑𝑛𝑡=1(R 𝑡 − R
𝑛 𝜎𝑅 = √
𝑛−1
Expected Return Standard Deviation of Expected Return
2
E(R) = ∑ R i P(R i ) σE(R) = √∑(R i − E(R)) × P(R i )
Relation between leverage and equity beta.
ASSET = EQUITY × S/(S+B) + DEBT × B/(S+B)
The cost of equity capital
CAPM, RS = RF + (RM – RF)
The weighted average cost of capital:
WACC = (S/(B+P+S))RS + (P/(B+P+S))RP + (B/(B+P+S))RD(1-TC)
Expected return of equity capital:
RS = R0 + (R0 – RB)(B/S)(1-Tc)
Value of unlevered and levered firm:
EBIT ∗ (1 − 𝑇𝑐)
VU =
𝑅0
VL = VU + B*Tc and VL = B + S
Net working capital + Fixed assets = Long-term debt + Equity
Net working capital = Cash + Other current assets – Current liabilities
Cash = Long-term debt + Equity + Current Liabilities – Other current assets – Fixed assets
Operating cycle = inventory period + accounts receivable period
Cash cycle = operating cycle – accounts payable period
FIN201 _ WSB_ S1 2021 _ Final Exam Set 1 1
