ACYFMG1
Summary of Formula
UNIT II
Free Cash Flow
FCF/
FCFF (to
firm)
OR
FCF = Cash flow from operating activities + [Int exp (1-T)] –
Net increase (decrease) in cash + Cash flow from investing
activities
Net NOWC= [current assets] - [current liabilities- notes payable]
operation
working
capital
FCFE (to
equity)
where: Net debt repayment (borrowings) = Principal debt repayment less new debt OR
= (Notes payable, beg + LT debt, beg) – (Notes payable, end + LT debt, end)
OR
FCFE = Cash flow from operating activities – Net increase
(decrease) in cash + Cash flow from investing activities + [Cash
flow from financing activities - -Cash dividends paid*]
Liquidity ratios
Current ratio
ACYFMG1 Formula
Quick (Acid
test) ratio
OR
2
ACYFMG1 Formula
Liquidity ratios (cont’d)
Cash Ratio
OR
Net working
capital
Activity/Efficiency ratios
Accounts receivable turnover
ratio
where: Ave AR = (Beg AR + End AR)/2
Days sales outstanding (Ave.
collection period/ ave. age of
receivables)
Inventory turnover
where: Ave Inv = (Beg Inv + End Inv)/2
Days Inventory Outstanding
(Inventory conversion period or
Ave. age of inventory)
Fixed asset turnover ratio
where: Ave net PPE = (Beg net PPE + End
net PPE)/2
Total asset turnover ratio
where: Ave TA = (Beg TA + End TA)/2
Accounts payable turnover ratio
where: Ave AP = (Beg AP + End AP)/2
3
ACYFMG1 Formula
Days Payables Outstanding (Ave.
payment period or Ave. age of
payables)
4
ACYFMG1 Formula
Debt ratios
Debt ratio
Equity ratio
OR
Debt-to-Equity
ratio
OR
Debt-to-capital
ratio
Where: Total debt = All interest bearing liabilities (ST & LT)
Total capital = Total debt + Total SHE
Times-interest-earn
ed (TIE) or interest
coverage Ratio
EBITDA coverage
Ratio
Fixed-payment or
Fixed-charge
coverage Ratio
Equity (financial
leverage) multiplier
OR OR
5
ACYFMG1 Formula
6
ACYFMG1 Formula
Profitability ratios
Gross profit margin
Operating profit
margin
Net profit margin
(return on sales)
Return on Assets
(ROA) or Return on
Investment (ROI)
where: Ave TA = (Beg TA + End TA)/2
Return on Equity
(ROE)
where: Ave SHE = (Beg SHE + End SHE)/2
Book value per
share (BVPS)
Earnings per share
(EPS)
*aka Earnings available to common stockholders
Dividend payout
ratio
Retention ratio
Return on Invested
capital (ROIC)
NOPAT = EBIT (1- tax rate)
Ave Invested capital= Ave debt + Ave SHE
Basic Earning
Power Ratio
7
ACYFMG1 Formula
Market ratios
Price Earnings (P/E)
Ratio
Market/book (M/B)
Ratio
Dividend Yield ratio
Dupont
Dupont formula Net profit margin x Total Asset turnover = ROA
where: TA turnover= Sales/TA, end; ROA = NI/
TA,end
Modified (expanded) Net profit margin x Total Asset turnover x Equity
Dupont formula multiplier = ROE
OR
ROA x Equity multiplier = ROE
where: TA turnover= Sales/TA, end; ROA = NI/ TA,
end and ROE = NI/SHE,end
8
ACYFMG1 Formula
UNIT III
Discretionary Financing Needs (DFN)
Capital = total assets/ sales
intensity ratio
DFN/AFN/ =Projected Assets – Projected Liabilities – Projected SHE; OR
EFN equation
= Change in Assets – Change in Liabilities – Change in SHE
Alternative =(Assets0/ Sales0)Δ Sales+1 - (L0* / Sales0)ΔSales+1 -
DFN equation (NPM0)(Sales+1)(1- DPR0)
where, L* are liabilities that increase spontaneously with sales;
OR
=(Assets0 x g) - (L0* x g) - [(NI0)x (1+g)x (1- DPR0)]
where, g is the sales growth rate
Full capacity = current sales / % of capacity
sales
Projected Δ Fixed assets+1 = (FA0/SFC x S1) - FA0
change in FA where, SFC is full capacity sales and S1 is projected sales next period
DFN with =(A0*/ Sales0)Δ Sales+1 + Δ Fixed assets+1 - (L0* /
excess Sales0)ΔSales+1 - (NPM0)(Sales+1)(1- DPR0)
capacity where, A* assets that increase spontaneously with sales
L* liabilities that increase spontaneously with sales; OR
=(A0* x g) + Δ Fixed assets+1 -(L0* x g) – [(NI0)x (1+g)x (1-
DPR0)]
where, g is the sales growth rate
Growth rates
Internal growth
rate (derived
equation)*
9
ACYFMG1 Formula
Growth rates (cont’d)
IGR simplified Using Beg TA:
equation* IGR = ROA x RR
IGR = Reinvested earnings/ (TA less reinvested earnings)
Using End TA:
IGR = (ROA x RR) / [1-(ROA x RR)]
Sustainable
growth rate
(derived
equation)
where: ROE = NI/ SHE, end; OR
SGR simplified Using Beg SHE:
equation SGR = ROE x RR
SGR = Reinvested earnings/ (SHE less reinvested earnings)
Using End SHE:
SGR = (ROE x RR)/ [1-(ROE x RR)]
* we will use the derived equation for ACYFMG1 unless the question explicitly stated to use
the simplified equation
Leverage
Operating leverage
(sensitivity)
Operating leverage
(base formula)^
Financial leverage
(sensitivity)
Financial leverage
(base formula)^
10
ACYFMG1 Formula
Leverage (cont’d)
Total leverage
(sensitivity)
OR
DOL x DFL
Total leverage (base
formula)^
^we will use sensitivity formula unless there is no enough information given to use sensitivity
formula or the question explicitly stated to use the base formula
11
ACYFMG1 Formula
UNIT IV
Working Capital Mgt and Cash/MS Management
Cash conversion = Inventory conversion period + Average collection
cycle period – Average payment period
Operating cycle = Inventory conversion period + Average collection
period
Net float =Disbursement float less Collection float
Value of Collection =Ave. daily cash receipts x collection float time
float
Value of =Ave. daily cash disbursements x disbursement float
disbursement float time
Cost of collection = value of collection float x opportunity cost
float
Benefit of = value of disbursement float x opportunity cost
disbursement float
Cash conversion Optimal cash balance =
model (Baumol)
where,
Opportunity cost and
Trading cost
12
ACYFMG1 Formula
AR MANAGEMENT
Opportunity cost
of carrying
receivables
Cost of bad debts
Carrying cost of = opportunity cost + cost of bad debts + administrative
AR cost
Altman Z-score
Marginal = additional (lost) units sold x unit contribution margin
contribution
margin
Savings (Costs) of =marginal investment in AR x interest rate
marginal where: Marginal AR investment= Current VC of Ave AR - Proposed
investment in AR VC of Ave AR ; and
Savings (Costs) of = Costs under Current Plan - Costs under Proposed Plan
marginal bad
debts
Net benefit (loss) Net benefit (loss) of proposed credit standards = Marginal
of proposed (lost) CM + financing savings (cost) from marginal
credit standards investment in AR + savings (cost) of marginal bad debts
Net benefit (loss) Net benefit (loss) of proposed credit terms = Marginal
of proposed (lost) CM + financing savings (cost) from marginal
credit terms investment in AR + savings (cost) of marginal bad debts +
lower (additional) cost of cash discount
13
ACYFMG1 Formula
Inventory MANAGEMENT (cont’d)
Economic order
quantity
where: S = usage in units per period
O = fixed cost per order
C = carrying costs per unit per period (P)
Ordering cost = O x S/Q
where Q is the number of units per order
Carrying cost = C x Q/2
Total cost = ordering cost + carrying cost
Reorder point = (lead time in days x daily usage) + Safety Stock
Short term sources of financing
annual percentage
cost of giving up cash
discount OR
where: CD% – stated cash discount percentage
CD- cash discount amount (purchase price x CD%) CP –
credit period
CDP – cash discount period
Net purchase- purchase price less cash discount
Interest cost of ST = Principal × Annual Rate × Time
loans
14
ACYFMG1 Formula
Short term sources of financing (cont’d)
Annual interest/
percentage rate
or
Periodic rate
or
Effective periodic
rate/cost of discount
loan OR
Effective periodic
rate/cost of loan with
compensating balance
Effective periodic
rate/cost of loan with
compensating and
commitment fee
Effective periodic cost
of ST funds
Effective periodic cost
of commercial paper
15
