Evaluation of Financial Policy

FRL 440
Formula Sheet
Prepared by P. Sarmas

Tax Liability
Average Tax Rate =
Taxable Income

Cash Flow from Assets = Cash Flow to Creditors + Cash Flow to Stockholders

Operating Cash Flow Interest Paid Dividend Paid

- ∆ Net Working Capital - Net New Borrowing - Net New Equity
- Net Capital Spending Cash Flow to Creditors Cash Flow to Stockholders
Cash Flow from Assets

EBIT Ending Net Fixed Assets

+ Depreciation - Beginning Net Fixed Assets
- Taxes + Depreciation .
Operating Cash Flow Net Capital Spending

Ending Net Working Capital (CA – CL)

- Beginning Net Working Capital (CA-CL)
Change in Net Working Capital

Ending L.T. Debt Ending Equity

- Beginning L.T. Debt - Beginning Equity
Net New Borrowing - Addition to Retained Earnings
Net New Equity

Current Assets
Current Ratio =
Current Liabilitie s

Current Assets - Inventorie s

Quick Ratio =
Current Liabilitie s
 Cash
Cash Ratio =
Current Liabilitie s

Total Debt Total Assets - Total Equity

Total Debt Ratio = =
Total Assets Total Assets

Total Debt
Debt - to - Equity Ratio =
Total Equity

EBIT
Time Interest Earned =
Interest

EBIT + Depreciati on
Cash Coverage Ratio =
Interest

EBIT + Lease Pmt.

Fixed Charge Coverage Ratio =
Sinking Funds
Interest + Lease Pmt. +
1−T

Total Assets D 1
Equity Multiplier = or EM = 1 + =
Equity E D
1−
TA

Sales
Total Assets Turnover =
Total Assets

Sales
Fixed Assets Turnover =
Net Fixed Assets

Sales Cost of Goods Sold

Inventory Turnover = OR
Inventory Inventory
 Receivable s
ACP or DSO =
Sales
365

Net Income
Profit Margin (ROS) =
Sales

Net Income
ROA =
Total Assets

Net Income
ROE =
Common Equity

Net Income + Interest + Preferred Dividnd

Return on Capital =
Debt + Common Equity + Preferred Stock

EBIT
Basic Earnings Power =
Total Assets

Net Income
Earnings per Share =
No. Shares Outstandin g

Market Price per Share

Price - Earnings Ratio =
EPS

Dividend Payout Ratio = Dividends ÷ Net Income

ROADuPont = Profit Margin * Total Assets t/o

Market Price per Share
Market Value - Book Value Ratio =
Book Value per Share
ROEDuPont = Profit Margin * Total Assets t/o * Equity Multiplier

ROA * b
Internal Growth Rate =
1 - (ROA * b)

ROE * b
Sustainabl e Growth Rate =
1 - (ROE * b)

Earnings Retention Ratio = b = 1 – Dividend Payout Ratio = 1- DIV/NI

FV = PV (1 + r ) t = PV * FVIF r , t

FV
PV = = FV * PVIF r , t
(1 + r ) t

r m *t
FV = PV (1 + ) = PV * FVIF r
m m
, mt

FV
PV = = FV * PVIF r
r m *t , mt
(1 + ) m
m

r m
EAR = (1 + ) −1
m

FV = PV * e r *t

PV = FV * e −r *t

(1 + r ) t −1
FVA = C *   = C * FVIFA r , t
 r 

1 1 
PVA = C *  − t  = C * PVIFA r , t
 r r * (1 + r ) 
 C
PV Perpetuity =
r

 (1 + r ) t − 1
FVA = Cdue *   * (1 + r ) = C due * FVIFA r , t * (1 + r )
 r 

1 1 
PVA = C due *  − t
* (1 + r ) = C due * PVIFA r , t * (1 + r )
 r r * (1 + r ) 

Reminder: In the case of frequent compounding or discounting,

divide the nominal rate (APR) by “m” and multiply period by “m”.
“m” is number of times interest is compounded/discounted in one
period. Also, annuity interval must match the frequency (m) of
compounding or discounting.
 1 1  FV
Bond Value = C *  − t 
+
 r r * (1 + r )  (1 + r ) t

(1+R) = (1+r)*(1+h)

Coupon
Coupon Rate =
FV
Coupon
Current Yield =
VB
 1 1  FV
VB = C *  − +
YTM YTM * (1 + YTM )  (1 + YTM ) t
t

D1 D2 D3
P0 = 1
+ 2
+ + ........
(1 + r ) (1 + r ) (1 + r ) 3
D1 D2 D3 Dn  Dn +1 1 
P0 = + + + ..... + +  * 
(1 + r )1 (1 + r ) 2 (1 + r ) t (1 + r ) n  r − g c (1 + r ) n 

D
P0 =
r
D1
P0 =
r−g
D
r= 1 +g
P0
Dn = D0 * (1 + g ) n

n
CFt
NPV = ∑ + (CF0 )
t =1 (1 + r ) t

n
CFt
∑ (1 + IRR )
t =1
t
+ (CF0 ) = 0
 Last Negative Cum . CF
PBP = t +
CF t +1

n
CFt
∑ (1 + r )
t =1
t
PI =
CF0

∑ Net Income
t =1
t

ARR = n
Beginning Value Investment + Ending Value Ivestment
2

n
COFt ∑ CIF t * (1 + r ) n −t
∑
t =o (1 + r )
t
= t =1

(1 + MIRR ) n

Operating Cycle = Inventory Period + Accounts Receivable Period

Cash Cycle = Operating Cycle – Accounts Payable Period

 Cost of Goods Sold
Inventory Turnover =
Average Inventory

365
Inventory Period =
Inventory Turnover

Credit Sales
Receivable Turnover =
Average Accounts Receivable

365
Receivable Period =
Receivable Turnover

Cost of Goods Sold

Payable Turnover =
Average Payable

365
Payable Period =
Payable Turnover

Beginning + End
Average =
2

Operating Cash Flow = EBIT + Depreciation – Taxes

Operating Cash Flow = (Sales – OC – Depreciation)*(1-T) + Depreciation

Operating Cash Flow = Net Income + Depreciation

Operating Cash Flow = (Sales – OC)*(1 – T) + T*Depreciation

Book Value of Asset = Original Cost – Accumulated Depreciation

Original Cost − Salvage Value

Straight − Line Depreciati on =
n

VC = Q*v
TC = VC + FC
NI = (S – FC – VC – D)*(1-T)
 FC +OCF
Q general =
P −v
FC + D
Q Accounting BEP =
P −v
FC
QCash BEP =
P −v
FC +OCF *
Q Financial BEP =
P −v
FC
DOL =1 +
OCF

Q( P − v)
DOL =
Q ( P − v) − FC
Q ( P − v) − FC EBIT
DFL = =
Q ( P − v) − FC − Int EBIT − Int
Q( P − v)
DTL = DCL = DOL * DFL =
Q ( P − v) − FC − Int

Pt +1 − Pt
Capital Gain Yield =
Pt

− ∑R t
R= t =1

T
1  − − −

VAR ( R ) = ( R1 − R ) 2 + ( R2 − R ) 2 + ......... + ( RT − R ) 2 
T −1  
Standard Deviation or SD(R) = VAR(R)

n
E ( R) = ∑ Pr .s * Rs
s =1
n
σ 2 = ∑ Pr .s * [ Rs − E ( R )]2
s =1
n
σ = σ2 = ∑ Pr * [ R
s =1
s s − E ( R )] 2

E(Rp) = WA*E(RA) + WB*E(RB)

R = E(R) + U
 n
β p = ∑W j * β j
j =1

W A +WB + ..... + W N = 1

E(RA) = Rf + [E(RM) – Rf]*β A

E(R j ) − R f
Slope =
βj

D1 D * (1 + g )
RE = +g = 0 +g
P0 P0
R E = R f + β E * ( RM − R f )
D
RP =
P0
E P D
WACC =   * R E +   * RP +   * R D * (1 − t c )
V  V  V 
V =E+P+D

WACC = WE*RE + WP*RP + WD*RD*(1-tc)

WE + WP + WD = 1

FV − P0
Coupon +
YTM approximate = n
FV + 2 P0
3

(Revenue - Total Variable Costs - Fixed Costs - Interest) * (1 - t) ( EBIT − Interest ) * (1 − t )

EPS = =
Number of Shares Outstandin g Number of Shares Outstandin g

(Revenue - Total Variable Costs - Fixed Costs - Interest) * (1 - t) ( EBIT − Interest ) * (1 − t )

ROE = =
Equity Equity
 EBIT (1 − T )
Vu =
Ru
( EBIT − Int )(1 − T )
Vl =
WACC

VL = VU
VL = VU + Tc * D
RE = R A + ( R A − R D ) * D / E
 D
β L = βU 1 + (1 − T ) 
 E

( EBIT − K d D ) (1 − T )
S=
Ks
V =S +D
V − D0
P=
n0
D
n1 = n0 −
P
 (1 − Tc )(1 − Ts ) 
Vl = Vu + 1 + ×D
 (1 − Td ) 

DPO = Dividend ÷ Net Income

Dividend Yield = Dividend per share ÷ Price per share

Modified Accelerated Cost Recovery System

Property Class
Year 3-Year 5-Year 7-Year
1 33.33% 20.00% 14.29%
2 44.44% 32.00% 24.49%
3 14.82% 19.20% 17.49%
4 7.41% 11.52% 12.49%
5 11.52% 8.93%
6 5.76% 8.93%
7 8.93%
8 4.45%