Important Formulae: Financial Management (CA - IPCC) Compiled By: - CA.

Aditya Kumar Maheshwari

Working Capital Management

Current Ratio = CA Dividend Coverage Ratio (CR) Cost of Irredeemable Debentures/Debt: RM Storage Period = 365

Financing Decision
Ratio Analysis
CL Pref. Div. CR Div CR Eq. Div. CR K d = Cost of Debt (In Days) Raw Material Turnover Ratio
= = = Kd = I (1 t) I = Interest amt
Ratio Analysis

Quick Ratio = QA or QA (QA = CA Stock Prapaid Exp.) NP t = Tax rate WIP Holding Period = 365
____PAT_______ PAT PAT Pref. Div.
NP = Net proceeds/market price (In Days) WIP Turnover Ratio
or Liquid Ratio QL CL (QL = CL Bank OD - CC) Pref. Div Pref. Div & Eq. Div Equity Div.
or Acid Test Ratio Cost of Redeemable Debentures: FG Holding Period = 12
Interest Coverage Ratio = PBIT
Absolute Liquidity or = (Cash & Bank +Mkt. Sec.) I (1 t) + (RV NP) NP = Net proceeds (In Months) FG Turnover Ratio
Interest
Cash Ratio CL Kd = N ___ RV = Redemption Value
(RV + NP) N = No. of Yrs of Redemption
Debtor Collection Period = 52
Debt Service Coverage Ratio (DSCR) (In Weeks) Debtor Turnover Ratio
Basic Defense Interval = Quick Assets n
Earnings Available for Debt Service or PAT + Dep + Interest
2
Cash Expenses per Day Debt Service Commitments (Interest + Installment) Cost of Irredeemable Preference Shares: Creditor Payment Period = 12
Cash Expense per day = (Operating Cash Expense + Interest + Tax) K p = Cost of Pref. Shares
Turnover Ratios (TR) (In Months) CreditorsTurnover Ratio
365 Kp = PD PD = Preference Dividend
RM TR = WIP TR = FG TR =
Debt Equity = Debt (Debt = Long Term Funds & Debentures)) NP NP = Net proceeds/Mkt. Price Operating Cycle = (RM+WIP+FG) Storage Period
Material Consumed Factory Cost COGS (+) Debtors Collection Period
Ratio Equity (Equity = (ESC+PSC+R&S))
Avg Stock of RM Avg Cost of WIP Avg. Stock of FG Cost of Redeemable Preference Shares:
(-) Creditors Payment Period
PD + (RV NP) Kp = Cost of capital
Equity Ratio = Equity Capital TR = Fixed Assets TR = WC TR = Ke = N PD = Pref. Dividend RM storage Period = Average stock of RM
Equity + Total Debt Sales Sales Sales (RV + NP) NP = Net Proceeds Avg. cost of RM Consumption/day

Working Capital Management

`Avg. CE Avg. Fixed Assets Avg. WC 2 RV = Redn Value

Financing Decision
Ratio Analysis

Capital = Long Term Funds + PSC Creditors Payment Period = Average A/c Payables
Cost of Equity / Retained Earnings:
Ratio Analysis
Gearing Ratio Equity Shareholders Fund Debtors TR = Creditors TR = Avg. credit purchase/ day
Sales Raw Material Purchase or COGS (a) Dividend Price Approach:
Debt Ratio = Total Debt or TOL Ke = Cost of equity
Avg. Debtors Avg. Creditors Debtors Collection Period = Average A/c Receivables
Equity + Total Debt (TOL) Ke = D1 D1 = Dividend of year 1
Avg. Credit Sales per day
Earning Yield = EPS*100 P0 P0 = Price of year 0
Proprietary = Equity or Equity Finished Goods = Average stock of Finished goods
Market Value per Share (b) Earning Price Approach:
Ratio Total Assets Equity + TOL Storage Period Avg. cost of goods sold per day
Ke = E1 E1 = Earnings of year 1
OP Ratio NP Ratio PV Ratio Book Value Per Share = Net Worth-Pref Sh.Cap P0
= = = No. of Equity Shares (c) Realized Yield Approach: Effective Cost = (Factoring Commission + Interest) (Savings on Factoring)
Operating Profit Net Profit Contribution Ke = D1 + (P1-P0) P1 = Price of year 1 of Factoring Net amount Received from Factor
Sales Sales Sales Calculation Steps through Calculator:
P0
EPS = (PAT - Preference Dividend) IRR = Base Rate(Min) + in Rate * Desired(Amt) from Base
Discounting of Rs. 1: (d) Capital Asset Pricing Model Approach (CAPM):
th in Amount
No of Equity Shares PV@10% for 5 yrs (PV5) 1.1 5 times = Rm = Rate of return of Mkt
Ke = Rf + b ( Rm Rf) Rf = Risk free return (This is simple unitary method formula, practice IRR Calculation)
Time Value of Money

Yield = DPS * 100 (Dividend Per Share) b = Beta

AV @ 10% for 5 yrs (AV5) 1.1 5times = GT
MPPS (Market Price Per Share) (e) DCF (Discounted Cash Flow Method) / Growth Method: ARR = Average Annual Net Income
(Assumption: The Cash Flow
is at the end of year) Ke = D1 + G D1 = D0 (1+G) (Accounting Initial Investment or Average Investment
MV / BV Ratio = Market Value per Share P0 rate of Return)

Investment Decision
Book Value per Share Compounding of Rs 1: (f) Modigillani Miller Approach (Assuming no PSC):
NPV = PV of Inflow (-) PV of Outflow
Ke = Ko + D (Ko Kd) D = Debt or Loan

Financing Decision
PE Ratio = Market Price Per Share Future Value @ 10% for 1.1 * 4 times =
Ratio Analysis

th
5 yr (FV5) E E = Equity
or Price Earning Ratio Earning Per Share Payback period = Total initial capital investment
(Assumption: The Cash Flow
Annual CFAT and other Annual Inflows
Du Pont Chart is at the beginning of year) Indifference point: (Where EPS of 2 Alternatives are Same)
ROE = PAT * Sales * Net Assets (EBIT I1)(1 t) = (EBIT I 2) (1 t) PI = PV of Inflow
Sales Net Assets Net Worth (NW) Future Annuity Value 1.1+1*1.1+1*1.1+1*1.1+1 E1 E2 PV of Outflow
ROE = Profit Margin * Assets Turnover * Equity Multiplier EBIT = Indifference point
@ 10% for 5 years (FAV5) E 1 & E2 = Number of Equity Shares in Alternative 1 & 2
Financial Leverage: EBIT or EBIT
(Assumption: The Cash Flow I 1 & I2 = Interest in Alternative 1 & 2
Alternative Formula, t = Tax-rate (FL) EBT EBIT - Interest
is at the end of Year)
ROE = EBIT * Sales * PAT
Sales Net Assets EBIT n Overall Cost of Capital E = Equity Alternative Formula:
Future Value of = P0 (1 + i) P0 = Present Amt
ROE = Profit Margin * Assets Turnover * Financial Leverage Ko = (Kd * D) + (Kp* P) + (Ke * E) D = Debt OL = % Change in EBIT
Present Amt (FVn) N = No. of Period % Change in Sales or Contribution
I = Interest Rate per D+P+E P = PSC
Note: (Fin. Leverage Formula in Du Pont Chart is different.)
Period
Working Capital Management

n Tandon Committee: Maximum Permissible Bank Finance = FL = % Change in EBT

Future Value of = R * (1+i) 1 % Change in EBIT
ROI or ROCE ROE ROA 75% of (CA-CL) or (75% of CA) CL or {75% of (CA- CCA)} CL
Time Value of Money

Annuity i
= = = CL = % Change in EBT or PAT or EPS
* R = Equal Amt to be received / paid for n period Method 1 Method 2 Method 3
PBIT PAT PBIT or PAT Change in Sales %
Capital Employed Equity or NW Total Assets i = Interest Rate per period Where, CCA is Core / Permanent Current Assets
Ratio Analysis

Present Value = Amount k = Discounting Rate

Operating Leverage: Cont. or Contribution
Baumols Economic Order Quantity Model (OL) EBIT Cont. Fixed Cost

Leverages
of Growing Perpetuity kg g = Growth Rate Cash Deposit = Optimum cash balance
CE = Equity + LTL Non Trade Invt.
Or CE = FA + Trade Invt. + WC Cash = 2AO A = Annual cash disbursement
EMI = Total Principal Amt Combined Leverage: Contribution or (OL * FL)
Deposit C O = Fixed cost per
* AV Factor of the period (CL) EBT
PBIT = PBIT + Non Trade Expense Non Trade Income transaction.
C = Cost of Rs. 1 p.a.