Final Exam Formula Sheets

1. Cash Flow Analysis

1.1. Cash flow from assets
Operating Cash Flow (OCF) Net Capital
Spending (NCS) NWC
where
OCF = EBIT + Depreciation Taxes
= NI + Interest Paid + Depreciation
NCS = End. F/A + Depreciation Begin. F/A
NWC = End. NWC Begin. NWC
1.2. Cash flow to creditors
Interest Paid Net New Debt
where
Net New Debt = End. L-T Debt Begin. L-T Debt
1.3. Cash flow to shareholders
Dividends Paid Net New Equity
where
Net New Equity = End. Common Share Begin.
Common Share
2. Ratios
2.1. Liquidity ratios
Current assets
Current ratio =
Current liabilities
Current assets Inventory
Quick ratio =
Current liabilities
Cash
Cash ratio =
Current liabilities
NWC
NWC ratio =
Total assets
Current assets
Interval measure =
Avg. daily operating costs
2.2. Financial leverage ratios
Total assets Total equity
Total debt ratio =
Total assets
Total debt
Debt/equity ratio =
Total equity
Total assets
Equity multiplier =
Total equity
LT debt
LT debt ratio =
LT debt + Total equity
EBIT
Times interest earned =
Interest
EBIT + Depreciation
Cash coverage ratio =
Interest
2.3. Asset utilization turnover ratios
Cost of goods sold
Inventory turnover =
Inventory
365
Days' sales in inventory =
Inventory turnover

FINE 5200, Dr. Y.S. Tian

Sales
Accounts receivable
365
Days' sales in receivables =
Receivables turnover
Sales
NWC turnover =
NWC
Sales
Fixed assets turnover =
Net fixed assets
Sales
Total assets turnover =
Total assets
2.4. Profitability ratios
Net income
Profit margin =
Sales
Net income
ROA =
Total assets
Net income
ROE =
Total equity
2.5. Market value ratios
Stock price per share
P/E ratio =
Earnings per share
Market value per share
Market - to - book ratio =
Book value per share
EV/EBITDA= [MV equity + MV debt + Pref'd shares
+ Minorityinterest - Cash (and cash equivalents)]/EBITDA
Receivables turnover =

2.6. Du Pont analysis

Net income
Sales
Total assets
ROE =

Sales
Total assets Total equity
= Profit margin TA turnover Equity multiplier
3. Financial Planning and Growth
3.1. Internal growth rate
+ ROA R
g=
1 ROA R
3.2. Sustainable growth rate
+ ROE R
g* =
1 ROE R
4. Time Value of Money
4.1. Future value

FVt = C (1 + r ) t = C FVIF(r , t )
where FVIF ( r , t ) = (1 + r ) t
4.2. Present value
C
PV =
= C PVIF (r , t )
(1 + r ) t
where

Final Exam Formula Sheets

FINE 5200, Dr. Y.S. Tian

where

1
(1 + r ) t
4.3. Multiple cash flows
PVIF (r , t ) =
n

t =1

t =1

FVn = Ct (1 + r ) nt , PV =

Ct
(1 + r )t

4.4. Annuities

PVA = C PVIFA(r , t ) , FVA = C FVIFA(r , t )

where

1
PVIFA(r , t ) =

1
(1 + r )t
(1 + r ) t 1
, FVIFA(r , t ) =
r
r

4.5. Annuities due

PVAD = C PVIFA(r , t ) (1 + r )
FVAD = C FVIFA(r , t ) (1 + r )
4.6. Perpetuities
C
PVP =
r
4.7. Growing annuities

1 + g t
C
PVGA =
1

r g 1 + r

FVGA =

C
(1 + r )t (1 + g )t
rg

4.8. Growing perpetuities

C
PVGP =
rg
4.9. Annual Percentage Rate (APR) and Effective
Annual Rate (EAR)
m
Discrete: EAR = 1 + APR 1
m

APR
Continuous: EAR = e 1
4.10. Mortgage loans: Effective Monthly Rate
1/ 6
APR
EMR = 1 +
1
2

5. Bond Valuation
Bond Value = C PVIFA( r , t ) + F PVIF ( r , t )
6. Stock Valuation
6.1. Constant growth model

P0 =

Dt (1 + g )
rg
6.3. Required rate of return
a) Constant growth model
D
r= 1 +g
P0
b) Nonconstant/supernormal growth model
D
Dt
Pt
D2
P0 = 1 +
+ ... +
+
2
t
1
+
r
(
1
+
r
)
(
1
+
r
)
(
1
+
r )t

Pt =

D0 (1 + g )
D
= 1
rg
rg

6.2. Non-constant/supernormal growth model

D
Dt
Pt
D2
P0 = 1 +
+ ... +
+
2
t
(1 + r ) (1 + r ) t
1 + r (1 + r )

where
Dt (1 + g )
rg
6.4. P/E ratio
EPS
Price =
+ NPVGO
r
Pt =

7. NPV and Other Investment Criteria

7.1. The NPV rule
NPV = PV of future CFs Cost
7.2. The payback rule
Number of years it takes to pay back the initial
investment.
7.3. The discounted payback rule
Use discounted cash flows.
7.4. The IRR rule
The discount rate such that NPV = 0.
7.5. The profitability index rule
The ratio of PV of future cash flows to initial
cost.
8. Project Cash Flow Analysis
8.1. PV of CCA tax savings
a) No half-year rule:

I d Tc
k +d
b) Half-year rule:

I d Tc 1 + k / 2

k + d 1+ k
8.2. (After-tax) operating cash flows (OCF)
a) Basic:
OCF = EBIT + Depn Taxes
b) Bottom-up:
OCF = NI + Depn
c) Top-down:
OCF = Sales Costs Taxes
d) Tax shield:
OCF = (SalesCosts)(1Tc) + Depn Tc
8.3. Equivalent annual cost (EAC)

Final Exam Formula Sheets

FINE 5200, Dr. Y.S. Tian

The annual payment of an annuity over the same

investment horizon that has the same PV as the
NPV of a project.
8.4. Accounting break-even quantity
FC + D
Q=
Pv
8.5. Cash break-even quantity
D T
FC
1T
Q=
Pv
8.6. Financial break-even quantity
Q such that NPV = 0.
8.7. Degree of operating leverage
%(OCF) (OCF)/OCF
DOL =
=
%(Q )
Q / Q
FC (1 T ) D T
DOL = 1 +
OCF
9. Risk and Return
9.1. Returns (sample average)
a) Simple (arithmetic) average return

RA =

+ ... + RT R
1
2 R
T 1
Standard deviation: SD( R) = Var( R)
9.3. Expected return and risk
(population/theoretical)
n

Expected return: E ( R ) = pi Ri
i =1

Variance: 2 = pi [Ri E ( Ri )]
i =1

Standard deviation:
n

p [R
i

xa2 a2 + xb2 b2 + 2 xa xb a b

9.5. Systematic risk and beta

i= CORR i , M

i
M

9.6. Portfolio beta

n

P = xi i
i =1

9.7. Security market line (CAPM)

E ( Ri ) = R f + i [ E ( RM ) R f ]
9.8. Risk-to-reward ratio
Total risk (Sharpe ratio):
E ( R) R f

Alpha: excess return

i = Ri [ R f + i ( RM R f )]

10. Cost of Capital

10.1. WACC

b) Compound (geometric) average return

1/ T
R G = [(1 + R1 )(1 + R2 )...(1 + RT ) ] 1
9.2. Risk (sample estimate)
Variance:
2

P =

Systematic risk (Treynor ratio):

E ( R) R f

R1 + R2 + ... + RT
T

(R R ) + (R
Var ( R ) =

Portfolio standard deviation:

E ( R )] = 2
2

i =1

where p1 + p2 + ... pn = 1
Risk Premium = E(R) Rf
9.4. Stock portfolios
Portfolio expected return:
E ( R P ) = x a E ( R a ) + x b E ( Rb )
Portfolio variance:

WACC = w E R E + w D R D (1 T ) + w P R P
where

wE = E / V , wD = D / V , wP = P / V = 1 wE wD
10.2. Cost of equity
a) Dividend growth model

RE =

D1
+g
P0

b) Security market line/CAPM

E ( RE ) = R f + E [ E ( RM ) R f ]
c) Bond yield plus risk premium
RE = LT bond yield + Risk Premium
10.3. Cost of debt
(1-T) RD where RD is before-tax yield to maturity
10.4. Cost of preferred stock
D
RP =
P0
10.5. Floatation cost

f A = wE f E + wD f D + wP f P
Flotation costs
fA =
Net proceeds + Flotation costs

P2 = xa2 a2 + xb2 b2 + 2 xa xb a b
3

Final Exam Formula Sheets

FINE 5200, Dr. Y.S. Tian

11. Derivatives
11.1. Forward/futures contracts

11.2. Options
Call options

Put options