finance formulas

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finance formulas

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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

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 =

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

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

where

1

PVIFA(r , t ) =

1

(1 + r )t

(1 + r ) t 1

, FVIFA(r , t ) =

r

r

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

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

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 =

7.1. 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)

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

i= CORR i , M

i

M

n

P = xi i

i =1

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

9.8. Risk-to-reward ratio

Total risk (Sharpe ratio):

E ( R) R f

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

10.1. WACC

1/ T

R G = [(1 + R1 )(1 + R2 )...(1 + RT ) ] 1

9.2. Risk (sample estimate)

Variance:

2

P =

E ( R) R f

R1 + R2 + ... + RT

T

(R R ) + (R

Var ( R ) =

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

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

11. Derivatives

11.1. Forward/futures contracts

11.2. Options

Call options

Put options

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