1.

Total shareholder returns (TSR) =( Year end share price – Share price at the start of year +dividend per share/share price at the start of year ) *100

2. ROCE (Return on capital employed) = (Average annual operating profit/ initial investment)*100 OR (average annual operating profit/ average
profit)

Where: Average investment = (Initial investment + scrap value) / 2

3. FV (future value) = P (1 + r) n

Where: P = initial principal

r = annual rate of interest (as a decimal)

n = number of years for which the principal is invested

4. Effective Annual Interest Rates (EAIR) = 1 + R = (1 + r) n

Where: R = annual rate (EAIR)

r = interest rate per period (month /quarter)

n = number of periods in year

5. Annuity− a stream of identical cash flows arising each year for a finite period of time.

The present value of an annuity is given as = CF*1/r (1-{1/ (1+r})

Where: CF is the cash flow and r is the rate of return

6. Perpetuity − a stream of identical cash flows arising each year to infinity.

The present value of a perpetuity = CF × 1/r

Where CF is the cash flow received each year.

And if a project has equal annual cash flows receivable in perpetuity then,

IRR = (Annual cash flow / Initial investment)*100

7. 5.4.1 Linear Interpolation Formula

When cash flows are not perpetuities or annuities, the IRR is estimated as follows:

Calculate the NPV of the project at a chosen discount rate.

If NPV is positive, recalculate NPV at a higher discount rate (i.e. to get an NPV closer to zero).

If NPV is negative, recalculate at a lower discount rate (again to get an NPV closer to zero).

Use the following formula to estimate the IRR by “linear interpolation”:

IRR ~ A + (NA / NA- NB) *(B-A)

Where: A = Lower discount rate

B = Higher discount rate

NA = NPV at rate A

NB = NPV at rate B

The linear interpolation formula always “works” although care must be taken with + and − signs.

8. Nominal rates, real rates and general inflation are linked by the Fisher formula:

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

Where: i = nominal interest rate

r = real interest rate

h = general inflation rate

9. Changes to working capital balances are relevant cash flows: inventory + accounts receivable − accounts payable.

10. Profitability index = NPV/Capital investment

11. The asset replacement decision process are:

Calculate the NPV of each possible replacement cycle.

Calculate the equivalent annual cost (EAC) of each cycle:

EAC = NPV/Annuity factor

12. Sensitivity analysis has TWO steps:

Step 1 Calculate the NPV of the project on the basis of best estimates.

Step 2 For each element of the decision (cash flows, cost of capital), calculate the change necessary for the NPV to fall to zero.

The sensitivity can be expressed as a percentage change for an individual cash flow:

Sensitivity = NPV / PV of relevant cash flow × 100

The lower the percentage, the more sensitive the NPV is to that project variable, as the variable would need to change by a smaller amount to
make the project non-viable.

13. Expected value – the quantitative result of weighting uncertain events by the probability of their occurrence.

An expected value is calculated as follows:

Expected value = weighted arithmetic mean of possible outcomes= ∑xp(x)

Where x = value of an outcome

P(x) = the probability of outcome x

∑ = sum

14. Theoretical ex-rights price (TERP) = pre- existing value of equity + proceeds of right issue + project NPV / Number of share after the right issue

15. With Constant Dividend the formula for share valuation can be derived as follow

Ex-div market value is the market value assuming that a dividend has just been paid (or just about to be paid).

Let, P0 = Current ex-div market value

Dn = Dividend at time n

Re = Shareholders' required rate of return

The model then becomes =Po =D1*/(1+RE) + D1*/(1+RE)^2 + D1*/(1+RE)^3 ……D1*/(1+RE)^N and Po =D/re

16. with Dividend Growth

If dividends are forecast to grow at a constant rate in perpetuity, P O = DO*(1+g)/(Re- g )=( D1/ Re –g)

Where g = future annual growth rate:

DO = most recent dividend

D1 = dividend in one year

Re = required return of equity investor

17. Gordon growth model: P = D1/r-g

Where P = stock price, g = constant growth rate, r = rate of return, D 1 = value of next year's dividend

18. Cost of Preference Shares = ke = D/ PO

 Where D = constant annual dividend

19. Irredeemable Loan Notes P0 = I/Kd

Where:

P0 = Ex-interest market price

I = Annual interest payment

kd = Bondholders' required return

20. Semi-annual Interest Payments

Effective annual cost = (1 + semi-annual cost)2 -1

21. WACC (weighted average cost of capital) = [VE/(VE+VD)]KE + VD/(VE +VD)*KD(1-T)

Where:
Ve = Total market value of equity
Vd = Total market value of debt
ke = Cost of equity “geared”
kd = Pre-tax cost of debt
T = Corporation tax rate

22. The CAPM formula

E(ri) = Rf + βi(E(rm) − Rf)

Where:

E(ri) = expected/required return from an investment

Rf = risk-free return

E(rm) = expected return from the market portfolio

βi = beta of the investment

23. Asset Beta formula (based on Modigliani and Miller's models). Can be used to convert an equity beta to an asset beta (and vice
versa):

Ba = ¿
[ Ve
Ve+Vd ( 1−t ) ][
Be +
Vd ( 1−t )
Ve+Vd ( 1−t )
Bd
]
Where βa = asset beta

βe = equity beta

βd = beta of corporate debt

Ve = market value of equity

Vd = market value of debt

T = company profit tax rate

Ve + Vd(1-T) = after-tax market value of company

24. Efficiency Ratios

 Inventory turnover = Cost of sales / Average inventory

Inventory holding period = Average inventory / Cost of sales × 365 days

Receivables collection period = Average accounts receivable /Annual credit sales × 365

Sales/working capital = Annual sales / Average working capital

25. Receivables collection period = Accounts receivable / Annual credit sales × 365 = x

Payables payment period = Accounts payable/ Annual credit purchases × 365 = (x)

Finished goods holding period = Finished goods inventory / Annual cost of goods sold × 365 = x

WIP (length of production process) = Work in progress / Annual cost of goods sold × 365 = x

Raw materials holding period = Raw materials inventory / Annual raw materials purchases × 365= x

Length of cycle = x

26. EOQ

X=
√ 2 C0
Ch
D

Where, x = order quantity

Ch = cost of holding one unit for one year

D = annual demand
Co = cost of placing an order

27. Total annual cost = Annual holding cost + Annual order cost + Annual purchase cost

28. Uncertain Demand

Calculate expected demand in the lead time.

Expected lead time demand = ∑xi p(xi)

Where
Xi = level of demand p(xi) = probability of level of demand

Take each level of demand ≥ expected lead time demand as a possible reorder level and calculate the expected annual stock-out cost.

For each possible ROL, calculate the expected annual buffer holding cost.
Choose the ROL with the lowest sum of stock-out cost and holding cost.

29. Baumol Model

The Baumol model is derived from the EOQ model and can be applied in situations where there is a constant demand for cash.

Economic transfer =
√ 2 C0
Ch
D

Where:

D = annual requirement for cash

Co = transaction costs (brokerage, commission, etc) of selling a "parcel" of short-term investments

Ch = opportunity cost of holding cash (interest rate difference between short-term investments and cash)

30. Miller-Orr Model

The following formulae are provided in the examination:

Return point = Lower limit + (⅓ × spread)

[ ]
3
∗transaction cost∗variance of cash flow
Spread = 3 × 4
Interest rate
^1/3

Where:

Spread = the difference between the upper limit and lower limit

Transaction cost = the fixed cost of buying or selling marketable securities

Variance = variance (i.e. standard deviation × standard deviation) of the net daily cash flows

Interest rate = daily interest rate on marketable securities

(i.e. daily opportunity cost of holding cash)

31. Purchasing Power Parity (PPP)

(1+ hc)
The formula for relative PPP: S1 = S0 *
(1+hb)

Where:

S1 = Expected spot exchange rate after one year

S0 = Today's spot exchange rate

hc = Variable currency (“foreign”) inflation rate (as a decimal)

hb = Base currency (“domestic”) inflation rate

32. Interest Rate Parity (IRP)

IRP states that the forward exchange rate is based on the spot rate and the interest rate differential between the
(1+i c)
two currencies = F0 = S0 * (1+i b)

Where:

F0 = Forward exchange rate

S0 = Spot exchange rate

ic = Variable currency interest rate

ib = Base currency interest rate

33. Net Book Value (NBV)

The NBV method simply uses the "balance sheet" equation (also called "accounting" equation):

Equity = assets – liabilities

34. Net Realisable Value (NRV)

The NRV method estimates the liquidation value of the business:

Equity = Estimated net realisable value of assets – liabilities

35. Net Replacement Cost

Net replacement cost can be viewed as the cost of setting up an identical business "from scratch":
Equity = Estimated depreciated replacement cost of net assets
36. Price/Earnings Ratio

Price/Earnings (P/E) ratio = Market price per ordinary share / Earnings per share

Earnings per Share (EPS) =Profit after tax and preference dividends / Number of issued ordinary shares

Therefore:

Ordinary share price = P/E ratio × EPS

Value of company = P/E ratio × profit after tax and preference dividends

37. Earnings Yield

Earnings yield = EPS /Market price per share × 100

Therefore:

Ordinary share price = EPS / Earnings yield

38. Dividend Valuation Model

D0 (1+ g)
P0 = R e−g

Where Do = most recent dividend

D1 = dividend in one year

re = required return of equity investors (= ke)

39. Irredeemable Loan Notes

P0 = I/Re
Where:

P0 = Ex-int market price

I = Annual interest payment

Re = Investors' required return

40. Profitability Ratios

Gross profit margin = Gross profit / Sales × 100

Operating profit margin = Profit before interest and tax/ Sales × 100

Return on capital employed (ROCE) = Profit before interest and tax /Capital employed asterisk × 100

Return on equity (ROE) = Profit after tax minus preference dividends/ Ordinary shareholders prime funds × 100

* Capital employed = Shareholders’ funds + long-term liabilities

= Total assets − current liabilities

41. ROCE

Profit margin × asset turnover = ROCE

= (PBIT/ SALES * SALES/ CAPITAL UNEMPLOYED)

42. Gearing/Risk Ratios

Debt to equity = Non minus current liabilities /Capital plus reserves × 100

Debt to total capital = Non minus current liabilities/ Capital employed × 100

Operational gearing =Fixed operating costs /Variable operating costs × 100

Or

Fixed operating costs/Total operating costs × 100

Or

Contribution over Profit before interest and tax

Interest coverage = Profit before interest and tax / Interest expense

Cash flow coverage = Cash generated from operations /Interest expense

Earnings per ordinary share (EPS)=Profit after tax minus preference dividends/ Weighted average number of ordinary shares in issue
Diluted EPS= Profit after tax minus preference dividends+ PDS adjustments /Ordinary dividend plus PDS
Price/earnings (P/E) ratio= Ordinary share price/ EPS

Dividend coverage= Profit after tax minus preference dividends over Ordinary dividend

Dividend payout ratio= Ordinary dividend over Profit after tax minus preference dividends
Dividend yield= Dividend per ordinary share over Ordinary share price × 100