CA INTER – FINANCIAL MANAGEMENT

FORMULA SHEET
Financial Planning and Analysis – Interest Coverage Ratio Payable TO Ratio
EBIT Annual Net Credit Purchases
Ratio Analysis = =
Interest Average Accounts Payables
LIQUIDITY RATIOS
Preference Dividend Coverage Ratio Payable Velocity
Current Ratio Earnings after tax Average Account Receivables
Current Assets = =
= Preference Dividend Average Daily Credit Sales
Current Liabilities
Equity Dividend Coverage Ratio 12 months / 52 weeks / 360 days
Quick Ratio EAT − Preference dividend =
Quick Assets = Receivables TO Ratio
= Equity Dividend
Current Liabilities
Fixed Charges Coverage Ratio PROFITABILITY RATIOS
Cash Ratio EBIT + Depreciation
Cash & Bank + Marketable securities = Gross Pro�it Ratio
= Interest + Repayment of Loan Gross Pro�it
Current Liabilities = x 100
Sales
Cash & Bank + Current investments TURNOVER (TO) RATIOS
= Net Pro�it Ratio
Current Liabilities Net Pro�it / EAT
Total Assets TO Ratio
Net Working Capital Sales ∗ = x 100
= Sales
= Current Assets – Current Liabilities Total Assets Pre-tax Pro�it Ratio
Fixed Assets TO Ratio EBT
CAPITAL STRUCTURE RATIOS Sales ∗ = x 100
= Sales
Equity Ratio Fixed Assets
Shareholder ′ s Equity Operating Pro�it Ratio
= Capital / Net Assets TO Ratio Operating Pro�it / EBIT
Net Assets Sales ∗ = x 100
= Sales
Debt Ratio Net Assets
Total Debt Cost of Goods Sold Ratio (COGS)
= Current Assets TO Ratio Cost of Goods Sold
Net Assets Sales ∗ = x 100
= Sales
Debt to Equity Ratio Current Assets
Total Outside Liability Operating Expenses Ratio
= Working Capital TO Ratio Admin. exp + Selling & Dist. OH
Shareholder ′ s Equity Sales ∗ = x 100
Total Debt = Sales
= Working Capital Operating Ratio
Shareholder ′ s Equity
Long term Debt Inventory TO Ratio COGS + Operating exp
= = x 100
Shareholder ′ s Equity Cost of Goods Sold Sales
=
Average Inventory Financial Expenses Ratio
Debt to Total Assets Financial exp
Total Outside Liability Raw Material Inventory TO Ratio = x 100
= Raw Material Consumed Sales
Total Assets =
Total Debt Average Raw Material Stock
OVERALL RETURN ON ASSETS/
=
Total Assets Receivables TO Ratio INVESTMENTS
Credit Sales
Proprietary Ratio = Return on Investments
Proprietary Fund Average Accounts Receivable Return / Pro�it / Earnings
= = x 100
Total Assets Receivables Velocity Investment
Average Account Receivables = Pro�itability x Investment TO Ratio
=
Average Daily Credit Sales
COVERAGE RATIOS Return on Assets
12 months / 52 weeks / 360 days Net Pro�it after taxes
Debt Service Coverage Ratio = = x 100
Earning available for debt service Receivables TO Ratio Average Total Assets #
=
Interest + Installments *Use COGS, if Sales not available #Alternatively, Average Tangible
Assets or Avg Fixed Assets can be used
Cash and Bank balances +Net Receivables + Market Securities
Basic Defense Interval =
Operating Expenses ÷No.of days

Preference Share Capital+Debentures+Other Borrowed funds

Capital Gearing Ratio =
Equity Share Capital+Reserves
Payables TO Ratio & Surplus−Losses
Return on Assets can also be calculated Earnings Yield or EP Ratio If �loatation cost is incurred
as: Earnings per Share (EPS) D1
Net Pro�it after taxes + Interest = x 100 ke = +g
Market Price per Share (MPS) P0 − F
= x 100
Average Total Assets ∗
Market Value / Book Value per Share Estimation of Growth rate
Return on Total Assets Average share price (i) Average Method
EBIT (1 − t) =
Net worth ÷ No. of equity shares n D
g= � 0−1
= x 100
Average Total Assets Closing share price
D n

= (ii) Gorden’s Growth Model

Return on Net Assets Net worth ÷ No. of equity shares
EBIT (1 − t) g=bxr
= x 100 Q Ratio
Average Net Assets Market Value of equity & liability Capital Asset Pricing Model Approach
= Ke = Rf + β (Rm – Rf)
Return on Capital Employed Estimated replacement cost of asset
Net Pro�it after taxes + Interest Market Value of a Company Cost of Retained Earnings
= x 100 =
Capital Employed Assets Replacement Cost Dividend Price Approach
EBIT D
Pre-tax = x 100 kr =
Capital Employed P
EBIT (1−t)
Cost of Capital
Post-tax = x 100 Earnings Price Approach
Capital Employed Cost of Irredeemable Debentures EPS
I kr =
Return on Equity kd = (1 − t) P
PAT − Preference dividend NP
Growth Approach
= x 100 Cost of Redeemable Debentures D1
Net worth
(RV − NP) kr = +g
Pro�itability / Net Pro�it margin I (1 − t) + P0
kd = n
Pro�it / Net Income (RV + NP) Also Kr = Ke (1 – tp)(1 – f)
=
Sales / Revenue 2
If discount on issue or premium on Financing Decisions – Capital
Investment TO Ratio redemption is also tax deductible then,
Sales / Reveue (RV − NP) Structure
= I +
Investment n (1 − t) Value of the �irm, V = S + D
kd =
Asset TO Ratio (RV + NP) Where, S = Market value of Equity
Sales / Reveue 2 D = Market value of Debt
= Internal Rate of Return,
Assets EBIT
NPVL Also, V =
Capital TO Ratio IRR = L + (H − L) KO
Sales / Reveue NPVL − NPVH NI
= S=
Capital Amortised Value of a Debenture Ke
n
Equity Multiplier Ct Where, K0 = Overall cost of capital
VB = �
Investment / Assets / Capital (1 + k d ) NI = Earnings available for
= t=1
equity shareholders
Shareholder ′ s Equity
Where, C = Cash �lows Ke= Equity Capitalisation Rate
Kd = Interest rate
RATIOS FROM OWNER’s POINT OF Cost of Irredeemable Preference Shares Modigliani-Miller (MM) Approach
VIEW PD Without tax –
kp =
Earnings per Share (EPS) P0 Vg = Vu
Net pro�it available to equity holders Cost of Redeemable Preference Shares Where, Vg = Value of levered �irm
= Vu = Value of unlevered �irm
No. of equity shares outstanding (RV − NP)
PD +
kp = n Debt
Dividend per Share (DPS) (RV + NP) K e = K o + (K o − K d )
Total Dividend paid to equity holders Equity
= 2
No. of equity shares outstanding
Cost of Equity, With tax –
Dividend Pay-out Ratio (DP) Dividend Price Approach Vg = Vu + TB
DPS D Where, TB = Tax bene�it
= ke =
EPS P0 Debt
Price-Earnings Ratio (P/E Ratio) K eg = K eu + (K eu − K d )
Earnings Price Approach Debt + Equity
Market Price per Share (MPS)
= E Where,
Earnings per Share (EPS) ke =
P Keg = Cost of equity in a levered Co.
Dividend and Earning Yield Growth Approach / Gordon’s Model Keu = Cost of equity in an unlevered Co
Dividend ± Change in share price D1
= ke = +g
Initial share price P0 WACC in a levered company
Dividend per Share (DPS) Kog = Keu (1 – tL)
= x 100
Market Price per Share (MPS)
 Where, n = Sum of PV of Dividends
Keu = Cost of equity in an unlevered Co Ct + PV of Stock Sale Price
=� −I
t = tax rate (1 + k)t D1 D2
Debt t=1 = + +⋯
(1 + K e )1 (1 + K e )2
L= Where, C = Cash �lows Dn
Debt + Equity
k = Discount rate +
(1 + K e )n
Financial Break-even point n = Life of the project RVn
Prefrence dividend I = Investment +
(1 + K e )n
= Interest +
1 − tax rate Pro�itability Index (PI)
Graham & Dodd Model
Indifference point Sum of discounted cash in �lows E
(EBIT − I1 )(1 − t) (EBIT − I2 )(1 − t) = Market price, P = m[D + ]
= Intial cash outlay ∗ 3
E1 E2 Where, m = multiplier
*also, total discounted cash out�low
Internal Rate of Return (IRR) Linter’s Model
Financial Decisions - Leverages D1 = D0 + [(E x Target payout) – D0] x
Degree of Operating Leverages (DOL) NPVL Af
= LR + x (HR − LR)
NPVL − NPVH Where, AF = Adjustment factor
% change in EBIT
= PVL − CI
% change in Sales = LR + x (HR − LR)
PVL − PVH
Contribution
= Management of Working Capital
EBIT
Dividend Decisions
Break-even point Unit-1: INTRODUCTION
Growth, g = b x r
Fixed Cost Where, Working Capital
in units, =
Contribution per unit b = Retention ratio = Current Assets – Current Liabilities
Margin of Safety r = Rate of return on investment Operating Cycle
Sales − BEP Sales MM Approach = R +W + F + D – C
= x 100
Sales
Market price of Shares Where,
EBIT P1 + D1 R = Raw material storage period
= P0 =
Contribution 1 + Ke W = Work-in-progress inventory
Where, holding period
Degree of Financial Leverage (DFL) P1 = Price at the end of the period F = Finished goods storage period
% change in EPS D1 = Dividend at the end of the period D = Debtors collection period
= Ke = Cost of equity C = Credit period allowed by
% change in EBIT
creditors
EBIT Value of the �irm
= (n + ∆n)P1 − I + E Raw Material (RM) Storage Period
EBT Vf or nP0 = Avg stock of RM
(1 + K e ) =
Combined Leverage Where, Avg cost of RM Consumption per day
n = No. of shares in the beginning Work-in-Progress (WIP) inventory
= DOL x DFL
∆n = No. of shares issued holding period
% change in EPS I = Amount required for investment Avg WIP inventory
= E = Earnings during the period =
% change in Sales Avg cost of Production per day
Contribution Walter’s Model Finished Goods (FG) storage period
=
EBT Market price of Shares Avg stock of FG
r =
D + (E − D) Avg cost of Goods Sold per day
Ke
Investment Decisions P= Debtors Collection period
Ke
TRADITIONAL CAPITAL BUDGETING Where, Avg Receivables
=
TECHNIQUES E = Earnings per share Avg Credit Sales per day
Payback Period D = Dividend per share Credit period allowed by creditors
r = Internal rate of return Avg Payables
Total initial capital investment =
= Gordon’s Model Avg Credit Purchases per day
Annual expected after tax NCF
Accounting Rate of Return (ARR) Market price
E1 (1 − b) D0 (1 + g) Estimation of Current Assets
Average Annual net income P0 = =
= K e − br Ke − g Raw Materials Inventory
Investment Estimated production (units)
=
Dividend Discount Model 12 months / 365 days
TIME ADJUSTED CAPITAL BUDGETING x Estimated cost per unit
TECHNIQUES Intrinsic value of the stock
x Average RM storage period
= Sum of PV of future cash �lows
Net Present Value (NPV)
Work-in-Progress Inventory
Estimated production (units) Unit-3: MANAGEMENT OF INVENTORY
=
12 months / 365 days Economic Order Quantity
x Estimated WIP cost per unit 2A x O
x Average WIP holding period =�
C
Finished Goods Where,
Estimated production (units)
= A = Annual demand of inventory
12 months / 365 days O = Cost per Order
x Estimated cost of production per unit C = Carrying cost per unit p.a.
x Average FG storage period
Receivables (Debtors)
Estimated credit sales (units) Unit-4: MANAGEMENT OF
= RECEIVABLES
12 months / 365 days
x Estimated cost of sales per unit Total Fixed Cost
x Average debtors collection period = [Average Cost per unit
– Variable Cost per unit]
x No. of units sold on credit under
Estimation of Current Liabilities Present Policy
Direst wages = Opportunity Cost
= Total Cost of Credit Sales
Estimated labour hours x Wage rate per hour Collection period (Days)
12 months/365 days x
365 (or 360)
Required Rate of Return
x Average time lag in payment of wages x
100

Trade Payables Unit-5: MANAGEMENT OF PAYABLES

Estimated credit purchases Nominal Cost of Payables
=
12 months / 365 days d 365 days
x Credit period allowed by suppliers = x
100 − d t
Overheads (OH)
Estimated Overheads Cost of Lost Cash Discount
365
= 100 t
12 months / 360 days
=� � −1
x Average time lag in payment of OH 100 − d
Where,
Unit-2: TREASURY & CASH d = rate of discount
MANAGEMENT t = the reduction in the payment
Optimum Cash Balance period in days
2U x P
=�
S
Where,
U = Annual cash disbursement
P = Fixed cost per transaction
S = Opportunity cost of one rupee p.a.

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