FINANCIAL ECONOMICS

CASH FLOW FORMULAS

1. Net Working Capital = Current Assets - Current Liabilities
NWC = CA – CL
2. Cash Flow from Assets = Cash Flow to Creditors + Cash Flow to Stockholders
CFFA = CFC + CFS
3. Cash Flow from Assets = Operating Cash Flow - Net Capital Spending - Changes in NWC
CFFA = OCF – NCS – cNWC
a) OCF = EBIT + depreciation – taxes
b) NCS = ending net fixed assets - beginning net fixed assets + depreciation
c) Changes in NWC = ending NWC - beginning NWC
4. CF to Creditors = interest paid - net new borrowing
5. CF to Stockholders = dividends paid - net new equity raised

Current Accounts
CA (Current Assets)
CL (Current Liabilities)

Fixed Assets and Depreciation

NFA (Net Fixed Assets)
Depreciation Expense

Long-term Debt and Equity

LTD (Long-term Debt)
Common stock & APIC (Additional Paid in Capital)

Income Statement
EBIT (Earning Before Interest and Taxes)
Taxes
Interest Expense
Dividends
INCOME STATEMENT FORMULAS
1. EBIT = Revenues – Cost of Goods Sold – Expenses – Depreciation
2. Taxable income = EBIT – Interest Expense
3. Net Income = Taxable Income - Taxes

Computing Liquidity Ratios

Current Ratio = CA / CL (times)
Quick Ratio = (CA - Inventory) / CL (times)
Cash Ratio = Cash / CL (times)
NWC to Total Assets = NWC / TA
Interval Measure = CA / average daily operating costs (days)

Computing Long-term Solvency Ratios

Total Debt Ratio = (TA - TE) / TA
Debt/Equity = TD / TE
Equity Multiplier = TA / TE = 1 + D/E
Long-term debt ratio = LTD / (LTD + TE)

TA = Total Assets
TE = Total Equity
LTD = Long-term Debt
D/E = Total debt ratio / (1 - total debt ratio)

Computing Coverage Ratios

Times Interest Earned = EBIT / Interest
Cash Coverage = (EBIT + Depreciation) / Interest

Computing Inventory Ratios

Inventory Turnover = Cost of Goods Sold / Inventory
Days’ Sales in Inventory = 365 / Inventory Turnover
Computing Receivables Ratios
Receivables Turnover = Sales / Accounts Receivable
Days’ Sales in Receivables = 365 / Receivables Turnover

Computing Total Asset Turnover

Total Asset Turnover = Sales / Total Assets
NWC Turnover = Sales / NWC
Fixed Asset Turnover = Sales / NFA

Computing Profitability Measures

Profit Margin = Net Income / Sales
Return on Assets (ROA) = Net Income / Total Assets
Return on Equity (ROE) = Net Income / Total Equity
GPM = (Sales - COGS) / Sales
GPM = Gross Profit Margin
OPM = EBIT / Sales
OPM = Operating Profit Margin

Computing Market Value Measures – I

PE Ratio = Price per share / Earnings per share
Market-to-book ratio = Market value per share / Book value per share
Enterprise value = market value of stock + book value of liabilities – cash
EBITDA ratio = Enterprise value / EBITDA

PE Ratio = Price-to-Earnings Ratio

Deriving the DuPont Identity

ROE = NI / TE
Multiply by 1 (TA/TA) and then rearrange
ROE = (NI / TE) (TA / TA)
ROE = (NI / TA) (TA / TE) = ROA × EM
NI = Net Income
Multiply by 1 (Sales/Sales) again and then rearrange
ROE = (NI / TA) (TA / TE) (Sales / Sales)
ROE = (NI / Sales) (Sales / TA) (TA / TE)
ROE = PM × TAT × EM

TAT = Total Assets Turnover

PM = Profit Margin
EM = Equity Multiplier
 PROBLEME

1. Building a Balance Sheet [LO1] Penguin Pucks, Inc., has current assets of $5,100, net fixed assets
of $23,800, current liabilities of $4,300, and long-term debt of $7,400. What is the value of the
shareholders’ equity account for this firm?
How much is net working capital?
NWC = ?
NWC = CA – CL = 5.100 – 4.300 = 800

2. Building an Income Statement [LO1] Papa Roach Exterminators, Inc., has sales of $586,000, costs
of $247,000, depreciation expense of $43,000, interest expense of $32,000, and a tax rate of 35
percent. What is the net income for this firm?
EBIT = sales – costs – depreciation expense = 586.000 - 247.000 – 43.000 = 296.000
Taxable Income = EBIT – Interest expense = 296.000 – 32.000 = 264.000
Net Income = Taxable Income – Taxes = 264.000 – 35%*264.000 = 171.600

3. Dividends and Retained Earnings [LO1] Suppose the firm in Problem 2 paid out $73,000 in cash
dividends. What is the addition to retained earnings?
Retained Earnings = Net Income – Dividends = 171.600 – 73.000 = 98.600

4. Per-Share Earnings and Dividends [LO1] Suppose the firm in Problem 3 had 85,000 shares of
common stock outstanding. What is the earnings per share, or EPS, figure? What is the dividends per
share figure?
EPS = 73.000/85.000 = 0.85

5. Market Values and Book Values [LO1] Klingon Widgets, Inc., purchased new cloaking machinery
three years ago for $7 million. The machinery can be sold to the Romulans today for $4.9 million.
Klingon’s current balance sheet shows net fixed assets of $3.7 million, current liabilities of $1.1
million, and net working capital of $380,000. If all the current assets were liquidated today, the
company would receive $1.6 million cash. What is the book value of Klingon’s assets today?
What is the market value? Book value today = 4.9 + 1.6 = 6.5
Net fixed Assets 3.7
Current Liabilities 1.11
NWC 380.000
Current Assets 1.6
14. Calculating Total Cash Flows [LO4] Jetson Spacecraft Corp. shows the following information on
its 2009 income statement:

 sales $196,000;
 costs $104,000;
 other expenses $6,800;
 depreciation expense $9,100;
 interest expense $14,800;
 taxes $21,455;
 dividends $10,400.
In addition, you’re told that the firm issued $5,700 in new equity during 2009 and redeemed $7,300 in
outstanding long-term debt.
a. What is the 2009 operating cash flow? 63.745
b. What is the 2009 cash flow to creditors? 7.500
c. What is the 2009 cash flow to stockholders? 4.700
d. If net fixed assets increased by $27,000 during the year, what was the addition to
NWC?

a. OCF = EBIT + depreciation – taxes

EBIT = sales – costs – other expenses – depreciation
= 196.000 – 104.000 – 6.800 – 9.100
= 76.100

OCF = 76.100 + 9.100 – 21.455

= 63.745

b. CF to Creditors = Interest Paid – Net new borrowing

= 14.800 – 7.300
= 7.500

c. CF to Stockholders = Dividends – Net new equity raised

= 10.400 – 5.700
= 4.700
d. CF from Assets = CF to Creditors + CF to Stockholders
= 7.500 + 4.700
 = 12.200
CFFA = OCF – NCS – cNWC
a) OCF = EBIT + depreciation – taxes = 63.745
b) NCS = ending net fixed assets - beginning net fixed assets + depreciation
= 27.000 + 9.100
= 36.100

d)