Professional Documents
Culture Documents
Business Finance Decision Formulas
Business Finance Decision Formulas
TABLE OF CONTENTS
No. Name Page No. Name Page
1. Return on capital employed (ROCE) 1 20. Profit margin 4
2. Return on shareholder capital (ROSC) 1 21. Current ratio 5
3. Basic earnings per share (EPS) 1 22. Quick ratio 5
4. Accounting rate of return (ARR) 1 23. Gearing ratio 5
5. Payback period (for an investment with 1 24. Debt to equity ratio 5
constant cashflows)
6. Discount factor 2 25. Interest cover 5
7. Changing discount rates 2 26. Receivables turnover 5
8. Equivalent periodic rate (EPR) 2 27. Payables turnover 5
9. Present value annuity factor 2 28. Inventory turnover 5
10. Future value annuity factor 2 29. Theoretical ex-rights price (TERP) 5
11. Perpetuity factor 2 30. Dividend valuation model (without growth) 6
12. IRR interpolation formula 3 31. Dividend valuation model (with growth) 6
13 Modified internal rate of return (MIRR) 3 32. Gordon’s growth model 6
14. Fisher equation (Link between money cost, 3 33. Geometric mean growth rate 6
real cost and inflation)
15. Profitability Index (PI) 3 34. Capital asset pricing model (CAPM) 7
16. DuPont analysis / method 3 35. Market premium 7
17. Expected value 4 36. Beta factor 7
18. Equivalent annual cost 4 37. Alpha (α) 8
19. Sensitivity 4 38. Country risk premium (CRP) 8
TABLE OF CONTENTS
No. Name Page No. Name Page
39. CAPM adjusted for country risk premium 8 54. Modigliani and Miller’s propositions 13
(with taxation)
40. Arbitrage pricing model 8 55. Asset beta, equity beta and debt beta 14
41. Sharpe ratio 8 56. Price/Earnings ratio method 14
42. Treynor index (ratio) 9 57. Earnings yield method 14
43. MV of irredeemable fixed rate debt 9 58. Earnings growth model 15
44. Weighted average cost of capital (WACC) 9 59. Dividend yield method 15
45. Total market value of a company (Subject to 10 60. Purchasing power parity 15
certain conditions)
46. Variance 10 61. Interest rate parity 15
47. Standard deviation 10 62. Leverage 16
48. Co-variance of returns of A & B 10 63. Operating leverage 16
49. Expected return from a two-asset portfolio 11 64. Financial leverage 16
50. Standard deviation of return for a 11 65. Combined leverage 16
two-asset portfolio
51. Expected return from a three-asset portfolio 12 66. Hedge efficiency 16
52. Standard deviation of return for a 12 67. Basis 16
three-asset portfolio
53. Modigliani and Miller’s propositions 13
(no taxation)
Basic earnings per Net profit (or loss) attributable to ordinary shareholders during a period
3.
share (EPS) Weighted average number of shares in issue during the period
a = annual rate
(1 + a) = (1 + er)en
Equivalent periodic er = equivalent periodic rate (half yearly/ quarterly/ monthly)
8. OR where:
rate (EPR)
(1 + er)en − 1 = a en = no. of equivalent periods in one year (e.g. '4' in case of
quarterly rate)
Present value
1 1 1 − (1 + r)−n r = discount rate, as a proportion
9. (1 − ) OR ( ) where:
annuity factor r (1 + r)n r
n = number of time periods
Modified internal B = the present value of the capital investment in the investment phase
13. rate of return
OR
(MIRR)
PVR = the PV of the return phase
n PVR
√ × (1 × re ) − 1 where: PVI = the PV of the investment phase
PVI
re = the cost of capital
Current assets
21. Current ratio
Current liabilities
Current assets excluding inventory
22. Quick ratio
Current liabilities
Long term debt
23. Gearing ratio × 100
Share capital + reserves + long term debt
Credit purchases
27. Payables turnover times
Average trade payables
Cost of sales
28. Inventory turnover times
Average inventory
Theoretical ex-rights (Number of existing shares × Price per share) + (Number of new shares × Rights issue price)
29.
price (TERP) Total number of shares after the rights issue
do = the annual dividend for the year that has just ended
Dividend valuation do (1 + g)
31. MV = where: re = the cost of equity
model (with growth) re − g
g = the expected annual growth rate
Geometric mean n value at end of period of n years n = number of terms in the series (e.g. years of
33. √ −1 where:
growth rate value of start growth)
βS =
σS βS = beta factor of security S
σM
where: σS = systematic risk of security S
σM = systematic risk of the market as a whole
Covariance of a share with the market
or βS =
Variance of the market
36. Beta factor ρShM σSh σM ρShM = Correlation coefficient of a share’s returns with
or βS =
those of the market
σM 2
ρShM σSh σSh = Standard deviation of a share’s returns
or βS =
where:
σM
σM 2 = Variance of the market
σM = Standard deviation of the market
CAPM adjusted
39. for country risk R E = R RF + β(R M − R RF + CRP)
premium
Ke = cost of equity
where:
where:
Expected return
51. from a three-asset RP = expected return of the portfolio
portfolio
̅ A, R
R ̅ C = are expected returns of assets/ securities A, B and C respectively
̅ B and R
where:
ρAB , ρAC , ρBC = the correlation coefficient in returns between pairs of assets
(A and B, A and C, B and C)
ρAB σA σB , ρAC σA σC , ρBC σB σC = the covariance of returns between pairs of assets (A and B,
A and C, B and C)
r = discount rate
Earnings growth Earnigs at time 1
58. MV = where: g = the expected annual growth rate
model r−g
MV = the market value of the company
Contribution margin
63. Operating leverage
PBIT (Operating profit)
PBIT
64. Financial leverage
Profit after interest but before tax (PBT)
Contribution margin
65. Combined leverage
Profit after interest but before tax (PBT)