Working Capital = Current Assets ( - ) Current Liabilities

Current Ratio = Current Assets / Current Liabilities

Quick Ratio = Quick Assets / Current Liabilities
Acid Test Ratio * Quick Assets = Current Assets - Inventory
Inventory Holding Period = ( Inventory / Cost of sales ) * 365
Inventory Turnover = Cost of sales / Average Inventory
Average Inventory = (Opening stock + Closing stock ) / 2
Raw material holding period
= ( Raw material inventory / Material usage ) * 365
Work in Progress Holding=Period
( WIP Stock held / Production cost ) * 365
Finished Goods Holding Period
= ( FG Stock held / Cost of goods sold ) * 365
Receivables Turnover = Credit Sales / Debtors (Expressed in times)
Payables Turnover = Credit Purchases / Creditors (Expressed in times)
EOQ = Square Root of ( 2* Annual Demand * Order cost per order / Holding cost per unit per annum)
Cost of financing debtors = Debtor Balance * Rate of interest on OD
Annual Cost of Discount = [1 + Discount / Amount left to pay] ^ Number of periods) - 1
Contribution = Sales - Variable Cost
Working Capital Turnover= Sales Revenue / Working Capital
Fixed Assets Turnover = Sales Revenue / Net Fixed Assets
Trade Receivables = (Trade Receivable Days / 365 ) * Credit sales
Trade Payables = (Trade Payable Days / 365 ) * Credit Purchases
Inventory = [ Inventory Days / 360 ] * Cost of sales
Net Working Capital = Stock + Debtors - Creditors
Optimum amount of cash
to be invested [Using
Baumol Model] = Square root of [ 2 * Annual cash demand * Transaction cost / Holding cost ]
Gives the answer which indicates the amount to be invested to keep transaction and holding cost at a minimum
The Miller-Orr model
Return Point = Lower Limit + 1/3*Spread
Spread = 3*[(3/4*Transaction cost*Variance of cash flow)/Interest Rate ]^1/3
Upper Limit = Lower Limit + Spread
ROCE = (Average Annual Profits before interest and tax / Initial capital investment) * 100
ROCE = (Average Annual Profits before interest and tax / Average Capital Investment ) * 100
Average Capital invested = (Initial Investment + Scrap Value) / 2
Depreciation (SLM ) = [ Initial Cost - Scrap Value ] / Estimated Useful Life
Payback period = Initial Investment / Annual Cashflow
FV = P * (1+r)^n
Present Value = Future Value / ( 1 + Rate ) ^ period
Discounting Factor = 1 / (1 + r ) ^ n
When annuity starts at T1
Annuity Factor (AF) = [ (1-(1+r)^-n) ] / r
When Annuity starts at T0 (Advanced Annuity)
Annuity Factor for n years= 1 + AF for (n - 1) years
Net Present Value = PV of Inflow ( - ) PV of Outflow
Present Value of Perpetuity
= Cash Flow/ Rate
(which starts at T1)
Present Value of
= 1st instalment + (Cash flow/ Rate)
Advanced Perpetuity

Present Value of = Cashflow / (Discounting rate - Growth Rate)

Perpetuity with growth
IRR = L + [NL /(NL - NH) * (H - L)]
IRR of a perpetuity = (Annual Inflow / Initial Investment) * 100
Fischer's Formula (1 + Money Rate) = (1 + Real Rate) * (1 + Inflation)
Real return is inflation adjusted
Money rate/nominal rate is non inflation adjusted
If WDV > Sale Proceeds, it is Balancing allowance - It is an expense
If WDV < Sale Proceeds, it is Balancing charge - Treated like income
On Balancing Allowance ( Expense) - There is tax saving
On Balancing Charge (Income) - There is tax payment
Sensitivity Margin = NPV / PV of post tax cashflow under consideration
Post-tax cost of borrowing= Cost of borrowing × (1 – Tax rate).
EAC = PV of costs / Annuity Factor
EAB = NPV of the project / Annuity Factor
DVM (Assuming constant dividends)
Price per share [ P0 ] = D / Ke
Ke (Cost of equity) = D / P0
D = Constant Dividend
P0 = Price per share right now
Ke = Cost of equity
DVM (assuming dividend growth at a fixed rate)
Price per share [ P0 ] = D1 / ( Ke - g)
Where
D1 = Dividend to be received in one year's time
Ke = Cost of equity
g = Growth rate of dividend
Ke = (D1/ P0) + g
Cum Dividend Price - Dividend = Ex Dividend Price
Cum -dividend is price including dividend
Growth in Dividend (g) = [ Dividend today / Dividend 'n' years ago ] ^ 1/n - 1
Using Gordon's growth model
g = ROCE * Retention % = 10% * 60% = 6%
Cost of preference capital =
(Kp)
Preference Dividend / Price of Preference share
Cost of Debt (Kd) = Int / P0
Steps to calculate cost of convertible debt
Step 1: Calculate the value of the conversion option using available data
Step 2: Compare the conversion option with the cash option/ redemption. Assume all investors will choose the option with the higher value.
Step 3: Calculate the IRR of the flows as for redeemable debt considering value chosen in step 2
CAPM = Rf + Beta * (Rm - Rf)
Beta * (Market Rate - Risk Free Rate)
This is known as 'Risk Premium'
Operational Gearing
Fixed costs / Variable Costs
Fixed Costs / Total Costs
% change in EBIT / % change in revenue
Financial Gearing
Equity Gearing = (Long term debt + Preference Capital ) / Ordinary capital and reserves
Total Gearing = (Long term debt + Preference Capital ) / Total Long Term Capital
Interest Gearing = Debt Interest / Operating profit before interest and tax
Interest Coverage Ratio = PBIT / Interest
Total Long Term Capital = Equity and Reserves + Preference capital + Long Term Debt
Long term capital = Equity + Preference Capital + Debt
Equtiy = Equity share capital + Reserves and Surplus
Steps to solve a beta + gearing question
Step 1
Check what is the Equity Beta of the Other company
This will be in the question
Step 2 - Also called De-Gearing because you are removing impact of debt
Multiply Equity Beta of step 1 by the following
E/ [E + D ( 1 - tax)] E and D are of the other company
E is for proportion of Equity, D is for proportion of debt
This will give you Asset Beta
This is the measure of systematic risk of the specific industry
Asset Beta = Equity Beta * E/ [E + D*(1-tax)]
Step 3 - Also called Re-Gearing because you are adding impact of debt
Take Asset Beta from step 2 and use the following formula again to calculate equity beta of your company
Asset Beta = Equity Beta * E/ [E + D*(1-tax)]
Here, E and D will be of your company
This gives you Equity Beta of your company E is for proportion of Equity, D is for proportion of debt
Step 4
Use CAPM to calculate cost of equity
Interest Cover = PBIT / Interest
It tells us whether company's profits are adequate enough to cover for interest
Higher interest cover is good but it might suggest that company is not using debt which is cheap but over-using equity
Equity Gearing = Debt / Equity
Total Gearing = Debt / (Debt + Equity)
Earnings per Share (EPS) = Profit available for equity shareholders / Number of equity shares
Price Earnings (PE) Ratio = Price per share / Earnings per share
Dividend per share = Total Ordinary Dividend / Total number of shares in issue
Dividend Cover = Profit available for equity shareholders / Dividend for the year
Dividend yield = Dividend per share / Market price per share
Interest yield = Interest / Market value of loan note
Total shareholder return = (Dividend per share + Change in share price ) / Share price at the start of the period
PE Ratio * Dividend Cover= 1/ Dividend Yield
Theoretical Ex Rights Price - TERP
TERP q= [ Market value of shares already in issue + Proceeds from rights issue ] / Total Number of shares after rights issue
Value of a Right = TERP - Issue price for Right shares
Value of a right per existing
= share
Value of a right / Number of shares needed to obtain the right
Value of the company = Profit for eq holders * PE Ratio
Earnings Yield = EPS / Market Price
Value of company = Profit for eq shareholders (Total Earnings) * 1/ Earnings Yield
Value per share = EPS * 1/ Earnings Yield
** Total earnings here stand for 'Profit for equity share holders'
Value of company = Earnings * (1+g) / (Earnings yield - growth)
Price of eq share = D1 / (ke - g)
Valuing shares using the dividend valuation model (DVM)
P0 = Constant Dividend / Cost of equity
P0 = D1 / (Cost of equity - Growth rate)
Convertible Debt
Floor value = Market value without the conversion option (i.e. market value of redemption option)
Conversion Premium = Market value – current conversion value
Conversion Premium = Market value – current conversion value