Topic 1: Financial Statement Analysis

Term Formula

Accounts payable 𝐶𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠

Accounts payable turnover =
turnover 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒

Accounts 𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠

Accounts receivable turnover =
receivable 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
turnover

Annual growth 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝑎𝑚𝑜𝑢𝑛𝑡 − 𝑃𝑟𝑖𝑜𝑟 𝑦𝑒𝑎𝑟 𝑎𝑚𝑜𝑢𝑛𝑡

Annual growth rate = x 100
rate 𝑃𝑟𝑖𝑜𝑟 𝑦𝑒𝑎𝑟 𝑎𝑚𝑜𝑢𝑛𝑡

Basic earnings 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠

Basic earnings per share =
per share 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

Book value per 𝑇𝑜𝑡𝑎𝑙 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠′ 𝑒𝑞𝑢𝑖𝑡𝑦 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑒𝑞𝑢𝑖𝑡𝑦

Book value per share =
share 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

Cash cycle = Operating cycle – Days purchases in account payable

Cash cycle (cash Or:

conversion cycle)
Cash cycle = Days in inventory + Days sales in accounts receivable – Days of
payables outstanding

𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑓𝑟𝑜𝑚 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑖𝑒𝑠

Cash flow ratio Cash flow ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Cash flow to Cash flow to fixed-charges ratio =

fixed-charges 𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑓𝑟𝑜𝑚 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 + 𝐹𝑖𝑥𝑒𝑑 𝑐ℎ𝑎𝑟𝑔𝑒𝑠 + 𝑇𝑎𝑥 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠
ratio 𝐹𝑖𝑥𝑒𝑑 𝑐ℎ𝑎𝑟𝑔𝑒𝑠
 𝐶𝑎𝑠ℎ + 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠
Cash ratio Cash ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Common base- 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝑙𝑖𝑛𝑒 𝑖𝑡𝑒𝑚 𝑎𝑚𝑜𝑢𝑛𝑡

Common base-year statements = x 100
year statements 𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑙𝑖𝑛𝑒 𝑖𝑡𝑒𝑚 𝑎𝑚𝑜𝑢𝑛𝑡

Common-size 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 𝑠ℎ𝑒𝑒𝑡 𝑙𝑖𝑛𝑒 𝑖𝑡𝑒𝑚

Common-size balance sheet = x 100
balance sheet 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

Common-size 𝐼𝑛𝑐𝑜𝑚𝑒 𝑠𝑡𝑎𝑡𝑒𝑚𝑒𝑛𝑡 𝑙𝑖𝑛𝑒 𝑖𝑡𝑒𝑚

Common-size income statement = x 100
income 𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒
statement

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
Current ratio Current ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠

Days purchases in account payables =
Days purchases 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 / 365
in account Or:
payables 365
Days purchases in account payables =
𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒

Days sales outstanding in accounts receivable =
Days sales in 𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 / 365
account Or:
receivable Days sales outstanding in accounts receivable =
365
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Days sales in inventory =
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 / 365
Days sales in
inventory Or:
365
Days sales in inventory =
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟

Debt-to-equity 𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Debt-to-equity ratio =
ratio 𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦
 Debt-to-total- 𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
Debt-to-total-assets ratio =
assets ratio 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒

DFL =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐸𝐵𝐼𝑇
Degree of
financial leverage Or:
(DFL)
𝐸𝐵𝐼𝑇
DFL =
𝐸𝐵𝐼𝑇 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐸𝐵𝐼𝑇

DOL =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑠𝑎𝑙𝑒𝑠
Degree of
operating Or:
leverage (DOL)
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑚𝑎𝑟𝑔𝑖𝑛
DOL =
𝐸𝐵𝐼𝑇

Diluted earnings per share =

Diluted earnings
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
per share
𝐷𝑖𝑙𝑢𝑡𝑒𝑑 𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

Dividend payout 𝐶𝑜𝑚𝑚𝑜𝑛 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑

Dividend payout ratio =
ratio 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑡𝑜 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠

𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Dividend yield Dividend yield =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑚𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

𝐵𝑎𝑠𝑖𝑐 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Earnings yield Earnings yield =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑚𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒

EBITDA margin 𝐸𝐵𝐼𝑇𝐷𝐴

EBITDA margin percentage =
percentage 𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠

Economic profit Economic profit = Revenue – Explicit costs – Implicit costs

 Financial 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
Financial leverage ratio =
leverage ratio 𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦

Fixed asset 𝑆𝑎𝑙𝑒𝑠

Fixed asset turnover =
turnover 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑦,𝑝𝑙𝑎𝑛𝑡,𝑎𝑛𝑑 𝑒𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡 (𝑁𝑒𝑡)

Fixed-charge 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑓𝑖𝑥𝑒𝑑 𝑐ℎ𝑎𝑟𝑔𝑒𝑠 𝑎𝑛𝑑 𝑡𝑎𝑥𝑒𝑠

Fixed-charge coverage ratio =
coverage ratio 𝐹𝑖𝑥𝑒𝑑 𝑐ℎ𝑎𝑟𝑔𝑒𝑠

Gross margin
(gross profit 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
margin Gross margin =
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
percentage)

Inventory 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑

Inventory turnover =
turnover 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

Long-term debt- 𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Long-term debt-to-equity ratio =
to-equity ratio 𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦

Market-to-book 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑠𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒

Market-to-book ratio =
ratio 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Net profit margin 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒

Net profit margin percentage =
percentage 𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠

Net working 𝑁𝑒𝑡 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

Net working capital ratio =
capital ratio 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

Operating cycle Operating cycle = Days sales in accounts receivable + Days sales in inventory

Operating profit 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒

Operating profit margin percentage =
margin 𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
percentage
 Percentage (𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 − 𝑃𝑟𝑖𝑜𝑟 𝑦𝑒𝑎𝑟)
Percentage change = x 100
change (financial 𝑃𝑟𝑖𝑜𝑟 𝑦𝑒𝑎𝑟
statement line
item)

Price-earnings 𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Price-earnings ratio =
ratios 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Quick ratio =
Quick ratio 𝐶𝑎𝑠ℎ 𝑎𝑛𝑑 𝑐𝑎𝑠ℎ 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠 + 𝑆ℎ𝑜𝑟𝑡−𝑡𝑒𝑟𝑚 𝑚𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠+ 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 (𝑛𝑒𝑡)
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
ROA =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

Return on assets Or:

(ROA)
ROA = Net profit margin x Total asset turnover
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑆𝑎𝑙𝑒𝑠
= x
𝑆𝑎𝑙𝑒𝑠 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
ROE =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑒𝑞𝑢𝑖𝑡𝑦

Or:
Return on equity
(ROE)
ROE = ROA x Financial leverage
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
= x
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑒𝑞𝑢𝑖𝑡𝑦

Shareholder return =
Shareholder
𝐸𝑛𝑑𝑖𝑛𝑔 𝑠𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒 − 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑠𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒 + 𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
return
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑠𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒

Sustainable growth rate = ( 1 – Dividend payout ratio) x ROE

Sustainable
Or:
growth rate
Sustainable growth rate = Retention ratio x ROE
 Times interest earned ratio =
Times interest
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑎𝑛𝑑 𝑡𝑎𝑥𝑒𝑠 (𝐸𝐵𝐼𝑇)
earned ratio
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒

Total asset 𝑆𝑎𝑙𝑒𝑠

Total asset turnover =
turnover 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

Topic 2: Corporate Finance

Term Formula

Accounting profit Accounting profit = Revenue – Explicit costs

Annual cost 360

APR of quick payment discount = x
(APR) of quick 𝑃𝑎𝑦 𝑝𝑒𝑟𝑖𝑜𝑑 − 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑝𝑒𝑟𝑖𝑜𝑑
payment 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡
discount 100 − 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 %

Annual Annual percentage rate = Effective periodic interest rate x Number of periods in a
percentage rate year

𝐸𝑛𝑑𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 − 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 + 𝐼𝑛𝑐𝑜𝑚𝑒

Annual return Annual return =
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒

Capital asset pricing mode = 𝑅𝑐𝑒 = 𝑅𝑓 + [𝑅𝑚 − 𝑅𝑓 ]

Where:
Capital asset 𝑅𝑐𝑒 = Required rate of return on common equity
pricing model 𝑅𝑓 = Risk-free rate of return
 = Beta of the security
𝑅𝑚 = Market return
 𝐸𝑛𝑑𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 − 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒
Capital return Capital return =
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒

𝐷𝑡+1
𝑃𝑡 =
Constant 𝑅−𝐺
Where:
(Gordon) growth
𝑃𝑡 = Current price (price at period “t”)
dividend
𝐷𝑡+1 = Dividend one year after period “t”
discount model
R = Required return
G = Sustainable growth rate

Conversion Conversion premium = Convertible bond current price - Convertible bond

premium conversion value

𝑃𝑎𝑟 𝑣𝑎𝑙𝑢𝑒
Conversion ratio Conversion ratio =
𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑝𝑟𝑖𝑐𝑒

Conversion value = Current stock price x Number of shares issued if bond is

Conversion value
converted

Cost of preferred 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠𝑡𝑜𝑐𝑘 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠

Cost of preferred stock =
stock 𝑁𝑒𝑡 𝑝𝑟𝑜𝑐𝑒𝑒𝑑𝑠 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠𝑡𝑜𝑐𝑘

𝐷1
Cost of retained earnings = +g
𝑃0
Cost of retained Where:
earnings 𝑃0 = Current market value or price of the outstanding common stock
𝐷1 = The dividend per share expected at the end of one year
g = The constant rate of growth in dividends

Currency Appreciation or depreciation rate =

appreciation or 𝐸𝑛𝑑−𝑜𝑓−𝑝𝑒𝑟𝑖𝑜𝑑 𝑒𝑥ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒 − 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔−𝑜𝑓−𝑝𝑒𝑟𝑖𝑜𝑑 𝑒𝑥ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒
depreciation rate 𝐵𝑒𝑔𝑖𝑖𝑛𝑖𝑛𝑔−𝑜𝑓−𝑝𝑒𝑟𝑖𝑜𝑑 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒
 𝑖
Effective annual interest rate = [1 + ( )]𝑝 - 1
𝑝
Where:
i = Stated interest rate
Effective annual p = Compounding periods per year
interest rate
Or:

𝐴𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒

Effective annual interest rate =
𝐴𝑚𝑜𝑢𝑛𝑡 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑢𝑠𝑒

Effective interest 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑖𝑑

Effective interest rate =
rate 𝑁𝑒𝑡 𝑝𝑟𝑜𝑐𝑒𝑒𝑑𝑠 𝑜𝑓 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑

Expected return for a portfolio (𝑅𝑝 ) = 𝑊1 𝑅1 + 𝑊2 𝑅2 +…+ 𝑊𝑛 𝑅𝑛

Effective return Where:
for a portfolio 𝑊1 , 𝑊2 ,… 𝑊𝑛 = Weights of each investment in the total portfolio
𝑅1 , 𝑅2 ,…, 𝑅𝑛 = Expected returns of each investment in the portfolio

Forward P/E ratio = 𝑃0 / 𝐸1

Forward price- Where:
earnings ratio 𝑃0 = Stock price or value today
𝐸1 = EPS expected in one year (next four quarters)

Free cash flow (FCF) = [EBIT x (1- Tax rate)]

+ Noncash expenses (amortization or depreciation expense)
– Increases in working capital
Free cash flow
– Capital expenditures
(FCF)
Note: If the exam does not give a tax rate, then free cash flow can be calculated
on a pretax basis.

𝐹𝐶𝐹1
The present value of cash flows (constantly growing) =
𝑅−𝐺
Gordon growth
model (using free Where:
cash flows) 𝐹𝐶𝐹1 = The expected future free cash flows for the next year
R = The required rate of return (CAPM)
G = The expected, constant growth rate
 𝐼𝑛𝑐𝑜𝑚𝑒
Income return Income return =
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒

Net working
Net working capital = Current assets – Current liabilities
capital

Nominal interest
Nominal interest rate = Real interest rate + Inflation rate
rate

𝐷
Present value of a perpetuity = Stock value per share = P =
𝑅
Present value of Where:
a perpetuity
P = Stock price
D = Dividend
R = Required return

1 − 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒
Annuity present value = C x
𝑟

1
1−
(1+𝑟)𝑡
Present value of = C x
𝑟
an annity

Where:
C = Amount of annuity (equal future cash flow)
r = rate of return
t = number of years

𝑃0
P / B ratio =
𝐵0
Price-to-book
ratio Where:
𝑃0 = Stock price or value today
𝐵0 = Book value of common equity
 𝑃0
Price to sales ratio =
𝑆1
Price-to-sales
ratio Where:
𝑃0 = Stock price or value today
𝑆1 = Expected sales in one year

Ratio of 𝑂𝑓𝑓𝑒𝑟 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Ratio of exchange =
exchange 𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑎𝑐𝑞𝑢𝑖𝑟𝑖𝑛𝑔 𝑒𝑛𝑡𝑖𝑡𝑦

Real interest rate Real interest rate = Nominal interest rate – Inflation rate

Reorder point Reorder point = Safety stock + (Lead time x Sales during lead time)

Total return = Capital return + Income return

Total return 𝐸𝑛𝑑𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 − 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 + 𝐼𝑛𝑐𝑜𝑚𝑒
=
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒

𝑃0
Trailing P/E ratio =
𝐸0
Trailing price-
earnings ratio Where:
𝑃0 = Stock price or value today
𝐸0 = EPS for the past year (past four quarters)

𝐷𝑛+1
𝑛 𝐷0 (1+𝑔𝑠 )𝑇 (𝑟 − 𝑔𝐿)
Stock value = ∑𝑡=1 + 𝑛
(1+𝑟)𝑇 (1+𝑟)

Where:
Two-stage
𝐷0 = Current period dividend
dividend
𝑔𝑠 = Short-term growth rate
discount model
𝑔𝐿 = Long-term growth rate
r = Required rate of return
n = Number of years in the first stage (short-term, high-growth rate)
𝐷𝑛+1 = 𝐷0 (1 + 𝑔𝑠 )𝑛 (1 + 𝑔𝐿 )
T = Payment period (i.e., one for Year 1, two for Year 2, etc.)
 𝑃0
𝑃0 = ( ) x 𝐵0
𝐵0
Value of equity
with price-to-
Where:
book ratio
𝑃0 = Stock price or value today
𝐵0 = Book value of common equity

𝑃0
𝑃0 = ( ) x 𝑆1
𝑆1
Value of equity
with price-to-
Where:
sales ratio
𝑃0 = Stock price or value today
𝑆1 = Expected sales in one year

𝐸 𝑃 𝐷
WACC = ( )( 𝑅𝑒 ) + ( )( 𝑅𝑝 ) + ( ) [ 𝑅𝑑 (1 − 𝑇)]
𝑉 𝑉 𝑉

Weighted Where:
average cost of V = The summed market values of the individual components of the firm’s capital
capital (WACC) structure: common stock equity (E), preferred stock equity (P), and debt (D)
R = The required rate of return (also known as the “cost”) of the various
components
T = The corporate tax rate

Weighted 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑎𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠

average interest Weighted average interest rate =
𝐷𝑒𝑏𝑡 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
rate
 Topic 3: Decision Analysis

Term Formula

After-tax benefit
After-tax benefit (revenue) = Pretax benefit (revenue) x (1 – Tax rate)
(revenue)

After-tax cost After-tax cost = Pretax cost x (1 – Tax rate)

After-tax income After-tax income = Pretax income x (1 – Tax rate)

Average fixed 𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠

Average fixed cost =
cost 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑

Average total 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡𝑠

Average total cost =
cost 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑

Average variable 𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑒𝑙 𝑐𝑜𝑠𝑡𝑠

Average variable cost =
cost 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑

Breakeven point
Breakeven point in dollars = Unit price x Breakeven point (in units)
(in dollars)

𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 𝑡𝑜 𝑏𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛
Units to breakeven =
𝑈𝑛𝑖𝑡 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒

Breakeven point Or:

(in units)
𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠
Breakeven point in units =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑚𝑎𝑟𝑔𝑖𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
 Contribution margin = Sales revenue – All variable costs
Contribution
Or:
margin
Contribution margin = Contribution margin per unit x Number of units sold

Contribution
Contribution margin per unit = Selling price per unit – Variable cost per unit
margin per unit

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑚𝑎𝑟𝑔𝑖𝑛

Contribution margin ratio =
Contribution 𝑇𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠
margin ratio 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑚𝑎𝑟𝑔𝑖𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
=
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Life-cycle cost per unit =

Life-cycle cost 𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑓𝑒−𝑐𝑦𝑐𝑙𝑒 𝑐𝑜𝑠𝑡𝑠
per unit
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑡𝑜 𝑏𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 𝑎𝑛𝑑 𝑠𝑜𝑙𝑑 𝑜𝑣𝑒𝑟 𝑡ℎ𝑒 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡

Marginal cost Marginal cost =
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠

Marginal revenue Marginal revenue =
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑜𝑙𝑑

Margin of safety Margin of safety (in dollars) = Total sales (in dollars) – Breakeven sales (in dollars)

Margin of safety 𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑠𝑎𝑓𝑒𝑡𝑦 𝑖𝑛 𝑑𝑜𝑙𝑙𝑎𝑟𝑠

ratio Margin of safety ratio =
𝑇𝑜𝑡𝑎𝑙 𝑠𝑎𝑙𝑒𝑠

Markup price:
Percentage of Price = Product cost x (1 + Markup percentage)
cost

Markup price: 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 𝑐𝑜𝑠𝑡

Percentage of Price =
(1 − 𝑀𝑎𝑟𝑘𝑢𝑝 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒)
selling price
 Operating
income
Operating income = Contribution margin – All fixed costs
(contribution
approach)

Percentage 𝑁𝑒𝑤 𝑝𝑟𝑖𝑐𝑒 − 𝑂𝑙𝑑 𝑝𝑟𝑖𝑐𝑒

% Change in price =
change in price (𝑁𝑒𝑤 𝑝𝑟𝑖𝑐𝑒 + 𝑂𝑙𝑑 𝑝𝑟𝑖𝑐𝑒) / 2

Percentage
change in 𝑁𝑒𝑤 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 − 𝑂𝑙𝑑 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦
% Change in quantity demanded =
quantity (𝑁𝑒𝑤 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 + 𝑂𝑙𝑑 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦) / 2
demanded

𝐴𝑓𝑡𝑒𝑟−𝑡𝑎𝑥 𝑖𝑛𝑐𝑜𝑚𝑒
Pretax profit Pretax profit =
1− 𝑇𝑎𝑥 𝑟𝑎𝑡𝑒

Price elasticity of % 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝐸𝑝 = Price elasticity of demand =
demand % 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

Sales dollars = Variable costs + Fixed costs + Pretax profit

Sales dollars
Or:
needed to obtain
a desired profit 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 + 𝑃𝑟𝑒𝑡𝑎𝑥 𝑐𝑜𝑠𝑡𝑠
Sales dollars =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑚𝑎𝑟𝑔𝑖𝑛 𝑟𝑎𝑡𝑖𝑜

Sales units
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 + 𝑃𝑟𝑒𝑡𝑎𝑥 𝑝𝑟𝑜𝑓𝑖𝑡
needed to obtain Sales (units) =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑚𝑎𝑟𝑔𝑖𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
a desired profit

Selling price 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 + 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 + 𝑃𝑟𝑒𝑡𝑎𝑥 𝑝𝑟𝑜𝑓𝑖𝑡

based on Sales price per unit =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑠𝑜𝑙𝑑
assumed volume

Target cost per

Target cost per unit = Target price – Target operating income per unit
unit
 Topic 5: Investment Decisions

Term Formula

Net present value = [(After-tax cash flows + Depreciation benefit) × Present value
factor] - Initial cash outflow
Net present
Where:
value
After-tax cash flows = Annual net cash flow × (1 − Tax rate)
Depreciation benefit = Depreciation × Tax rate

𝑁𝑒𝑡 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

Payback period =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑐𝑟𝑒𝑚𝑒𝑛𝑡𝑎𝑙 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤∗
Payback period

*Where the cash flow per period is even.