FORMULA SHEET
Assets = Liabilities + Shareholders’ equity [2.1]
Revenues − Expenses = Income [2.2]
Cash flow from assets = Cash flow to bondholders + Cash flow to shareholders [2.3]
Current ratio = Current assets∕Current liabilities [3.1]
Current assets − Inventory
Quick ratio = __________________
[3.2]
Current liabilities
Cash ratio = (Cash + Cash equivalents ) ∕Current liabilities [3.3]
Net working capital to total assets = Net working capital∕Total assets [3.4]
Interval measure = Current assets∕Average daily operating costs [3.5]
Total debt ratio = [Total assets − Total equity]∕Total assets [3.6]
Debt–equity ratio = Total debt∕Total equity [3.7]
Equity multiplier = Total assets∕Total equity [3.8]
Long-term debt
_________________________
Long-term debt ratio =
[3.9]
Long-term debt + Total equity
Times interest earned ratio = EBIT∕Interest [3.10]
Cash coverage ratio = [ EBIT + Depreciation ] ∕ Interest [3.11]
Inventory turnover = Cost of goods sold∕Inventory [3.12]
Days’ sales in inventory = 365 days∕Inventory turnover [3.13]
Receivables turnover = Sales∕Accounts receivable [3.14]
Days’ sales in receivables=365 days∕Receivables turnover [3.15]
NWC turnover=Sales∕NWC [3.16]
Fixed asset turnover=Sales∕Net fixed assets [3.17]
Total asset turnover=Sales∕Total assets [3.18]
Profit margin=Net income∕Sales [3.19]
Return on assets=Net income∕Total assets [3.20]
Return on equity=Net income∕Total equity [3.21]
P∕E ratio=Price per share∕Earnings per share [3.22]
Market-to-book ratio=Market value per share∕Book value per share [3.23]
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Formula Sheet
Dividend payout ratio = Cash dividends∕Net income [4.1]
EFN = Increase in total assets − Addition to retained earnings
[4.2]
= A(g ) − p(S ) R × (1 + g )
EFN = − p(S ) R + [ A − p(S ) R ] × g [4.3]
EFN=− p(S ) R + [ A − p(S ) R ] × g [4.4]
ROA × R
Internal growth rate = ________ [4.5]
1 − ROA × R
EFN * = Increase in total assets − Addition to retained earnings − New borrowing [4.6]
= A(g ) − p(S ) R × (1 + g ) − p(S ) R × (1 + g ) [ D∕E ]
EFN * = 0
g * = ROE × R⁄ [ 1 − ROE × R ] [4.7]
p(S∕A ) (1 + D∕E ) × R
g * = _______________ [4.8]
1 − p(S∕A ) (1 + D∕E ) × R
Future value = $1 × (1 + r)t [5.1]
PV = $1 × [1 ∕ (1 + r)t] = $1∕ (1 + r )t [5.2]
PV × (1 + r)t = FVt
PV = FVt∕ (1 + r )t
= FVt × [1 ∕ (1 + r )t] [5.3]
_____
Annuity present value = C × (
1 − Presentrvalue
factor
) [6.1]
___
= C ×
{
1 − 1∕(1 + r)
r
t
} [6.1]
Annuity FV factor = (Future value factor − 1 ) ∕ r
[6.2]
= ((1 + r )t− 1 ) ∕ r
Annuity due value = Ordinary annuity value × (1 + r ) [6.3]
Perpetuity present value × Rate = Cash flow [6.4]
PV × r = C
Annuity present value factor =
(1 − Present value factor)∕r [6.5]
= (1∕r) × (1 − Present value factor)
PV = ___C
r − [6.6]
g
g[ (1 + r) ]
t
1+g
C 1 − _
PV = ___
r − [6.7]
EAR = [ 1 + (Quoted rate ∕ m )]m− 1 [6.8]
EAR = eq− 1 [6.9]
Bond value = C × (1 − 1 ∕ (1 + r)t) ∕ r + F ∕ (1 + r)t [7.1]
1 + R = (1 + r)× (1 + h) [7.2]
R=r+h+r×h [7.3]
R≈r+h [7.4]
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Formula Sheet
P0= (D1+ P1) ∕ (1 + r ) [8.1]
P0= D ∕ r [8.2]
D× (1 + g ) ___ D
P0= ________
0 r−g = r −1 g [8.3]
D× (1 + g ) Dt + 1
Pt = _______
t r − g = ____
r − g [8.4]
(r − g ) = D1∕ P0 [8.5]
r = D1 ∕ P0 + g
OCF =
EBIT + D − Taxes [10.1]
= (S − C − D) + D − (S − C − D) × TC
OCF =
(S − C − D) + D − (S − C − D) × TC [10.2]
= (S − C − D) × (1 − TC) + D
= Project net income + Depreciation
OCF =
(S − C − D) + D − (S − C − D) × TC [10.3]
= (S − C) − (S − C − D) × TC
= Sales − Costs − Taxes
OCF =
(S − C − D) + D − (S − C − D) × TC [10.4]
= (S − C) × (1 − TC) + D × TC
[IdTc] [1 + .5r] _ S dT
PV tax shield on CCA =__
× __ 1
− n c × __ [10.5]
d+r 1+r d + r (1 + r)n
S − VC = FC + D [11.1]
P × Q − v × Q = FC + D
(P − v) × Q = FC + D
Q = (FC + D)∕(P − v)
OCF =
[(P − v) × Q − FC − D] + D [11.2]
= (P − v) × Q − FC
Q = (FC + OCF)∕(P − v) [11.3]
Total dollar return = Dividend income + Capital gain (or loss ) [12.1]
Total cash if stock is sold = Initial investment + Total return [12.2]
__ __
[(R − R
_____ )2 + … + (RT − R
)2]
1
Var(R) = [12.3]
T−1
Geometric average return = [ (1 + R1) × (1 + R2) × … × (1 + RT ) ]1∕T− 1 [12.4]
Risk premium =
Expected return − Risk-free rate [13.1]
= E(RU) − Rf
E(R) = ∑R
j × Pj [13.2]
j
where
Rj = value of the jth outcome
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Formula Sheet
Pj = associated probability of occurrence
∑ = the sum over all j
j
σ2 = ∑[ Rj − E(R)]2 × Pj [13.3]
j
__
σ = √
σ2
E(RP) = x1 × E(R1) + x2 × E(R2) + … + xn × E(Rn) [13.4]
σ2P = x2Lσ2L + x2Uσ2U + 2xLxUCORRL,UσLσU [13.5]
___
σ2 P
σP = √
Total return = Expected return + Unexpected return [13.6]
R = E(R) + U
Announcement = Expected part + Surprise [13.7]
R = E(R ) +Systematic portion + Unsystematic portion [13.8]
Total risk = Systematic risk + Unsystematic risk [13.9]
E(Ri) = Rf+ [ E(RM ) − Rf] × βi [13.10]
R = E(R ) +βIFI+ βGNPFGNP
+ βrFr+ ε [13.11]
E(R ) = RF + E [ (R1) − RF ] β1+ E [ (R2) − RF ] β2+ E [ (R3) − RF ] β3+ … +E [ (RK ) − RF ] βK [13.12]
σ2P= x2Lσ2L+ x2Uσ2U+ 2 xL xU CORRL,UσLσU [13A.1]
N N
σ2P= ∑∑xjσij [13A.2]
i=1 j=1
δ σ p
2
N
___
= 2∑xjσi2= 2[x1 COV(R1, R2)+ x2 σ22+ x3 COV(R3, R2)+ … +xN COV(RN , R2)] [13A.3]
δ x2 j=1
COV(R2, RM )
β2= _________
[13A.3]
σ2(RM )
RE = (D1∕ P0) +g [14.1]
RE = Rf+ βE× [ RM − Rf] [14.2]
RP = D ∕ P0 [14.3]
V=E+D [14.4]
100 % = E ∕ V + D ∕ V [14.5]
WACC = (E ∕ V ) × RE + (P ∕ V ) × RP + (D ∕ V ) × RD × (1 − TC ) [14.6]
Taxes * = EBIT × TC [14.7]
CFA* = EBIT + Depreciation − Taxes* − Change in NWC − Capital spending [14.8]
= EBIT + Depreciation − EBIT × TC − Change in NWC − Capital spending
CFA * = EBIT × (1 − TC ) +Depreciation − Change in NWC − Capital spending [14.9]
CFA CFA
*
CFA *
CFA+ Vt * *
V0= _______
+ _________
1
+ _________
2
+ ⋯ +________ 3 t
[14.10]
1 + WACC (1 + WACC ) (1 + WACC )
2 3 (1 + WACC )t
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Formula Sheet
CFA*t + 1
Vt= _______
[14.11]
WACC − g
fA = (E∕V) × fE + (D∕V) × fD [14.12]
Debt Equity
βPortfolio
= βLevered firm= _________
+ _________
× βDebt × βEquity [14A.1]
Debt + Equity Debt + Equity
Equity
βUnlevered firm= _________
× βEquity [14A.2]
Debt + Equity
Equity
βUnlevered firm= _______________
× βEquity [14A.3]
Equity + (1 − TC ) × Debt
Number of new shares = Funds to be raised∕Subscription price [15.1]
Number of rights needed to buy a share of stock = Old shares∕New shares [15.2]
Ro = (Mo − S)∕(N + 1) [15.3]
where
Mo = common share price during the rights-on period
S = subscription price
N = number of rights required to buy one new share
Me= Mo− Ro [15.4]
Re= (Me− S ) ∕ N [15.5]
Percentage change in EPS
Degree of financial leverage = _____
[16.1]
Percentage change in EBIT
DFL = ___
EBIT [16.2]
EBIT − Interest
Vu = EBIT∕REu = VL = EL + DL [16.3]
where
Vu = Value of the unlevered firm
VL = Value of the levered firm
EBIT = Perpetual operating income
REu = Equity required return for the unlevered firm
EL = Market value of equity
DL = Market value of debt
RE = RA + (RA − RD ) × (D∕E ) [16.4]
βE= βA× (1 + D∕E ) [16.5]
Value of the interest tax shield =
(TC × RD × D)∕RD [16.6]
= TC × D
VL = VU + TC × D [16.7]
RE = RU + (RU − RD ) × (D∕E ) × (1 − TC ) [16.8]
[ ]
(1 − TC ) × (1 − TS)
VL = VU + 1 − ________________
× D [16A.1]
1 − Tb
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Formula Sheet
Net working capital + Fixed assets = Long-term debt + Equity [18.1]
Net working capital = (Cash + Other current assets ) − Current liabilities [18.2]
Current −
Cash = Long-term debt + Equity + Current assets −
Fixed [18.3]
liabilities (other than cash) assets
Operating cycle = Inventory period + Accounts receivable period [18.4]
Cash cycle = Operating cycle − Accounts payable period [18.5]
Cash collections = Beginning accounts receivable + 1 ∕ 2 × Sales [18.6]
Accounts receivable = Average daily sales × ACP [20.1]
Cash flow (old policy ) = (P − v ) Q [20.2]
Cash flow (new policy ) = (P − v ) Q′ [20.3]
PV = [ (P − v ) (Q′ − Q ) ]∕ R [20.4]
Cost of switching = PQ + v(Q′ − Q) [20.5]
where
PQ = present value in perpetuity of a one-month delay in receiving the
monthly revenue of PQ
NPV of switching = −Cost of switching + PV of future incremental cash inflows [20.6]
= −[PQ + v(Q′ − Q)] + (P − v)(Q′ − Q)∕R
NPV = 0 = − [ PQ + v(Q′ − Q ) ]+(P − v ) (Q′ − Q ) ∕ R [20.7]
NPV = − v + (1 − π ) P′∕ (1 + R ) [20.8]
NPV = − v + (1 − π ) (P − v ) ∕ R [20.9]
Score = Z = 0.4 × [ Sales∕Total assets ] +3.0 × EBIT∕Total assets [20.10]
Total carrying costs =
Average inventory × Carrying costs per unit [20.11]
= (Q∕2) × CC
Total restocking cost = Fixed cost per order × Number of orders [20.12]
= F × (T∕Q)
Total costs =
Carrying costs + Restocking costs [20.13]
= (Q∕2) × CC + F × (T∕Q)
Carrying costs = Restocking costs [20.14]
(Q*∕2) × CC = F × (T∕Q*)
2T × F
Q∗2= _____ [20.15]
CC
_______
2T ×
√
Q = __
∗ F [20.16]
CC
(E [ S1] − S0) ∕ S0= hFC
− hCDN
[21.1]
E [ S1] = S0× [ 1 + (hFC
− hCDN
) ] [21.2]
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Formula Sheet
E [ St] = S0× [ 1 + (hFC
− hCDN
) ]t [21.3]
F1∕ S0= (1 + RFC
) ∕ (1 + RCDN
) [21.4]
(F1− S0)∕S0= RFC
− RCDN
[21.5]
F1= S0× [ 1 + (RFC
− RCDN
) ] [21.6]
Ft= S0× [ 1 + (RFC
− RCDN
) ]t [21.7]
E [ S1] = S0× [ 1 + (RFC
− RCDN
) ] [21.8]
E [ St] = S0× [ 1 + (RFC
− RCDN
) ]t [21.9]
RCDN
− hCDN
= RFC
− hFC
[21.10]
NPV = VB*− Cost to Firm A of the acquisition [23.1]
C1= 0 if (S1− E ) ≤ 0 [25.1]
C1= S1− E if (S1− E ) > 0 [25.2]
C0≤ S0 [25.3]
C0 ≥ 0 if S0 − E < 0 [25.4]
C0 ≥ S0 − E if S0 − E ≥ 0
S0 = C0 + E∕(1 + Rf) [25.5]
C0 = S0 − E∕(1 + Rf)
Call option value = Stock value − Present value of the exercise price [25.6]
C0 = S0 − E∕(1 + Rf)t
C0= S0× N(d1) − E ∕ (1 + Rf)t× N(d2) [25A.1]
_
d1 = [ln(S0∕E) + (Rf + 1∕2 × σ2) × t]∕[σ × √
t ] [25A.2]
_
d2 = d1 − σ × √ t
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Formula Sheet
ONLINE
Appendix 4A
EFN =
Increase in total assets − Addition to retained earnings − New borrowing [4B.1]
= A(g) − p(S)R × (1 + g) − pS(R) × (1 + g)[D∕E]
ROE = p(S∕A ) (1 + D∕E ) [4B.2]
Appendix 7B
NPV = (co − cN)∕cN × $1,000 − CP [7B.1]
Appendix 19A
Opportunity costs = (C ∕ 2 ) × R [19A.1]
Trading costs = (T⁄C ) × F [19A.2]
Total cost = Opportunity costs + Trading costs = (C⁄2 ) × R + (T⁄C ) × F [19A.3]
__________
C* = √
(2T × F)∕R [19A.4]
C * = L + (3⁄4 × F × σ2⁄R )1⁄3 [19A.5]
U * = 3 × C * − 2 × L [19A.6]
Average cash balance = (4 × C * − L ) ⁄3 [19A.7]
Appendix 20A
Net incremental cash flow = P′Q × (d − π ) [20A.1]
NPV = − PQ + P′Q × (d − π ) ∕ R [20A.2]
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