Foundation of Business Finance

Evaluation of Financial Policy FRL 440 Formula Sheet Prepared by P. Sarmas

Tax Liability Average Tax Rate  Taxable Income

Cash Flow from Assets = Cash Flow to Creditors + Cash Flow to Stockholders

Operating Cash Flow Interest Paid Dividend Paid - Net Working Capital - Net New Borrowing - Net New Equity - Net Capital Spending Cash Flow to Creditors Cash Flow to Stockholders Cash Flow from Assets

EBIT Ending Net Fixed Assets + Depreciation - Beginning Net Fixed Assets - Taxes + Depreciation . Operating Cash Flow Net Capital Spending

Ending Net Working Capital (CA – CL) - Beginning Net Working Capital (CA-CL) Change in Net Working Capital

Ending L.T. Debt Ending Equity - Beginning L.T. Debt - Beginning Equity Net New Borrowing - Addition to Retained Earnings Net New Equity

Current Assets Current Ratio  Current Liabilities

Current Assets - Inventories Quick Ratio  Current Liabilities Cash Cash Ratio  Current Liabilities

Total Debt Total Assets - Total Equity Total Debt Ratio   Total Assets Total Assets

Total Debt Debt - to - Equity Ratio  Total Equity

EBIT Time Interest Earned  Interest

EBIT  Depreciation Cash Coverage Ratio  Interest

EBIT  Lease Pmt. Fixed Charge Coverage Ratio  Sinking Funds Interest  Lease Pmt.  1 T

Total Assets D 1 Equity Multiplier  or EM  1  Equity E D 1 TA

Sales Total Assets Turnover  Total Assets

Sales Fixed Assets Turnover  Net Fixed Assets Sales Cost of Goods Sold Inventory Turnover  OR Inventory Inventory

Receivables ACP or DSO  Sales 365

Net Income Profit Margin (ROS)  Sales

Net Income ROA  Total Assets

Net Income ROE  Common Equity

Net Income  Interest  Preferred Dividnd Return on Capital  Debt  Common Equity  Preferred Stock

EBIT Basic Earnings Power  Total Assets

Net Income Earnings per Share  No. Shares Outstanding Market Price per Share Price - Earnings Ratio  EPS

Dividend Payout Ratio = Dividends  Net Income

ROADuPont = Profit Margin * Total Assets t/o

Market Price per Share Market Value - Book Value Ratio  Book Value per Share

ROEDuPont = Profit Margin * Total Assets t/o * Equity Multiplier

ROA * b Internal Growth Rate  1- (ROA * b)

ROE * b Sustainable Growth Rate  1- (ROE * b)

Earnings Retention Ratio = b = 1 – Dividend Payout Ratio = 1- DIV/NI

t FV  PV (1 r)  PV * FVIFr,t

FV PV   FV * PVIFr,t (1 r)t

r m*t FV  PV (1 )  PV * FVIFr m ,mt m

FV PV   FV * PVIFr r m*t ,mt (1 ) m m r EAR  (1 )m 1 m

FV  PV * er*t

PV  FV * er*t

(1 r)t 1 FVA  C *    C * FVIFAr,t  r 

1 1  PVA  C *   C * PVIFA  t  r,t r r * (1 r) 

C PV  Perpetuity r

(1 r)t 1 FVA  Cdue *   * (1 r)  Cdue * FVIFAr,t * (1 r)  r 

1 1  PVA  C *  * (1 r)  C * PVIFA * (1 r) due  t  due r,t r r * (1 r) 

Reminder: In the case of frequent compounding or discounting, divide the nominal rate (APR) by “m” and multiply period by “m”. “m” is number of times interest is compounded/discounted in one period. Also, annuity interval must match the frequency (m) of compounding or discounting. 1 1  FV Bond Value  C *    t  t r r * (1 r)  (1 r)

(1+R) = (1+r)*(1+h)

Coupon Coupon Rate  FV Coupon Current Yield  VB  1 1  FV V  C *   B  t  t YTM YTM * (1 YTM )  (1 YTM )

D1 D2 D3 P0     ...... (1 r)1 (1 r)2 (1 r)3 D D D D  D 1  P  1  2  3  .....  n  n1 * 0 1 2 t n  n  (1 r) (1 r) (1 r) (1 r) r  gc (1 r) 

D P  0 r D P  1 0 r  g D r  1  g P0 n Dn  D0 * (1 g) n CF NPV  t  (CF )  t 0 t1 (1 r)

n CF t  (CF )  0  t 0 t1 (1 IRR)

Last Negative Cum. CF PBP  t  CFt1

n CFt  (1 r)t PI  t1 CF0

n  Net Incomet t1 ARR  n Beginning Value Investment  Ending Value Ivestment 2

n CIF *(1 r) nt n COF  t t  t1  t n to (1 r) (1 MIRR)

Operating Cycle = Inventory Period + Accounts Receivable Period

Cash Cycle = Operating Cycle – Accounts Payable Period Cost of Goods Sold Inventory Turnover  Average Inventory

365 Inventory Period  Inventory Turnover

Credit Sales Receivable Turnover  Average Accounts Receivable

365 Receivable Period  Receivable Turnover

Cost of Goods Sold Payable Turnover  Average Payable

365 Payable Period  Payable Turnover

Beginning  End Average  2

Operating Cash Flow = EBIT + Depreciation – Taxes

Operating Cash Flow = (Sales – OC – Depreciation)*(1-T) + Depreciation

Operating Cash Flow = Net Income + Depreciation

Operating Cash Flow = (Sales – OC)*(1 – T) + T*Depreciation

Book Value of Asset = Original Cost – Accumulated Depreciation

Original Cost  Salvage Value Straight  Line Depreciation  n

VC = Q*v TC = VC + FC NI = (S – FC – VC – D)*(1-T) FC  OCF Q  general P  v FC  D Q  Accounting BEP P  v FC Q  Cash BEP P  v FC  OCF * Q  Financial BEP P  v FC DOL  1 OCF

Q(P  v) DOL  Q(P  v)  FC Q(P  v)  FC EBIT DFL   Q(P  v)  FC  Int EBIT  Int Q(P  v) DTL  DCL  DOL * DFL  Q(P  v)  FC  Int

P  P Capital Gain Yield  t1 t Pt

T R   t R  t1 T    1  2 2 2  VAR(R)  (R  R)  (R  R)  ......  (R  R) T 1  1 2 T  Standard Deviation or SD(R)  VAR(R)

n E(R)   Pr.s * Rs s1 n 2 2    Pr.s *[Rs  E(R)] s1 n 2 2      Prs *[Rs  E(R)] s1

E(Rp) = WA*E(RA) + WB*E(RB) R = E(R) + U

n  p  W j *  j j1

WA WB  ..... WN  1

E(RA) = Rf + [E(RM) – Rf]*A

E(R )  R Slope  j f  j

D1 D0 *(1 g) RE   g   g P0 P0

RE  R f   E *(RM  R f ) D RP  P0  E   P   D  WACC    * RE    * RP    * RD *(1 tc ) V  V   V  V  E  P  D

WACC = WE*RE + WP*RP + WD*RD*(1-tc)

WE + WP + WD = 1

FV  P Coupon  0 n YTM approximate  FV  2P0 3

(Revenue- Total Variable Costs - Fixed Costs - Interest)*(1- t) (EBIT  Interest)*(1 t) EPS   Number of Shares Outstanding Number of Shares Outstanding

(Revenue- Total Variable Costs - Fixed Costs - Interest)*(1- t) (EBIT  Interest)*(1 t) ROE   Equity Equity EBIT(1 T ) Vu  Ru (EBIT  Int)(1 T ) V  l WACC

VL  VU

VL  VU  Tc * D

RE  RA  (RA  RD ) * D / E  D  L  U 1 (1 T )  E 

EBIT  K D(1 T) S  d K s V  S  D V  D P  0 n0 D n  n  1 0 P

 (1 Tc )(1 Ts ) Vl  Vu  1   D  (1 Td ) 

DPO = Dividend ÷ Net Income

Dividend Yield = Dividend per share ÷ Price per share

Modified Accelerated Cost Recovery System

Property Class Year 3-Year 5-Year 7-Year 1 33.33% 20.00% 14.29% 2 44.44% 32.00% 24.49% 3 14.82% 19.20% 17.49% 4 7.41% 11.52% 12.49% 5 11.52% 8.93% 6 5.76% 8.93% 7 8.93% 8 4.45%