All Ratios Flashcards
What are the 2 ways of calculating ARR (Accounting rate of return) and Formulas
1.) Initial Mrthod
Average annual pre tax profit/Initial investment
2.) Average method
Average annual pre tax profit/Average investment.
What is the average annual pre tax profit and how to calculate.
it is profit before tax but after depreciation.
Total pre tax profit (Over lifetime of project)/Life of Investment
How to calculate average investment
(Initial investement - Residual value)/2
What are the positives and negatives of ARR?
Positives:
1.) Ease
2.) Percentage measured
3.) Life of project - Whole life of project.
Negatives:
1.) Profit Based -not cash
2.) Percentage measured - not an absolute measure
3.) Time value of money
What is the formula for payback period?
Initial investment/Annual Cashflow
This is only if the cashflow is the same every year.
What are the positives and negatives of payback period?
Postives:
1.) Cash based
2.) Measure of risk
3.) Focus of early cashflow
Negatives:
1.) Time value of money
2.) Time measure - no certainty it will maximise shareholder wealth
3.) Later Cashflow
What is the calculation for NPV?
(Total sum of discounted present cashflows + Initial Investment)
What are the positives and negatives of NPV
Postives:
1.) Time value of money
2.) Cash Based
3.) Life of project
4.) Shareholder Wealth
Negatives:
1.) Difficulty
2.) Appropriate discount rates
3.) Estimating CF’s
What is the initernal rate of return? how to calculate it?
IRR is the discount rate that will make the npv of a project nil
IRR = L+(NPVL/(NPVL-NPVH))*(H-L)
L = Lower discount rate
H = Higher discount rate
NPVL = NPV calculated at L
NPVH = NPV calculated at H
What are the positives and negatives of IRR?
Positives:
1.) Time value of money
2.) Cash based
3.) Life of project
4.) Percentage measured
Negatives:
1.) Assumes cashflows
2.) Unusual cashflows- can be more than one which IRR doesnt take into account
3.) Mutually executive - best IRR may not be best NPV
4.) Not absoulte measure
What is the fisher model and explain formula.
It is a method to calculate the cost of capital (Required rate of return for investors).
i = Money rate
r = Real rate
h = general inflation
What is the calculation of probability analysis? (Expected Value)
Expected Value = Probility x possible outcome
What is sensivtivity analysis and how to calculate it
It’s a measure that calculates the amount of variance a single variable can can make until the project becomes a negative NPV.
NPV of Investment / PV of the cash flow effect of variable being considered.
How to calculate sensitivity of discount rates?
1.) Calculate NPV of investment
2.) Calculate IRR
3.) (IRR - Original discount rate) / Original discounted rate
How to calculate Equivalent Annual Cost formula?
EAC = PV of cost for one replacement cycle / Annuity rate of cost of capital
what is ? and How to calculate? the theoretical ex-right price (TERP)
It is the share price immediately after a rights issue.
(Total market value of shares pre rights + proceeds from rights) / Total number of shares in issue after rights
How to calulate the value of a rights issue?
Value of right = TERP - Rights issue price
(Rights issue price is the discounted price of the rights)
The calculations for the value of the 3 options shareholders have for a rights issue
1.) Buy rights shares
(Number of shares after RI x TERP) - (Number of RI shares purchased x issue price)
2.) Selling shares
(Number of shares held after RI x TERP) + (Number of rights sold x value per share)
3.) Do nothing
Number of shares held after RI X TERP
How to calculate conversion premiums
Market value of bond - Value of shares if converted today = Conversion Premium.
What are the means of the functions in the growth model that is on the formula sheet
Re = The investors required rate of return
Do = The dividends now E.g just paid or just about to be paid
G = The expected future growth
Po = The market value of shares now (ex-div)
What is the dividends growth rate calculations and Gordon’s growth approximation how are they calculated?
Option 1 - Historical Method
G = SQRT(N) x (Do/Dn)
SQRT = Square root
N = Number of years of dividend growth
Do = Current Dividends
Dn = Dividends N years ago
Option 2 - Gordon’s growth model
G= Bre
B - Proportion of retained earnings
re - Return on re invested funds
How to calculate cost of preference shares?
Kpref = D/Po
D - Preference dividends per share
Po - Current preference share price (ex-div)
How to calculate irredeemable debt?
Kd = (I x (1-T))/Po
Kd - Cost of irredeemable debt
I = Annual Interest in $
T = Corporation Tax
Po = Current market value of debt (ex-int) per nominal value
How to calculate redeemable debt?
1.) Determine cashflows per $100 nominal value
2.) Calculate NPV of teh CF’s at the two different rates
3.) Calculate the IRR
What do the sections of the Capital asset pricing model (CAPM) mean?
E (Ri) = Return required by investors
Rf = Risk free rate
E(rm) = Market rate of return or return on market portfolio
E(rm)-Rf = equity risk premium or Market risk premium
Bi = Beta of teh sercurity or measure of risk of that sercuirity
Ke = Cost of equity
How to calculate the project specific discount rate?
Step 1: We find a proxy company that does the same business as the one we want to enter.
Step 2: We degear the Equity Beta of the proxy to establish the asset Beta.
Step 3: We regear the asset Beta with our own gearing rate.
Step 4: We use the regeared rate in CAPM to calculate the project specific discount rate.
What is the formula for Earnings per Share?
Earnings available to equity shareholders / Number of equity shares in issue
What is the formula for Price/Earnings (P/E) Ratio
Share Price / Earnings per share (EPS)
What is the formula for Dividends per share
Dividends payable to equity shareholders / Number of equity shares in issue
What is the formula for Dividends Yield
Dividends per share (DPS) / Share price
What is the formula for Dividends cover
Earnings per share / Dividends per share
What is the formula for Total shareholder return
Dividends per share (DPS) + change in share price / Share price at the start of the period
What is the formulas for Gearing
1.) Non-current Liabilities / Equity and non current liabilities
2.) Non-current Liabilities / Equity
What is the formula for Interest Cover
Operating Profits / Finance Charge (Interest Payable)
What is the formula for Return on capital employed (ROCE)
Operating Profit / Capital Employed
What is the formula for Return of equity
Earninsg available to equity shareholders / Equity
What is the formulas for operating gearing ratio
1.) Fixed costs / Variable costs
2.) Fixed Costs / Total costs
3.) Contribution / operating profit
4.) % Change in operating profit / % Change in revenue
What is the formula for the cash operating cycle
Inventory days + Receivable days - Payable days = COC
What is the formula for current ratio
Current assets / current liabilities
What is the formula for Quick (Acid Test) Ratio
(Current assets - Inventory) / Current liability
What is the formula for Raw materials invetory days
(Raw materials / Purchases) x 365
What is the formula for Work in progress days
(Inventory / cost of sales) x 365
What is the formula for Finished goods inventory days
(Finished goods inventory / Cost of sales) x 365
What is the formula for trade receivable days
(Trade receivables / credit sales) x365
What is the formula for Trade payable days
(Trade Payables / Credit Purchases) x 365
What is the formula for Working capital turnover
Working capital turnover = Sales revenue / Net Working Capital
Net Working Capital = Inventory + Receivables + Cash - Payables
What is the formula for Inventory days
Raw material days + Wip Days + Finished goods days
What is the formula for Economic order quantity (EOQ)
And what do the elements stand for?
SQRT(2) x (2CoD / Ch)
SQRT(2) : Square Root to the power of 2 (Normal Square root)
Co : The cost of placing an order
D : Annual demand for the product
Ch : The cost of holding one unit of the project for a year.
What is the formula for 1.) Annual holding costs & 2.) Annual Ordering costs & 3.) Annual holding costs
1.) ((EOQ/2) + Buffer Invetory) x Ch
2.) (D/EOQ) x Co
What is the formula for Finance cost of receivables
Average receivables balance x interest costs
What is the formula for average receivables balance
(Recievable days / 365) x credit sales
What is the formula for annual cost of early settlement discount
((1 + (Discount in £ / amount left to pay))^Number of periods) - 1
What is the formula for number of periods
365 / number of days money paid early
What is the formula for average payable days balance
(Payable days / 365) x credit purchases
What is the formula for the annual cost of not taking the early settlement discount from a supplier
(1+ (Discount / Amount left to pay)^Number of periods ) - 1
What is the formula for Baumol Model and describe the elements
Same as EOQ but for Cash.
Co : The admin cost of selling securities or withdrawling from a deposit account
D : Annual demand for cash for day to day operations
Ch : The opportunity cost of holding the cash (The return on securities or interest from deposit accouont)
What is the formula for Miller-Orr Model
Its on the formula sheet (Remember)
How to Calculate the probability of a scenario happening?
Calulate all the situations where the scenario is the answer and then multiply the percentage of each componant together to get the percentage chance of each situation and then all all the percenatges up to calculat the probability of a scenerio.
