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