BEC Formulas

Question 1

What is the formula for economic Value added?

Answer 1

EVA = NOPAT - (WACC * Capital invested)

Question 2

Formula(s) for Return on equity (ROE)?

hint: 3 total

Answer 2

SIMPLE:
ROE = Net income / Shareholder’s equity

INTERMEDIATE:
ROE = Return on assets x Leverage
AKA
Net inc / total assets * Total Assets / Equity

Advanced:
ROE = Net Profit Margin x Asset Turnover x Financial Leverage

AKA

ROE = Net income / Sales * Sales / Assets * Assets / Equity

Question 3

What is the formula for Return on Investment?

Answer 3

ROI = Net Income / Debt plus Equity

NOTE: IF debt and equity are not given THAN you can use Net Income / AVG total assets

Question 4

Formula for return on Assets?

Answer 4

ROA = Net income / AVERAGE total assets

Question 5

Investment turnover formula?

Answer 5

Investment Turnover = Net Sales / Debt + Equity

Question 6

What is the formula for Asset turnover?

Answer 6

Asset Turnover = Net Sales / Average Total Assets

Question 7

High low for cost per unit?

Answer 7

High cost - Low cost / High units - Low Units
**

Question 8

How do you adjust a total loan payment to state the amount worth in real terms using an inflation rate?

Answer 8

Divide the interest plus principle at the actual rate
BY
1+inflation rate

EX/ 200,000 X 1.03 = $206,000. The $206,000 amount repaid is readily adjusted for the 2% inflation by dividing it by a factor of 1.02 ($206,000 / 1.02 = $201,961), which is 1 plus the 2% inflation rate. Inflation reduces purchasing power and will reduce the valuation of a transaction. Although the lender received $206,000 from the borrower, the value after inflation is not $206,000 but $201,961. The amount of purchasing power lost, (should the exam ask) is the difference of $4,039.

Question 9

What is the formula for residual income?

Answer 9

Residual income = EBIT aka net operating income MINUS (avg invested income * the imputed interest rate)