F9 Formulae Flashcards
Earnings per share
This is the basic measure of a company’s performance from an ordinary shareholder’s point of view. It is the amount of profit, in cents, attributable to each ordinary share. The principles of calculating EPS are simple:
Profit after tax and preference share dividend / number of ordinary shares in issue
ROCE
ROCE gives a measure of how efficiently a business is using the funds available. It measures how much is earned per $1 invested.
PBIT/capital employed (equity+net) x100
Were no preference share
PBIT = Operating profit
CE= Non-current assets + Current assets -Current liabilities
= Share capital + Reserves + Long-term loans
ROE = PAT/ shareholders funds
Disadvantage
• uses profit which is not directly linked to the objective of maximising shareholder wealth
P/E ratio and earnings yield
PE = Share price (price per share) / EPS
Earnings yield = EPS/ price per share
Value of a company = total earnings x (1/ earnings yield)
Value per share = EPS x (1/earnings yield)
Return on Equity
(Profit after tax and preference dividends / ordinary share capital and reserves ) x 100%
Dividend per share
Total ordinary dividend for the period / total number of shares issued
Total shareholders return
Dividend per share + change in share price / share price at start of period
Perpetuity factor
1 / r
PV of growing perpetuity =
CF @ T1 x (1/r)
Sensitivity margin
NPV / present value of cash flow under consideration (net of tax)
What is the Cost of capital/ equity - (Dividend Growth Model) rearranged ?
Po = (Do (1+g) / (re -g))
Ke = (Do (1+g) / Po) + g
Po = current ex div share price Do = current dividend g = constant growth in dividend re = return on equity or cost of equity
Weakness of the DVM
- sound basic premise, but has weakness because
- inaccurate input data (current market price, future dividend patterns)
- growth in earnings is ignored.
Irredeemable debt
Kd (1-T) = I (1 - T) / MV
I = interest T = tax MV = ex interest market value
Preference share
Kp = D/Po or
MV of PS is Po = D/Kp
D = constant annual pref dividend Po = ex div MV Kp = cost of preference share
Operating gearing
Fixed cost / Total cost
= measure of the extent to which operating cost are fixed rather variable , affects the level of business risk in the firm
Baum Model for optimal cash holding
√(2FS)/ I
F = cost of obtaining funding S= Amount of cash required per annum I = cost of holding $1 for one year
Total annual cost (TAC) for cash
Annual order cost + Annual holding cost
TAC = FS/Q + I Q/2
Q = the amount of cash to be raised.
What is the PV of a future cash flow ?
PV = FV x (1+r) - n
FV = Future value r = rate n = number of years
What is the present value of an annuity ?
PV of Annuity = (A x 1- (1+r) -n)/r
PV = Present Value A = constant return r = period interest rate (decimal) n = number of period
What is the present value of a perpetuity and perpetuity with growth ?
A perpetuity is an annual cash flow that occurs for ever
PV = A x (1/r)
PV = present value A = constant return (cash flow) r = period interest rate
(1/r) = annuity factor
The PV of a growing perpetuity
PV = CF at T1 x 1/ r-g
1/ r-g perpetuity factor with growth
Cost of redeemable debt
Timing CF DF
0 (Po)
1-n 1(1-T)
n Rv
Rv = the redemption value at time n 1(1-T) = the after tax interest payment
Purchasing power parity
S1 = So x (1+hc)/(1+hb)
S1 = spot rate in one periods time (using direct quation I.e how much home currency does each unit of overseas currency equates to)
So = spot rate now hc = inflation in home country hb = inflation abroad
What’s is the fisher formula that can also be used to account for inflation in Discounted cash flow?
(1+i) = (1+r) x (1+h)
(1+money rate)= (1+real rate) x (1+inflation)
i = nominal interest rate or (money rate is inflated)
r = real rate (no inflation) h = inflation rate
In assets replacement decision what is the equivalent annual cost (EAC)
EAC = NPV / Annuity factor for the project life
1 - calculate NPV for each strategy
2- calculate EAC for each strategy
3- choose strategy with lowest EAC
What is the profitability index?
PI = Present value of future cash flow/ initial investment
Discounting a future sum - by rearranging the compounding formula
P = F
——-
(1+r)n
Remember (1+r)-n is the discount factor
PE Ratio & Dividend yield
P/E ratio = Market share price /Earnings per share
————————————————————-
A high PE ratio indicates that investors perceive the firm’s earnings to be of high quality –usually a mixture of high growth and/or lower risk expectations.
Dividend Yield = Dividend per share / Market share price
Current ratio
Current assets / Current liabilities
Quick ratio
(Current assets - inventory) / current liabilities
What’s are the components of the capital asset pricing model?
E(Rf) = Rf + β (Rm - Rf)
Rf = risk free rate of return
Rm = average return on the market
(Rm - Rf) = equity risk premium - average market risk premium
β - Beta factor
CAPAM - can be used to calculate a risk adjusted cost of equity
Historic dividend growth formula
Historic growth
Earnings retention
g = (Do/ Dn years ago) ^1/n -1 = historic growth
g = b*re = earnings retention
re = accounting rate of return = (profits after tax / equity investment) b = earnings retention rate (% or earnings not paid out as dividend)
What is the interest yield ?
The interest yield is the interest or coupon rate expressed as a % of the market price:
Interest rate/ MV of debt - gross = interest $/ MV$
This is a measure of return on investment for the debt holder
Interest cover
Debt interest
What is the total annual inventory cost ?
cod/ quantity + cheque/2
Co D
—–
Q
Ch Q
——
2
