Financial Management Formulas

Question 1

Inventory Conversion Period equation

Answer 1

Inventory Conversion Period = Avg. Inventory/COGS per day

Question 2

Receivables Conversion Period equation

Answer 2

Receivables Conversion Period = Avg. A/R /Credit Sales per day

Question 3

Payables Deferral Period Equation

Answer 3

Payables Deferral Period = Avg. A/P / Purchases per day

Question 4

Economic Order Quantity (EOQ) equation

and define 3 quantities

Answer 4

EOQ = squ. Rt(2aD/k)

a = ordering cost per order
D = Annual Demand
k = carrying cost for 1 unit for 1 year

Question 5

Reorder Point equation 3 parts

Answer 5

Reorder Point =

(# of Units Sold per Day X Purchase Lead Time in days) + Safety Stock

Question 6

Nominal Rate for Discount Period equation 4 parts

Answer 6

Nominal Rate for Discount Period =
[Discount %/(1 - Discount %)]
X (360 or 365 days/[Payment Period - Discount Period]

Question 7

Degree of Operating Leverage (DOL) equation

Answer 7

Degree of Operating Leverage =

% change in Operating Income/% change in unit volume

Question 8

Degree of Financial Leverage (DFL)

Answer 8

Degree of Financial leverage = % change EPS/ % change EBIT

Question 9

Cost of Debt (After tax) equation

Answer 9

Cost of Debt (After tax) = Interest Rate x (1 - tax rate)

Question 10

Cost of Debt (Before tax) equation

Answer 10

Cost of Debt (Before tax) = interest pmt/(debt price - floatation cost)

Question 11

Cost of Preferred Equity Equation

Answer 11

Cost of Preferred Equity = Preferred Div/Preferred Stock Issue Price

Question 12

Capital Asset Pricing model equation

And define 4 variables

Answer 12

Ks = Krf + (Km - Krf)bi

Ks = cost of existing common equity
Krf = risk free rate
Km = expected market return
Bi = beta

Question 13

Ks

Answer 13

Cost of existing common equity

Question 14

Bond Yield-Plus Approach equation

Answer 14

Ks = Long term Debt Interest Rate + (3% to 5% Risk Premium)

Question 15

Dividend-Yield-Plus-Growth-Rate Approach equation

Define 4 parts

Answer 15

Ks = (D1/P0) + Expected g

Ks = cost of existing common equity
D1 = next expected dividend
P0 = current stock price
g = growth rate in earnings

Question 16

Cost of new common stock equation

Define 5 parts

Answer 16

Ks = (d1/P0 - F) + Expected g

Ks = cost of new common equity
D1 = next expected dividend
P0 = current stock price
g = growth rate in earnings
F = floatation cost per share

Question 17

Cash Conversion Cycle equation 3 parts

Answer 17

Cash Conversion Cycle =
Inventory Conversion Period + Receivables Conversion Period
- Payables Deferral Period