Financial Ratio Summary

Question 1

net working capital ratio

Answer 1

net working capital / total assets

Question 2

degree of financial leverage

Answer 2

% change in net income / % change in EBIT

EBIT / EBT

Question 3

degree of operating leverage

Answer 3

% change in EBIT / % change in sales

contribution margin / EBIT

Question 4

financial leverage ratio (equity multiplier)

Answer 4

assets / equity

Question 5

interest coverage (times interest earned)

Answer 5

EBIT / interest expense

Question 6

ROA

Answer 6

net income / average total assets

Question 7

ROE

Answer 7

net income / average equity

Question 8

market to book ratio

Answer 8

current stock price / book value per share

Question 9

price earnings ratio

Answer 9

market price per share / EPS

Question 10

book value per share

Answer 10

(total stockholders’ equity - preferred equity) / number of common shares outstanding

Question 11

basic EPS

Answer 11

(net income - preferred dividends) / weighted average common shares outstanding

number of shares outstanding is weighted by the number of months shares are outstanding

Question 12

diluted EPS

Answer 12

(net income - preferred dividends) / diluted weighted average common shares outstanding

Diluted EPS adjusts common shares by adding shares that may be issued for convertible securities and options

Question 13

earnings yield

Answer 13

EPS / current market price per common share

Question 14

dividend yield

Answer 14

annual dividends per share / market price per share

Question 15

dividend payout ratio

Answer 15

common dividend / earnings available to common shareholders

Question 16

shareholder return

Answer 16

(ending stock price - beginning stock price / annual dividends per share) / beginning stock price

Question 17

DuPont ROA

Answer 17

net profit margin x total asset turnover

(net income / sales) x (sales / average total assets)

net income / average total assets

Question 18

DuPont ROE

Answer 18

ROA x financial leverage

(net income / average total assets) x (average total assets / average equity)

net income / average equity

Question 19

sustainable growth rate

Answer 19

(1 - dividend payout ratio) x ROE

Question 20

price elasticity of demand

Answer 20

(change in quantity / average of quantities) / (change in price / average of prices)

Question 21

profitability index

Answer 21

pv of future cash flow / initial investment

Question 22

Expected return using CAPM

Answer 22

risk free rate + [beta coefficient x (market rate risk - risk free rate)]

Question 23

Annualized cost of not taking a discount

Answer 23

[discount % / (1 - discount %)] x [days in year / (total payment period - discount period)]

Question 24

effective interest rate on discounted loan

Answer 24

rate / (1 - rate%)

Question 25

working capital turnover

Answer 25

sales / working capital

Question 26

Usable funds

Answer 26

Amount needed = invoice amount x (1 - discount %)

Question 27

Loan amount on discounted loans

Answer 27

Usable funds / (1 - stated rate)

Question 28

Effective rate

Answer 28

net interest expense / usable funds

Question 29

loan amount on loans with compensating balances

Answer 29

usable funds / (1-compensating balance %)

Question 30

effective rate with compensating balance

Answer 30

stated rate / (1 - compensating balance %)

Question 31

effective rate on discounted loan with compensating balance

Answer 31

stated rate / (1 - state rate - compensating balance %)

Question 32

annualized rate of commercial paper

Answer 32

[(face value - net proceeds) / Net proceeds] x number of terms per year

Question 33

annual benefit of reducing float

Answer 33

(daily cash receipts x days of reduced float) x opportunity cost of funds

Question 34

face amount of a loan with discounted (paid in advance) interest

Answer 34

amount needed / (1 - stated rate)

Question 35

cost of capital for preferred stock

Answer 35

dividend / (par value - flotation cost)

Question 36

Dividend growth model

Answer 36

[last dividend paid x (1 + growth rate)] / (discount rate - dividend growth rate)

Question 37

preferred stock valuation

Answer 37

dividend per share / cost of capital

Question 37

component cost of debt

Answer 37

effective interest rate x (1 - marginal tax rate)

Question 38

component cost of preferred stock

Answer 38

cash dividend on preferred stock / market price of preferred stock

Question 39

component cost of common stock

Answer 39

cash dividend on common stock / market price of common stock

Question 40

cost of new debt

Answer 40

annual interest / net issue proceeds

Question 41

cost of new preferred stock

Answer 41

next dividend / net issue proceeds

Question 42

cost of new common stock

Answer 42

[(next dividend / net issue proceeds)] + dividend growth rate

Question 43

increased investment in receivables

Answer 43

incremental variable costs x (incremental average collection period / days in year)

Question 44

cost of change in credit terms

Answer 44

increased investment in receivables x opportunity cost of funds

Question 45

forward premium or discount

Answer 45

[(forward rate - spot rate) / spot rate] x (days in year / days in forward period)