Formula Fun House

Question 1

profit margin =

Answer 1

profit margin =

net income / net sales

Question 2

future value =

Answer 2

future value =

present value x (1+r)^n

Question 3

present value =

Answer 3

present value =

future value / (1+r)^n

r = rate

n = number of periods

Question 4

net present value =

Answer 4

net present value =

future value / (1+r)^n - initial investment

Question 5

present value of annuity =

Answer 5

present value of annuity =

1-(1+r)^-n / r

r = rate

n = number of periods

Question 6

discount factor for perpetuity =

Answer 6

discount factor for perpetuity =

1/r

r = rate

Question 7

present value of perpetuity =

Answer 7

present value of perpetuity =

cash flow / r

Question 8

return on investment =

Answer 8

return on investment =

net income / invested assets

or

(current value of investment - cost investment) / cost of investment

Question 9

internal rate of return =

Answer 9

internal rate of return =

capital investment / net annual cash flows (gives IRR factor)

IRR factor -> find from the table the corresponding rate

The internal rate of return is a metric used in financial analysis to estimate the profitability of potential investments. The internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis. IRR calculations rely on the same formula as NPV does.

Question 10

annual rate of return =

Answer 10

annual rate of return =

expected annual net income / average investment

average investment = (original investment + value at the end of useful life) / 2

Question 11

profitability index =

Answer 11

profitability index =

present value of net cash flows / initial investment

The profitability index (PI) is a measure of a project’s or investment’s attractiveness. The PI is calculated by dividing the present value of future expected cash flows by the initial investment amount in the project.

Question 12

cash payback period =

Answer 12

cash payback period =

cost of capital investment / net annual cash flow

Ignore salvage value, if it occurs after the payback period.

Question 13

working capital =

Answer 13

working capital =

current assets - current liabilities

Question 14

cash conversion cycle =

Answer 14

cash conversion cycle =

inventory days + trade recivable days - trade payable days

Question 15

gearing ratio =

Answer 15

gearing ratio =

long term debt / equity

or

long term debt / (debt + equity)

Question 16

dividend yield =

Answer 16

dividend yield =

dividend per share / ex-dividend market price per share

The dividend yield is the cash return a shareholder is currently expecting on the shares of a company. Shareholders look for both dividend yield and capital growth. The dividend yield is therefore an important aspect of a share’s performance.

Question 17

earnings per share =

Answer 17

earnings per share =

profit distributable to ordinary sharehodlers / weighed-average number of ordinary shares

Question 18

price-earnings ratio =

Answer 18

price-earnings ratio =

market price per share / earnings per share

Question 19

return on capital employed =

Answer 19

return on capital employed =

estimated average accounting profits / estimated average investment

Using accounting profits (so after depreciation) not cash. Before tax.

You may sometimes see “inital investment” on the bottom line, examiner wants “average investment” = (initial investment + disposal value)/2

or

EBIT (operating income) / total assets - current liabilities

Question 20

current ratio =

Answer 20

current ratio =

current assets / current liabilities

Question 21

acid test ratio =

Answer 21

acid test ratio =

(cash + short term investments + accounts receivable) / current liabilities

Question 22

accounts receivables turnover =

Answer 22

accounts receivables turnover =

net credit sales / average net accounts receivable

Measures the number of times, on average, the company collects receivables during the period.

A variant of the accounts receivable turnover ratio is to convert it to an average collection period in terms of days: 365 / accounts receivables turnover

Question 23

cost of goods sold =

Answer 23

cost of goods sold =

beginning inventory + cost of goods purchased - ending inventory (merchandiser)

beginning finished goods inventory + cost of goods manufactured - ending finished goods inventory (manufacturer)

Question 24

inventory turnover =

Answer 24

inventory turnover =

COGS / average inventory

Question 25

asset turnover =

Answer 25

asset turnover = net sales / average total assets

Question 26

return on assets =

Answer 26

return on assets = net income / average total assets

Question 27

return on common stockholders equity =

Answer 27

return on common stockholders equity = net income - preference dividends / average common stockholders equity

Question 28

payout ratio =

Answer 28

payout ratio = cash dividends / net income The payout ratio is a financial metric showing the proportion of earnings a company pays its shareholders in the form of dividends, expressed as a percentage of the company's total earnings.

Question 29

debt to assets ratio =

Answer 29

debt to assets ratio = debt / assets

Question 30

times interest earned =

Answer 30

times interest earned = income before income taxes and interest expense / interest expense

Question 31

unit contribution margin =

Answer 31

unit contribution margin = unit selling price - unit variable costs It represents the incremental money generated for each product/unit sold after deducting the variable portion of the firm's costs.

Question 32

contribution margin ratio =

Answer 32

contribution margin ratio = unit contribution margin / unit selling price

Question 33

break-even point in units =

Answer 33

break-even point in units = fixed costs / contribution margin per unit contribution margin per unit = unit selling price - unit variable costs

Question 34

break-even point in EUR =

Answer 34

break-even point in EUR = fixed costs / contribution margin ratio

Question 35

required sales in units (contribution margin technique) =

Answer 35

required sales in units (contribution margin technique) = (fixed costs + target net income) / contribution margin per unit

Question 36

required sales in EUR (contribution margin technique) =

Answer 36

required sales in EUR (contribution margin technique) = (fixed costs + target net income) / contribution margin ratio

Question 37

target cost =

Answer 37

target cost = market price - desired profit Cost that provides the desired profit when the market determines a product’s price.

Question 38

In cost-plus pricing: target selling price =

Answer 38

In cost-plus pricing: target selling price = cost + (markup x cost)

Question 39

In cost-plus pricing: markup (profit) =

Answer 39

In cost-plus pricing: markup (profit) = selling price - cost

Question 40

margin of safety in EUR =

Answer 40

margin of safety in EUR = actual (expected) sales - break-even sales

Question 41

margin of safety ratio =

Answer 41

margin of safety ratio = margin of safety in EUR / actual (expected) sales

Question 42

total cost of work in progress =

Answer 42

total cost of work in progress = beginning work process inventory + total manufacturing costs

Question 43

time and material pricing =

Answer 43

time and material pricing = labour charges + material charges + material loading charges Labour charges expressed as a rate per hour of labor. Includes: a) direct labor cost (includes fringe benefits); b) selling, administrative, and similar overhead costs; c) allowance for desired profit (ROI) per hour Material loading charge added to invoice price of materials. Covers the costs of purchasing, receiving, handling, storing + desired profit margin on materials. Expressed as a percentage of estimated costs of parts and materials for the year:

Question 44

negotiated transfer price in case of NO capacity =

Answer 44

negotiated transfer price in case of NO capacity = variable cost + opportunity cost

Question 45

negotiated transfer price in case of EXCESS capacity =

Answer 45

negotiated transfer price in case of EXCESS capacity = variable cost = minimum transfer price In the minimum transfer price formula, variable cost is the variable cost of units sold internally. May differ - higher or lower - for units sold internally versus those sold externally. The minimum transfer pricing formula can still be used – just use the internal variable costs.

Question 46

absorbption-cost pricing =

Answer 46

absorbption-cost pricing = manufacturing costs per unit + (markup percentage x manufacturing cost per unit) = target selling price 1. Compute the unit manufacturing cost. 2. Compute the markup percentage – must cover the desired ROI as well as selling/ administrative expenses. 3. Set the target selling price

Question 47

variable cost pricing =

Answer 47

variable cost pricing = variable cost per unit + (markup percentage x variable cost per unit) = target selling price

Question 48

high-low method =

Answer 48

high-low method = Step 1: determine variable costs per unit using the following formula: change in total costs / high - low activity level = variable cost per unit Step 2: determine fix costs. Substract the total variable cost at either the high or the low activity level from the total cost at that activity level: high (or low) activity level - total variable cost = total fixed costs High-Low Method uses the total costs incurred at the high and the low levels of activity to classify mixed costs into fixed and variable components. The difference in costs between the high and low levels represents variable costs, since only variable-cost element can change as activity levels change.