formulas

Question 1

Weighted Average Contribution Capital (WACC)

Answer 1

(debt weighting x after-tax Rl) + (Equity weighting x RE)

Rl = required rate of return on debt (liabilities)
RE = required rate of return on equity

Question 2

leverage

Answer 2

leverage (or gearing) is a measure of the extent to which the entity utilises debt to finance its assets.

= interest bearing liabilities / total assets x 100

amount of debt (interest bearing liabilities) / total assets (interest bearing liabilities + E) x 100

Question 2

Return on equity
(profitability indicator)

Answer 2

Rate of which management has taken capital from shareholders and turned it into net profit.

profit available to ordinary shareholders/ ordinary shareholders’ equity x 100. (?)

Question 3

return on assets
(profitability indicator)

Answer 3

The ability of the entity to utilise its resources to generate returns.

EBIT/ATA x 100

Question 4

gross profit margin
(profitability indicator)

Answer 4

an indicator of (but not the same as) mark-up

gross profit / sales revenue x 100

Question 5

mark up %

Answer 5

gross profit / cost of sales

Question 6

EBIT profit margin
(profitability indicator)

Answer 6

the rate at which sales revenue generates EBIT

net profit / sales revenue x 100

Question 7

cash flows to sales ratio
(profitability indicator)

Answer 7

The rate at which sales revenue generates operating cash flow.

net operating cash flows / sales revenue x 100

Question 8

asset turnover
(efficiency ratio)

Answer 8

Indicates the effectiveness of the entities assets to generate sales revenue, how well the entity is managing its investment in current and non current assets.

sales revenue / ATA x 100

Question 9

ROA (link)

Answer 9

PM. x ATO

Question 10

inventory turnover
(efficiency ratio)

Answer 10

The avg. number of days inventory is held i.e. number of days b/w purchase and sale.

average inventory x 365 / cost of sales = n days

Question 11

days sales outstanding
(efficiency ratio)

Answer 11

average trade receivables x 365 / sales revenue = n days

Question 12

days purchases outstanding
(efficiency ratio)

Answer 12

average trade payables. x 365 / (cost of sales + net increase in inventory)

Question 13

current ratio
(liquidity ratio)

Answer 13

current assets / current liabilities

Question 14

quick ratio
(liquidity ratio)

Answer 14

cash + receivables / current liabilities - overdrafts

Question 15

cash flow ratio
(liquidity ratio)

Answer 15

The amount of operating cash flow available to service current liabilities.

net operating cash flow / current liabilities = n times

Question 16

debt ratio
(capital structure)

Answer 16

The extent to which the entity has used debt to finance its investment in assets.

Total liabilities / total assets x100

Question 17

equity ratio

Answer 17

measures the dollar of equity per dollar of assets.

total equity / total assets x 100

Question 18

debt to equity ratio

Answer 18

measures the dollar of liabilities per dollar of equity.

Total liabilities / total equity x 100

Question 19

interest coverage ratio / times interest earned
(capital structure)

Answer 19

The ability of the entity to generate earnings to cover financing costs

EBIT / finance costs = n times

Question 20

Debt coverage ratio
(capital structure)

Answer 20

Measures the entity’s capacity to remain solvent in the longer term.

non current liabilities / net operating cash flow = n times

Question 21

expense ratio
(profitability indicator)

Answer 21

Rate at which sales revenue is absorbed by a particular expense or cost centre.

selling and marketing expenses / sales revenue x 100 = n%

Question 22

Earnings per share
(market performance ratios)

Answer 22

Profit available to ordinary shareholders / average no. of ordinary shares on issue = n cents per share

Question 23

dividend payout ratio

Answer 23

The percentage of profits distributed as dividends to shareholders.

dividends per share / earnings per share = n %. ??????

Question 23

price earnings ratio

Answer 23

The number of years of earnings the market is prepared to pay for the entities shares.

current market price/earnings per share

Question 24

net tangible asset backing per share

Answer 24

Measures the book value of the entities net tangible assets (as reported in the balance sheet) per ordinary share on issue.

ordinary shareholders’ equity - intangibles / average no. ordinary shares on issue = n cents per share

Question 25

breakeven point in units

Answer 25

fixed costs / contribution margin per unit

Question 26

breakeven point in $ sales

Answer 26

fixed costs / Contribution margin ratio

Question 27

contribution margin ratio

Answer 27

CM per unit / selling price per unit

Question 28

desired profit ->

sales volume (units) to earn desired profit

Answer 28

fixed costs + desired profit before tax / contribution margin per unit

Question 29

margin of safety formula

Answer 29

expected sales volume less break even volume / expected volume of sales

Question 30

profit

Answer 30

contribution margin less fixed costs

Question 31

break even for multiple products

Answer 31

break even units = fixed costs / WACMU

-> apply sales mix to the break even units to get the break even units for each product

Question 32

WACMU:

Answer 32

1.calculate sales mix ratio:
e.g. Product A/Total Product

WACM = sales mix ratio x CMU
…. add them all together

WACMU = WACM(A) + WACM(B) + WACM(C)

Question 33

desired profit question: multiple products

Answer 33

no. of units to earn desired pre tax profit:
Fixed costs + desired profit / WACMU