Formulas

Question 1

Accounting Rate of Return (ARR)

annual % return on the project

Answer 1

ARR = Average annual profit / average (or initial investment)

Average investment = Initial outlay + scrap value / 2

Question 2

Money rate of interest

(real cost of capital - to get discount factor)

Answer 2

(1 + m) = (1 + r) (1 + i)

m= money rate
r = real rate (assume 10%)
i= general inflation (assume 5%)

Question 3

Equivalent annual cost (EAC)

represents a constant annual cashflow that has the same PV as the actual under each proposal

Answer 3

EAC = NPV / annuity factor for the project life

Question 4

Profitability Index

to score single period rationing

Answer 4

Profitability Index = NPV / Initial Investment

Question 5

Sensitivity - variable impacting on cashflows

the sensitivity to a change in a variables cost/price or volume

Answer 5

Sensitivity = NPV of project / PV of cashflows impacted by variable

Question 6

Sensitivity - cost of capital

the sensitivity to a change in discount factor

Answer 6

Sensitivity = IRR - Cost of Capital / Cost of Capital

Question 7

Correlation Coefficient

indicates the strength and direction of a relationship between variables

Answer 7

=CORREL(cell range for array 1, cell range for array 2)

Question 8

Standard deviation

average amount of variability in a data set, showing how far, on average, each results lies from the mean

Answer 8

=STDEV(cell range)

Question 9

Expected values

is the probability-weighted average of the possible outcomes

Answer 9

Expected value = probability of the outcome x the outcome

Question 10

CAPM

Answer 10

𝒓𝒋 = 𝒓𝒇 + 𝜷𝒋(𝒓𝒎 − 𝒓𝒇)

rm = market rate
rf = risk free rate
𝜷 = Beta

Question 11

Theoretical Ex-Rights Price (TERP)

Answer 11

Market capitalisation pre-rights issues + rights proceeds + project NPV / Total number of shares after the rights issue

Question 12

The dividend valuation model - ke

Answer 12

ke = (Do (1 + g) / Po) + g

Po = Current ex-div share price
Do = Current dividend
g = growth in dividends
ke = cost of equity

Question 13

Growth - geometric average

Answer 13

= POWER (most recent value/ oldest value, 1/ number of period of growth)

Question 14

Growth - historical pattern

Answer 14

g = rb

r = PAT / Opening shareholders’ funds
b = proportion of profits retained

Question 15

CAPM - ke

Answer 15

ke = 𝒓𝒇 + 𝜷𝒋(𝒓𝒎 − 𝒓𝒇)

rm = market rate
rf = risk free rate
𝜷 = Beta

Question 16

Cost of preference shares - kp

Answer 16

kp = D / Po

D = constant annual dividend
Po = ex-div market value

Question 17

Cost of irredeemable debt - kd

Answer 17

kd = I (1-T) / Po

Po = ex-interest price of the bond
I = annual interest paid on bond
T = rate of CT