FRA: basics

Question 1

How mixed PnL / BS ratios (including IRs) are calculated?

Answer 1

PnL items are taken to the date (t)

BS items are taken as average of (t) and (t-1)

Question 2

Formula for income tax expense

Answer 2

Cash tax(t) + d(Deferred tax liabilities) - d(Deferred tax assets)

Question 3

Activity ratios

Answer 3

1) Receivables turnover = Sales / Accounts receivables.
Days’ sales outstanding = 365 / Receivables turnover
2) Inventory turnover = COGS / Average inventory
Day’s inventory on hand = 365 / Inventory turnover
3) Payables turnover = (COGS + dInventory) / Account payables
Days’ payables = 365
4) Cash conversion cycle = DOH + DSO - Days’ payables

Question 4

NOPLAT / NOPAT

Answer 4

Operating income * (1 - tax) = Net income + Interest expenses * (1 - tax)
One-time losses and other non-recurring charges must be excluded in this calculation

Question 5

DuPont formula

Answer 5

ROE = net profit margin * asset turnover * financial leverage
Net profit margin = Net income / Sales
Asset turnover = Sales / Assets
Financial leverage = Assets / Equity

Question 6

ROIC

Answer 6

NOPLAT / Invested capital

Advantage comparing to ROE is that it does not depend on the capital structure

Question 7

FCF valuation fundamentals

Answer 7

Firm value (excluding non-operating assets) = FCFF discounted at WACC
Equity value = FCFE discounted at r_equity
Firm value = Equity value + Market value of debt

Question 8

FCFF calculation from Net income

Answer 8

FCFF = NI + NCC + Interest expense*(1 - tax) - FCInv - WCInv
NNC = non-cash charges and gains (depreciation, deferred taxes, amortizations and accruals on bonds, etc.)
FCInv = CAPEX - gains on sale of long-term assets
WCInv = dWC excluding cash, cash eq., notes payable and current portion of long-term debt
NI + NCC - WCInv = CFO!

Question 9

FCFE calculation

Answer 9

FCFE = FCFF - Interest expense*(1 - tax) + Net borrowing
Net borrowing = New debt issues - Debt repayments
FCFE - Dividends +/- Stock issuance/repurchase = dCash

Question 10

FCFF calculation from EBIT(DA)

Answer 10

FCFF = EBIT*(1 - tax) + Dep - WCInv - FCInv
FCFF = EBITDA*(1 - tax) - Dep*tax - WCInv - FCInv

Question 11

Ho preferred stocks are treated?

Answer 11

As debt, however not creating a debt shield:

1) Payments should be included in NCC
2) Issuance - in the Net borrowing
3) Increase share of debt in WACC

Question 12

Strange formula for FCFE forecasting assuming that the firm maintains a target debt ratio

Answer 12

FCFE = NI - (1 - D/A)*(FCInv - Dep + WCInv)

Question 13

Enterprise value (EV)

Answer 13

EV = market value of common stock + market value of preferred stock + market value of debt + minority interest - cash and investments

Question 14

Liquidity ratios

Answer 14

1) Current ratio = Current assets / Current liabilities
2) Quick ratio = (CA - inventories) / CL or (Cash + Marketable securities + Accounts receivables) / CL
3) Defensive interval ratio (DIR) = Current assets / Daily operational expenses

Question 15

Operating assets and liabilities

Answer 15

OA = Assets - (Cash + Marketable securities)
OL = Liabilities - Debt