CMA USA Part-2 All Formulas
Net Working Capital*
Net Working Capital = Current Assets - Current Liab
Liquidity Ratios: Current Ratio*
Current Ratio = Current Assets / Current Liab
Liquidity Ratios: Quick Acid Test Ratio*
Quick Acid Test ratio = (Cash + Marketable Securities + Net Receivables) / Current Liab
Liquidity Ratios: Cash Ratio
Cash Ratio = (Cash + Marketable Securities) / Current Liab
Liquidity Ratio: Cash Flow Ratio
Cash Flow Ratio = Cash flow from operations / current liab
AR Turnover*
AR Turnover = Net Credit Sales / Average AR
DSO in Receivables*
DSO in AR = days in a year / AR turnover
Inventory Turnover*
Inventory Turnover = COGS / Average inventory
Days Sales in Inventory*
Days sales in inventory = Days in a year / Inventory turnover
AP Turnover
AP Turnover = Purchases / Average AP
Days Purchase in AP
Days Purchase in AP = Days in a year / AP Turnover
Operating Cycle*
Operating Cycle = Days Sales in Receivables + Days Sales in inventory
or
Inventory turnover days + AR turnover days
Cash Cycle
Cash Cycle = Operating Cycle - Days purchases in payables
Fixed Assets Turnover Ratio
Fixed Assets Turnover Ratio = Net Sales / Average Net PPE
Total Assets Turnover Ratio
Total Assets Turnover Ratio = Net Sales / Average total assets
Debt Ratio*
Debt ratio = total liab / total assets
Total Debt to Total Capital Ratio
Total Debt to Total Capital Ratio = Total Debt / Total Capital
lower the ratio the better
Debt to Equity Ratio*
Debt to Equity Ratio = Total Debt / Stockholders' equity
lower the ratio the better
LT Debt to Equity Ratio*
LT debt to Equity Ratio = LT Debt / Stockholders' equity
Times Interest Earned Ratio*
Times Interest Earned Ratio = EBIT / Interest expense including capitalized interest
Degree of operating leverage (DOL) - Single period version
DOL = Contribution Margin / Op Inc or EBIT
Contribution Margin = Net Sales - Variable Costs
DOL Percentage Change Version
DOL Percentage Change Version = % Change in Op Inc or EBIT / % change in Sales
Degree of Financial Leverage (DFL) - Single period version*
DFL = EBIT / EBT
DFL Percentage Change Version*
DFL Percentage Change Version = % Change in NI / % change in EBIT
Return on Sales
Return on Sales = EBIT / Sales
Return on Assets*
ROA = Net Income / Average total assets
ROA Dupont* = Net Profit Margin x Total Asset turnover
Return on Equity*
ROE = Net Income / Average total equity
ROE Dupont = Net Profit Margin x Asset Turnover x Equity Multiplier
Equity Multiplier = Average total assets / average total equity
Return on Common Equity*
ROCE = (Net Income - Preferred Dividends) / Average Common Equity
Common Equity= Total Equity - Preferred Equity
Income available for common shareholders (IACS) = Net income - preferred dividends
ROCE Dupont =( IACS / net sales) x total asset turnover x common equity multiplier
common equity multiplier = average total assets / average common equity
Return on Investment for Common Stock
aka Dividend Growth Model*
Return on investment required for common stock = dividend yield + dividend growth rate
dividend yield = dividend / market price of common stock
Book Value per share*
Book Value per Share = (Total Equity - Liquidation value of preferred equity) / Common Shares Outstanding
Market / Book Ratio or Price Book Ratio*
Market Book Ratio = Market price per share / book value per share
Price / Earnings Ratio****
Price Earnings Ratio = Market Price per share / Diluted earning per share
eg: NI = $588K
10,000 shares preferred $100 par @6%
120,000 shares common $10 par and 5000 shares in treasury stock
Market price = $40
Diluted EPS = 588k - (10,000 shares x $100 x 6%) /120,000 common stock = $4.40 per share
PE ratio = $40/$4.4 = 9.09
Basic Earnings Per Share (BEPS)*
BEPS = IACS / Weighted average number of common shares outstanding
Earnings Yield*
Earnings Yield = EPS / Market price per share
Dividend Payout ratio*
Dividend Payout Ratio = Dividends to common shareholders / IACS or NI
Dividend Yield*
Dividend Yield = Dividend per share / Market price per share
Diluted Earnings per share (DEPS)*
DEPS = IACS / number of common shares outstanding after adjustment for all dilutive securities that could possibly be issued
eg: $2MM of 7.5% convertible bonds
converted into 50,000 shares of common stock
$1MM preferred at 9% 100 par
$1MM common at $10 par
NI = $317M and tax rate of 36%
NI = $317M
Less Pref dividends $1MM x 9% = $90M
Add after tax savings on bond = $2MM bonds x 7.5% x (1- 36%)
IACS = $317M - $90M + $96M = $323M
EPS = $323M / (100,000 shares CS + 50,000 converted stocks)
Expected Rate of Return*
Company A has 2 investments:
Investment A: Rate of Return = 80%; Probability of 60%
Investment B: Rate of return = -50%; probability of 40%
Wt Average (A) = 80% x 60% = 48%
Wt Average (B) = -50% x 40% = -20%
Expected Rate of Return = Wt avg (A) + Wt Avg (B) = 48% + (20%) = 28%
Compare the Expected ROR to another company or stock. the higher the Expected rate of return the better
Standard Deviation*
Standard Deviation of Company A
Square root of:
((ROR Investment A - Expected ROR)^2 x Probability of investment A) + ((ROR Investment B - Expected ROR)^2 x Probability of investment B)
Square root of:
((80% - 28%)^2) x 60%) + ((-50% - 28%)^2 x 40%))
= square root of 4,056 = 63.69%
compare this with Company B
The higher the standard deviation the higher the risk
Coefficient of Variation (CV)*
CV = Standard Deviation / Expected ROR
CV = 63.69% / 28% = 2.275
The lower the ratio the better the risk-return trade-off
Beta coefficient*
Beta coefficient = Return on the security / Return on the stock market
Beta less than 1 means that the stock is less volatile than the stock market
CAPM*
Stock with Beta Value of 1.2
Treasury Bills are paying 8.6% return
Expected average return on stock A = 10.1%
CAPM = 8.6% + 1.2(10.1% - 8.6%) = 10.4%
Investor must therefore receive at least 10.4% return on his stock instead the stock is paying only 10.1%
CAPM
Risk Premium = (Return on Market - Risk Free Rate) x Beta
CAPM = Risk Free Rate + Risk Premium
Dividend Discount Model
Stock value = dividend per share / (cost of capital - dividend growth rate)
assumes fixed growth rate
Preferred Stock valuation
Stock value = dividend per share / Cost of capital
assumes fixed dividend is paid out over time
Put Call Parity
PV of exercise price = value of the Put + Value of the underlying - Value of the Call
Component Cost of Long Term Debt
Component cost of LT debt = effective rate x (1-marginal tax rate)
Component cost of preferred equity
Component cost of preferred equity = cash dividend /market price of preferred stock less any underwriting fees
Component cost of common stock
component cost of common stock = (dividend amount / market price) + dividend growth rate
Component cost of retained earnings = component cost of common stock
which is:
next dividend / Market price
WACC*
WACC = Market value x % to total retained earnings x component cost = weighted costs
Add all weighted costs for bonds payable, preferred stock, common stock and retained earnings and that equals WACC
After Tax WACC
WACC = (Market Value of Firm's Equity)/ (Market value of debt and equity) x Cost of equity
+ (market value of debt / (market value of debt and equity) x cost of debt x (1-corp tax rate)
Cost of new debt
Cost of new debt = annual interest / net issue proceeds
to determine the after tax rate multiply this % by 1-tax rate
Cost of new preferred stock
Cost of new preferred stock = next dividend / net issue proceeds
Cost of new common stock
Cost of new common stock = (next dividend / net issued proceeds) + dividend growth rate
EOQ receivables
Optimum cash balance = square root of (2 x fixed cost x cash demand for the period) / interest rate of securities for the period
Average cash balance = Optimum cash balance / 2
Benefit of speeding up cash collections
Benefit = Daily cash receipts x days of reduced float x opportunity cost of funds
Average Balance of receivables
Avg Balance in receivables = daily credit sales x average collection period
if using annual sales:
avg balance in receivables = annual sales x (average collection period / 360 days)
Impact of change in credit terms
Impact of change in credit terms = incremental variable costs x (incremental average collection period / days in a year)
Cost of new credit plans
Cost of credit plan = incremental receivable balance x variable costs x opportunity cost of funds
Benefit or Loss from a new credit plan
Benefit or loss from a new credit plan = incremental contribution margin - cost of change
Inventory Reorder point
Inventory reorder point = (average daily demand x lead time in days) + safety stock
EOQ inventory
EOQ inventory = square root of (2 x variable costs per purchase order x periodic demand in units) / periodic carrying costs
Simple interest loans
Amount needed or usable funds = Invoice amount x (1-Discount %)
Interest expense annualized = amount needed x stated rate
Effective interest rate
Effective interest rate = Net Interest expense / usable funds
Effective rate on discounted loans*
Effective rate on discounted loans = stated rate / (1- stated rate)
Effective rate on loans with compensating balance
Effective rate with Comp Balances = Stated rate / (1- compensating balance %)
Face amount of a loan with compensating balance
Face amount of loan with compensating balance = amount needed / (1- compensating balance %)
Cost of not taking a discount
Cost of not taking a discount:
(Discount % / 1- discount %) x (days in a year / { total payment period - discount period} )
Forward Premium or Discount
((Forward rate - Spot Rate) / Spot Rate ) x (days in a year / days in forward period)
Break even point in units
BE Point in units = Fixed costs / Unit Contribution margin
UCM = unit selling price - unit variable cost
variable costs include DL, DM, VOH and variable SGA
Break even point in dollars
Break Even Point in dollars = Fixed costs / Contribution Margin Ratio
CMR = unit CM / unit selling price
Elasticity of Demand
E = Numerator: Absolute value of (Q1 -Q2) / (Q1 + Q2)
Denominator: Absolute value of (P1 - P2) / (P1 + P2)
or %change in quantity / % change in price
PV and FV of Ordinary annuity
4 payments of $1000 discounted 10%
(1000 x factor of 4 periods at 10%)
***If NPV is negative then discount rate exceeds the IRR
PV of Annuity Due
4 payments of $1000 discounted 10%
(1000 x (factor of 3 periods at 10% + 1)
FV of Annuity Due
3 payments of $1000 discounted 10%
Periods is 3 payments + 1 = 4
(1000 x (factor of 4 periods at 10% - 1)
Profitability index
Profitability index = NPV of future cash flows / net investment
****higher the number the better
Payback
Investment = $500
Cashflow = 150, 175, 125, 100, 100 and so on
Payback = 500-150= 350 (year1)
350 - 175 = 175 (year 2)
175 - 125 = 50 (year 3)
remainder of 50 / 100 which is the next cash flow
this equals 0.5
total is 3.5 years
Payback reciprocal
Payback reciprocal = 1/ payback time in years