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1

CAPM Calculation

E (R) = Rf + β (E(Rm) - Rf)


Rf = Risk Free Return

β = Beta

E(Rm) Expected Market Return

2

C.A.P.M

Links the expected return of an investment to its Beta

3

Effective Rate of Interest (A.E.R.)

R = (1 + i/n)n - 1

R = Effective annual rate,
i = Nominal rate
n = Number of compounding periods per year (for example, 12 for monthly compounding):

4

Effective Rate of Interest (A.E.R) - Example

R = (1 + i/n)n - 1

Nominal Rate is 3.2% P.A compounded on a QTR (4 payments) basis. £100 Invested
3.2% / 4 = 0.008
1+0.008 = 1.008
1.008 (To the power of 4) = 1.032
1.032 - 1 = 0.03238
0.03238 * 100 = 3.24%

5

Time Value of Money - Accumulation of Money

Amount (1 + r)n

r = Interest rate
n = Time Period * this is to the power

6

Annualised rate of return

PV (1 + r)n = FV

PV = Present Value
r = rate of return
n = number of time periods * this is to the power

7

Annualised rate of return - Example

PV (1 + r)n = FV

PV = £3,000
FV = £3,383 in 4 years time

r = £3,383 / £3,000 = 1.1276
1.1276 √4 = 1.0304
1.0304 - 1 = 0.0304
0.0304 = 100 = 3.04%

8

Working Capital

Working Capital = Current Assets / Current Liabilities

Links back to changes in Assets and Liabilities
Good measure of resilience and efficicency

9

Operating Profit Margin

Operating Profit Margin = Operating Income (EBIT) / Sales Revenue * 100


10

Operating Profit Margin - Example

Operating Profit Margin = Operating Income (EBIT) / Sales Revenue * 100

Operating Income = £12,000,000
Sales Revenue = £170,000

12,000,000 / 170,000,000 = 0.070588
0.070588 * 100 = 7.06% (2 DP's)

11

Working Capital Ratio

Working Capital Ratio

Current Assets / Current Liabilities

Current Assets £61,200,000
Current Liabilities £27,600,000

£61,200,000 / £27,600,000 = 2.22 (2 DP's)

12

Increase in Revenue

Increase in Revenue

(Current Year - Previous Year)/Previous Year * 100

13

Increase in Revenue - Example

Increase in Revenue

(Current Year - Previous Year)/Previous Year * 100

Current Year = £150,000
Previous Year = £125,000

£150,000 - £125,000 = £25,000
£25,000 / £125,000 = 0.20
0.20 * 100 = 20%
Increase in Revenue = 20%

14

Return on Equity (ROE)

Profit / Total Equity

15

Return on Capital Employed (ROCE)

ROCE

(Operating Profit x 100%) / (Capital Employed = Equity + Long term borrowing)

16

ROCE - Notes

The return on all assets including debt
ROE is just the equity investment
Profit figure normally includes interest
A low return on assets should prompt investors to ask if management is making the best use of capital available.


ROCE is especially useful when comparing the performance of companies in capital-intensive sectors such as utilities and telecoms. This is because unlike other fundamentals such as return on equity (ROE), which only analyzes profitability related to a company’s common equity, ROCE considers debt and other liabilities as well. This provides a better indication of financial performance for companies with significant debt.

Adjustments may sometimes be required to get a truer depiction of ROCE. A company may occasionally have an inordinate amount of cash on hand, but since such cash is not actively employed in the business, it may need to be subtracted from the Capital Employed figure to get a more accurate measure of ROCE.

17

TWR Time Weighted Returns

Time Weighted Returns

Transaction

V1 V2
---- -----
V0 (V1 +/- C)

V0 = Original Value
V1 = Value at end of period 1
V2 = Value at end of period 2
(V1 +/-C) Value at end of period 1 plus or minus contribtuion

18

TWR Time Weighted Returns - example

Time Weighted Returns

V1 V2
---- X ----- - 1
V0 (V1 +/- C)

Original Value = £18,000
Value at end of period 1 = £19,000
Value at end of period 2 = £20,100
Contribution £1,000

£19,000 / £18,000 = 1.055
£20,100 / £20,000 = 1.005

1.055 * 1.005 = 1.0603
1.0603 - 1 = 0.0603
0.0603 * 100 = 6.03% (2 DP's)

19

Dividend Yield

Dividend Yield

Dividend Per Share / Market Price of Share

20

Dividend Yield Notes

High Yield
Little expectation of growth
Losses / Insolvency
Negative Capital Growth
Special Dividend

21

Dividend Cover

Dividend Cover

Post Tax Profit / Dividend Paid (to ordinary shareholders)

22

Rights Issue - Rights Premium

Rights Issue - Rights Premium

Ex Rights Price - Issue Price

23

Rights Issue - Rights Premium - Example

Rights Issue - Rights Premium

Ex Rights Price - Issue Price

Ex Rights Price £350
Issue Price £320

£350 - £320 = £30

24

Rights Issue

Rights Issue

1 for 3 rights issue at 320
Current Price 360

Existing Value 3 * 360 = 1080
Share take up 1 * 320 = 320

1080 + 320 = 1400

1400 / 4 = 350

Ex rights = 350

25

Share Price Adjustment

Share Price Adjustment

3 for 5 Bonus Issue
Current Price £1,184

Existing 5 * 1,184 = 5,920

New issue 5,920 / 8 = 740

Current Price £1,184
New Price £740

26

Liquidity Ratio

Liquidity Ratio

Current Assets - Stock
----------------------------------
Current Liabilities

27

Liquidity Ratio - Example

Liquidity Ratio

Current Assets - Stock
----------------------------------
Current Liabilities

Assets £61,200, Stock £21,800 & Liabilities £27,600

£61,200 - £21,800 = £39,400
£39,400 / £27,600 = 1.43 (2 DP's)

Liquidity Ratio = 1.43 (2 DP's)

28

Price to Book Ratio

Price to Book Ratio

Share Price
-----------------
NAV Per Share

29

Price to Book Ratio - Example

Price to Book Ratio - Example

Share Price
-----------------
NAV Per Share

Share Price £410, NAV £180

410/180 = 2.28 (2 DP's)

30

Net Asset Value (NAV)

Net Asset Value (NAV)

Net Assets
-----------------------------------
No of Ordinary Shares