F9 Formulae

Question 0

Earnings per share

Answer 0

This is the basic measure of a company’s performance from an ordinary shareholder’s point of view. It is the amount of profit, in cents, attributable to each ordinary share. The principles of calculating EPS are simple:

Profit after tax and preference share dividend / number of ordinary shares in issue

Question 1

ROCE

Answer 1

ROCE gives a measure of how efficiently a business is using the funds available. It measures how much is earned per $1 invested.

PBIT/capital employed (equity+net) x100

Were no preference share

PBIT = Operating profit
CE= Non-current assets + Current assets -Current liabilities
= Share capital + Reserves + Long-term loans

ROE = PAT/ shareholders funds

Disadvantage

• uses profit which is not directly linked to the objective of maximising shareholder wealth

Question 2

P/E ratio and earnings yield

Answer 2

PE = Share price (price per share) / EPS

Earnings yield = EPS/ price per share

Value of a company = total earnings x (1/ earnings yield)
Value per share = EPS x (1/earnings yield)

Question 3

Return on Equity

Answer 3

(Profit after tax and preference dividends / ordinary share capital and reserves ) x 100%

Question 4

Dividend per share

Answer 4

Total ordinary dividend for the period / total number of shares issued

Question 5

Total shareholders return

Answer 5

Dividend per share + change in share price / share price at start of period

Question 6

Perpetuity factor

Answer 6

1 / r

PV of growing perpetuity =

CF @ T1 x (1/r)

Question 7

Sensitivity margin

Answer 7

NPV / present value of cash flow under consideration (net of tax)

Question 8

What is the Cost of capital/ equity - (Dividend Growth Model) rearranged ?

Answer 8

Po = (Do (1+g) / (re -g))

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

Po = current ex div share price
Do = current dividend 
g = constant growth in dividend
re = return on equity or cost of equity 

Weakness of the DVM

• sound basic premise, but has weakness because
• inaccurate input data (current market price, future dividend patterns)
  
  • growth in earnings is ignored.

Question 9

Irredeemable debt

Answer 9

Kd (1-T) = I (1 - T) / MV

I = interest 
T = tax
MV = ex interest market value

Question 10

Preference share

Answer 10

Kp = D/Po or

MV of PS is Po = D/Kp

D = constant annual pref dividend 
Po = ex div MV
Kp = cost of preference share

Question 11

Operating gearing

Answer 11

Fixed cost / Total cost

= measure of the extent to which operating cost are fixed rather variable , affects the level of business risk in the firm

Question 12

Baum Model for optimal cash holding

Answer 12

√(2FS)/ I

F = cost of obtaining funding
S= Amount of cash required per annum
I = cost of holding $1 for one year

Question 13

Total annual cost (TAC) for cash

Answer 13

Annual order cost + Annual holding cost

TAC = FS/Q + I Q/2

Q = the amount of cash to be raised.

Question 14

What is the PV of a future cash flow ?

Answer 14

PV = FV x (1+r) - n

FV = Future value 
r = rate 
n = number of years

Question 15

What is the present value of an annuity ?

Answer 15

PV of Annuity = (A x 1- (1+r) -n)/r

PV = Present Value 
A = constant return 
r = period interest rate (decimal)
n = number of period

Question 16

What is the present value of a perpetuity and perpetuity with growth ?

Answer 16

A perpetuity is an annual cash flow that occurs for ever

PV = A x (1/r)

PV = present value 
A = constant return (cash flow)
r = period interest rate 

(1/r) = annuity factor

The PV of a growing perpetuity

PV = CF at T1 x 1/ r-g

1/ r-g perpetuity factor with growth

Question 17

Cost of redeemable debt

Answer 17

Timing CF DF
0 (Po)
1-n 1(1-T)
n Rv

Rv = the redemption value at time n
1(1-T) = the after tax interest payment

Question 18

Purchasing power parity

Answer 18

S1 = So x (1+hc)/(1+hb)

S1 = spot rate in one periods time (using direct quation I.e how much home currency does each unit of overseas currency equates to)

So = spot rate now
hc = inflation in home country
hb = inflation abroad

Question 19

What’s is the fisher formula that can also be used to account for inflation in Discounted cash flow?

Answer 19

(1+i) = (1+r) x (1+h)

(1+money rate)= (1+real rate) x (1+inflation)

i = nominal interest rate or (money rate is inflated)

r = real rate (no inflation)
h = inflation rate

Question 20

In assets replacement decision what is the equivalent annual cost (EAC)

Answer 20

EAC = NPV / Annuity factor for the project life

1 - calculate NPV for each strategy
2- calculate EAC for each strategy
3- choose strategy with lowest EAC

Question 21

What is the profitability index?

Answer 21

PI = Present value of future cash flow/ initial investment

Question 22

Discounting a future sum - by rearranging the compounding formula

Answer 22

P = F
——-
(1+r)n

Remember (1+r)-n is the discount factor

Question 23

PE Ratio & Dividend yield

Answer 23

P/E ratio = Market share price /Earnings per share
————————————————————-

A high PE ratio indicates that investors perceive the firm’s earnings to be of high quality –usually a mixture of high growth and/or lower risk expectations.

Dividend Yield = Dividend per share / Market share price

Question 24

Current ratio

Answer 24

Current assets / Current liabilities

Question 25

Quick ratio

Answer 25

(Current assets - inventory) / current liabilities

Question 26

What’s are the components of the capital asset pricing model?

Answer 26

E(Rf) = Rf + β (Rm - Rf)

Rf = risk free rate of return

Rm = average return on the market

(Rm - Rf) = equity risk premium - average market risk premium

β - Beta factor

CAPAM - can be used to calculate a risk adjusted cost of equity

Question 27

Historic dividend growth formula

Historic growth
Earnings retention

Answer 27

g = (Do/ Dn years ago) ^1/n -1 = historic growth

g = b*re = earnings retention

re = accounting rate of return = (profits after tax / equity investment)
b = earnings retention rate (% or earnings not paid out as dividend)

Question 28

What is the interest yield ?

Answer 28

The interest yield is the interest or coupon rate expressed as a % of the market price:

Interest rate/ MV of debt - gross = interest $/ MV$

This is a measure of return on investment for the debt holder

Question 29

Interest cover

Answer 29

                         Debt interest

Question 30

What is the total annual inventory cost ?

Answer 30

cod/ quantity + cheque/2

Co D
—–
Q

Ch Q
——
2