Formulas

Question 1

Balance Sheet

Answer 1

Total Assets = Total Liabilities + Shareholder Equity

Question 2

Working Capital

Answer 2

Current Assets – Current Liabilities

Question 3

Current Ratio

Answer 3

Current Assets / Current Liabilities

Question 4

Quick Ratio

Answer 4

(Cash + Cash Equv + Accts Receivable) / Current Liabilities

Question 5

Book Value

Answer 5

Total Assets –Total Liabilities

Question 6

Tangible Book Value

Answer 6

Total Assets – Total Liabilities – Intangible Assets – Goodwill

Question 7

Debt to Total Capital Ratio

Answer 7

Total Debt / Total Capital –use either book or market value

Question 8

Debt to Equity Ratio

Answer 8

Total Debt / Total Shareholder Equity

Question 9

Common Shareholder Equity

Answer 9

Total Shareholder Equity – Preferred Shareholder Equity

Question 10

Days Sales Outstanding

Answer 10

(Accts Receivable/Total Credit Sales) x No of Days

Question 11

Interest Coverage Ratio

Answer 11

EBITDA / Interest Expense

Question 12

Debt to EBITDA Ratio

Answer 12

(Short and Long Term Debt) / EBITDA

Question 13

Accounts Receivable Turnover

Answer 13

Sales on Credit (current year) / Average Acct Receivable

Question 14

Inventory Turnover Rate

Answer 14

COGS / Average Inventory

Question 15

Operating Income (EBIT)

Answer 15

Operating profit +/– other income or expenses

Question 16

Net income

Answer 16

Operating profit – interest – taxes

Question 17

Earnings Available to Common

Answer 17

Net income – preferred dividends

Question 18

Basic EPS

Answer 18

Earnings Avail to Common / Avge Common Shares Outstanding

net income – preferred) / (common – treasury

Question 19

Return on Equity

Answer 19

Earnings Avail to Common / Avge Common Shareholder Equity

Question 20

EBITDA Margin

Answer 20

EBITDA / Sales or Revenue

Question 21

Return on Assets

Answer 21

Net Income / Average Assets

Question 22

PEG (P/E to Growth) Ratio

Answer 22

P/E Ratio / Annual Growth Rate

Question 23

Dividend Yield

Answer 23

Annual Dividend / Market Price of Common

Question 24

Dividend Payout Ratio

Answer 24

Annual Dividend / EPS

Question 25

Earnings Yield

Answer 25

EPS / Market Price of Common

Question 26

Price to Book Ratio

Answer 26

Market Price of Common / Book Value

Question 27

Price to FCF

Answer 27

Market Price of Common / FCF per share

Question 28

Free Cash Flow Yield

Answer 28

FCF per share / Market Price of Common

Question 29

Price to Sales Ratio

Answer 29

Market Price of Common / Sales or Revenue

Question 30

Enterprise Value

Answer 30

Market Cap Common and Pref + Debt + Capital Leases + Minority Interests – cash and equivalents

Question 31

After Tax Cost of Debt (WACC)

Answer 31

Pretax Cost x (1 – Tax Rate)

Question 32

Cost of Equity (CAPM) Capital Asset Pricing Model

Answer 32

Risk Free RoR + ß (Market RoR – Risk Free RoR)

Question 33

Risk Premium

Answer 33

Market RoR – Risk Free RoR

Question 34

Gordon Growth Model

Answer 34

Value of Company Share Price = Next period dividend / (equity cost of capital minus growth rate)

Question 35

WACC

Answer 35

(Cost of Equity x Weight of Equity) + (Cost of Debt x Weight of Debt)

Question 36

FCFF (free cash flow to firm)

Answer 36

EBIT x (1 – Tax Rate) + DepAmort – CapEx +/– change to working capital

Question 37

FCFE

Answer 37

Net income + DepAmort – CapEx +/– change to working capital

Question 38

Financial metric for financial service companies:

Answer 38

Price / Book

Question 39

Financial metric for REITs

Answer 39

Price / Funds from Operations

Question 40

Financial metric for Cyclical Companies

Answer 40

Normalised or relative P/E

Question 41

Financial metric for companies with negative earnings or retail companies with same leverage

Answer 41

Price / Sales ratio

Question 42

Financial metric for companies with negative earnings

Answer 42

Earnings yield

Question 43

Financial metric for basic/heavy industries

Answer 43

EV / EBITDA

Question 44

Financial metric for retail companies with different leverage

Answer 44

EV / Sales

Question 45

Financial metric for companies with high P/E ratios

Answer 45

PEG ratio

Question 46

Which tax rate should be used in adjustment calculations?

Answer 46

Always use marginal rather than the effective rate – it's more conservative

Question 47

Formula for current target share price?

Answer 47

FCFE / (Expected RoR – Expected Growth Rate)

Question 48

Comparisons for price of IPO or acquisition?

Answer 48

IPO: comparable company, sum of parts, DCF Acq: comparable transaction

Question 49

Estimate CAGR

Answer 49

Calculate growth from every period, compute average, test a value that's slightly lower

Question 50

Calculation of growth rate

Answer 50

Use Rule of 72 – divide 72 by no. of years for funds to double to get annual growth rate

Question 51

Simple present value under DCF

Answer 51

Period 1 earnings / (1+Wacc) PLUS Period n earnings / (1+Wacc)^n PLUS Terminal value / same as final period

Question 52

Calculate Projected Growth Rate:

Answer 52

(NTM Net Income / LTM Net Income) – 1

Question 53

If there's no debt, what's the relationship between FCFF and FCFE?

Answer 53

They're the same

Question 54

P/E ration is based on adjusted or unadjusted EPS?

Answer 54

Adjusted – extraordinary charges are added back in

Question 55

Treasury Method of adjusting EV

Answer 55

Assume valuable options are exercised, company uses proceeds to purchase shares in open market, issues or uses Treasury stock to make up the balance

Question 56

Transaction multiple on EBITDA gives...

Answer 56

Enterprise value – subtract the debt and add the cash to get to equity value

Question 57

Relationship of Operating Income to EBITDA?

Answer 57

Operating Income has depreciation taken out, so add it back in, along with amortization of intangibles. Do NOT add in amortization of bond premiums or deferred financing fees

Question 58

Growth rate (if you have PEG)?

Answer 58

(P/E) / PEG

Question 59

Crucial factor in calculating FCF?

Answer 59

Remember changes in working capital (current assets minus current liabilities)

Question 60

Treatment of Preferred when calculating EV?

Answer 60

Use market value

Question 61

How do you calculate how much debt a company can take on?

Answer 61

Do a DCF on the cash flows for the period, using after-tax cost of debt as the discount rate

Question 62

What does deteriorating working capital mean?

Answer 62

An increase in non-cash working capital, which ties up cash, causing cashflows to reduce, and under DCF, reducing valuation

Question 63

Levered beta

Answer 63

Levered beta = unlevered beta x (1 + [(1 - tax rate) x (debt/equity)])

Question 64

What does a reduction in current assets do to operating cashflows?

Answer 64

Increases them

Question 65

Stable growth FCFF model?

Answer 65

FCFF / (WACC – growth rate)

Question 66

Return on Common Equity?

Answer 66

(Net Income - Preferred Dividends) / Common Stockholders' Equity

Question 67

Goodwill created?

Answer 67

Offer value less net tangible assets

Question 68

Implied value?

Answer 68

Expected dividend / (cost of capital minus growth rate)