Ratios/Formulas

Question 1

Capital Budgeting 1

Answer 1

Cash Inflow pre-tax - Depreciation on investment = Increase in Tax Income - Tax = Increase in accounting net income Cash inflows before tax - Tax = After tax net cash inflows

Question 2

Capital Budgeting 2

Answer 2

Increase in accounting net income + depreciation on investment = After tax net cash inflows

Question 3

Payback method

Answer 3

Initial Investment / After Tax net cash inflows = Payback Period

Question 4

Accounting Rate of Return

Answer 4

Increase in accounting net income / Investment = Accounting rate of return

Question 5

Internal Rate of Return

Answer 5

Initial Investment / After tax cash inflows = Present value factor

Question 6

Net Present Value

Answer 6

After tax new cash inflows x present value factor for annuity at target rate = Present value of investment - Initial investment = NPV

Question 7

Inventory conversion period (ICP)

Answer 7

• ICP = Average inventory / Cost of sales per day
• Average inventory = (Beginning inventory + Ending inventory) / 2
• Assume 365 days in a year unless told otherwise

Question 8

Receivables collection period (RCP)

Answer 8

RCP = Average receivables / Credit sales per day

Question 9

Payables deferral period (PDP)

Answer 9

PDP = Average payables / Purchases per day

Question 10

Cash conversion cycle (CCC)

Answer 10

CCC = ICP + RCP – PDP

Question 11

Economic Order Quantity (EOQ)

Answer 11

EOQ = √2AP/S
A = Annual demand in units
P = Cost of placing an order or beginning a production run
S = Cost of carrying one unit in inventory for one period

Question 12

Reorder point

Answer 12

Average daily demand × Average lead time = Reorder point

Question 13

Safety stock

Answer 13

Maximum daily demand × Maximum lead time – Reorder point = Safety stock

Question 14

Operating leverage

Answer 14

% change in operating income / % change in unit volume = Degree of operating leverage

Question 15

Financial leverage

Answer 15

% change in earnings per share / % change in earnings before interest and taxes = Degree
of financial leverage

Question 16

Debt YTM

Answer 16

Yield to maturity × (1 – Effective tax rate)

Question 17

DEBT 2

Answer 17

(Interest expense – Tax deduction for interest) / Carrying value of debt

Question 18

Capital asset pricing model (CAPM)

Answer 18

CAPM = Beta × Excess of normal market return

over risk-free investments + Normal return on risk-free investments

Question 19

Return on Investment (based on assets)

Answer 19

Net income / Total assets

Question 20

DuPont return on investment (ROI) analysis

Answer 20

ROI = Return on sales × Asset turnover

Question 21

Return on sales

Answer 21

Net income / Sales

Question 22

Asset turnover

Answer 22

Sales / Total assets

Question 23

Residual income

Answer 23

Operating profit – Interest on investment

Question 24

Interest on investment

Answer 24

Invested capital × Required rate of return

Question 25

Economic Value Added

Answer 25

Net operating profit after taxes (NOPAT) – Cost of financing

Question 26

Cost of financing

Answer 26

(Total assets – Current liabilities) × Weighted-average cost of capital

Question 27

WACC

Answer 27

% of Debt x Effect Cost of Debt + %Preferred Stock x Effective Cost of PS + % Common Stock x Effective cost of CS

Question 28

Free Cash Flow

Answer 28

NOPAT + Depreciation + Amortization – Capital expenditures – Net increase in working capital

Question 29

Gross Margin

Answer 29

Gross profit / Net sales

Question 30

Operating Profit Margin

Answer 30

Operating profit / Net sales

Question 31

Return on Assets

Answer 31

Net income / Average total assets

Question 32

Average total assets

Answer 32

(Beginning total assets + Ending total assets) / 2

Question 33

Return on Equity

Answer 33

Net income / Average common stockholders’ equity

Question 34

Common stockholders’ equity

Answer 34

Stockholders’ equity – Preferred stock liquidation value

Question 35

Receivable Turnover

Answer 35

Net credit sales / Average accounts receivable

Question 36

Average accounts receivable (A/R)

Answer 36

(Beginning A/R + Ending A/R) / 2

Question 37

Receivables Collection Period

Answer 37

Average accounts receivable / Average credit sales per day

Question 38

Inventory Turnover

Answer 38

Cost of goods sold / Average inventory

Question 39

Inventory Conversion Period

Answer 39

Average inventory / Average cost of goods sold per day

Question 40

Fixed Asset Turnover

Answer 40

Sales / Average net fixed assets

Question 41

Total Asset Turnover

Answer 41

Sales / Average total assets

Question 42

Current Ratio

Answer 42

Current assets / Current liabilities

Question 43

Quick (or Acid Test) Ratio

Answer 43

Quick assets / Current liabilities

Question 44

Quick assets

Answer 44

Cash + Marketable securities + Accounts receivable

Question 45

Debt to Total Assets

Answer 45

Total liabilities / Total assets

Question 46

Debt to Equity Ratio

Answer 46

Total debt / Total equity

Question 47

Times Interest Earned Ratio

Answer 47

Earnings before interest and taxes / Interest expense

Question 48

Price/Earnings (PE) Ratio

Answer 48

Common stock price per share / Earnings per share

Question 49

Book Value per Share

Answer 49

Common stock equity / Common stock shares outstanding

Question 50

Common stock equity

Answer 50

Stockholders’ equity – Preferred stock liquidation value

Question 51

Market Capitalization

Answer 51

Common stock price per share × Common stock shares outstanding

Question 52

Market/Book Ratio can be calculated in two ways

Answer 52

1. Common stock price per share / Book value per share | 2. Market capitalization / Common stock equity