SECTION A FINANCIAL STATEMENT ANALYSIS

Operating Activities NI + Dep’n, Amortization – gains + losses from sale of asset - inc in CA, dec in CL + dec in CA, inc in CL

Vertical Analysis Line item / Base item

Horizontal Analysis
Amount of Change Current – Prior
Growth Rate (Current – Prior) / Prior
Trend / % Inc or Dec Current / Prior

Liquidity Ratios
Net Working Capital CA – CL
NWC Ratio NWC / TA
Current CA / CL
Quick (Cash + Marketable Securities + AR) /CL
Cash (Cash + Marketable Securities) /CL
Cash Flow Cash from Operations / CL

Solvency Ratios
Debt to Equity TD / Equity
Long-term Debt to Equity LTD / Equity
Debt to Total Assets TD / TA
Fixed Charge Coverage (Earnings to Fixed) Earnings before Fixed Charges / Fixed Charges
Interest Coverage (Times Interest Earned) EBIT / Interest Expense
Cash Flow to Fixed Charges (Cash from Operations + Fixed Charges + Tax) / Fixed Charges

Leverage Ratios
Degree of Operating Leverage % Change in EBIT / % Change in Sales (2 time periods)
Contribution Margin / EBIT (1 time period)
Degree of Financial Leverage % Change in NI or EPS / % Change in EBIT
EBIT / EBT

Total Assets / Total Equity

Financial Leverage TA / Equity
Degree of Total Leverage DOL x DFL

Efficiency Ratios
Inventory Turnover COGS / Avg. Inventory
Days Sales in Inventory 365 / Inventory Turnover
Avg. Inventory / (COGS / 365)
AR Turnover Credit Sales / Avg. Gross AR
Days Sales in Receivable 365 / AR Turnover
Avg. Gross AR / (Credit Sales /365)
AP Turnover Credit Purchases / Avg. AP
Days Purchases in AP 365 / AP Turnover
Avg. AP / (Credit Purchases /365)
Operating Cycle Days Sales in Inv. + Days Sales in AR
Cash Cycle Days Sales in Inv. + Days Sales in AR – Days Purchases in AP
Profitability Ratios
Asset Turnover Net Sales / Avg. TA
Fixed Asset Turnover Net Sales /Avg. FA
Gross Margin Gross Profit / Net Sales
Operating Margin Operating Income / Net Sales
Profit Margin NI / Net Sales
EBITDA Margin EBITDA / Net Sales
Return on Assets NI / Avg. TA
(NI / Sales) x (Sales / Avg. TA)
Return on Equity NI / Avg. Equity
(NI / Avg. TA) x (Avg. TA / Avg. Equity)

ROA x Financial Leverage

Return on Investment NI / Average Total Assets
Asset Turnover x Profit Margin
Market to Book Current Stock Price / Book Value per Share
Book Value (Total Stockholders Equity – Preferred Equity) / # of Common Shares Outstanding
Price / Earnings Market Price per Share / Earnings per Share
NI – Preferred Dividends
Basic EPS
Common Shares Outstanding + 2 for 1 Split (assume beg. yr) + New Issues (prorated)
NI + (Conv. Bonds outstanding x IR x Issue Price)(1 – Tax Rate)
Common Shares Outstanding + 2 for 1 Split (assume beg. yr) + New Issues (prorated)
+ Conv. PS (Outstanding x # of Shares convertible)
+ Conv. Stock Options (Outstanding x # Right) – ((Outstanding x # Options conv.x Exercise Price) / Avg. Stock
Diluted EPS
Price)
+ Conv. Stock Warrants (Outstanding x # Right)
+ Conv. Bonds (Outstanding x # Right)
(Conv. Stock Options & Warrants only exercised if exercise price < avg. stock price)
Earnings Yield EPS / Market Price per Share
Dividend Yield Annual Dividend per Share / Market Price per Share
Dividend Payout Ratio Common Dividends / Earnings Available to Common Shareholders
Shareholder Return (End Stock Price – Beg Stock Price + Annual Dividend per Share) / Beg Stock Price
Sustainable Growth Rate ROE x (1 – Dividend Payout Ratio)

Foreign Exchange
Direct Quote #LC per 1FC
Indirect Quote #FC per 1LC

Book Value vs Market Value

Gain / Loss on exchange Book Value - Market Value or Cash Received of Old Asset
Cost of New Asset Market Value of Old + Additional Cash Paid

Accounting vs Economic Profit

Accounting Profit Accounting Revenues – Accounting Expenses
Economic Profit Accounting Revenues – Accounting Expenses – Opportunity Costs

Quality of Earnings
Discontinuing Operations Income before Tax
- Income Tax Expense Income before Tax x Tax Rate

Income from Operations Income before Tax x (1 - Tax Rate) shortcut

- Loss from disposal, net of tax Loss x (1 – Tax Rate)

- Loss from operation, net of tax Loss x (1 – Tax Rate)

 Net Income

SECTION B CORPORATE FINANCE

Risk and Return
Return (Capital Appreciation + Income) / Investment
[(Investmentt+1 - Investmentt)+ Income] / Investment

Relationship of Risk ↑Risk = ↑Return = ↑Time = ↑Volatility = ↑Standard Deviation

Expected Return of Portfolio ∑(Probaility of Investment x Expected Return of Investment)
Coefficient of Variation Volatility / Expected Return
Correlation + 1 moves in the same direction; not diversified
-1 moves in the opposite direction; diversified
0 no linear relationship between the two variables
Beta = 0 no systematic risk
>1 more systematic risk than the market
<1 less systematic risk than the market
=1 same systematic risk as the market

Capital Asset Pricing Model Risk-free rate + Beta (Market Risk Premium)
(Cost of Equity) Risk-free rate + Beta (Market rate - Risk-free rate)

Long Term Financial Management

Real Return Nominal rate – Expected Inflation
Intrinsic Value per Share Expected EPS in the future x Forward P/E
Expected EPS in the future EPSprevious x (1 – Expected to contract %)

Bonds
Coupon rate Stated or Nominal rate
Yield to Maturity Market, Effective Interest, Required Rate of Return, Cost of debt, or Discount rate
Premium Bonds Sold above par Market < Coupon
Discount bonds Sold below par Market > Coupon
PV of Bonds (lump sum x par value) + (annuity x par value x coupon rate)
Basic Calculator To get lump sum: 1 + yield / / = (click equals by the number of years)
To get annuity: lump sum – 1 – = / coupon rate
Coupon or Interest Payment FV of bond x coupon rate x (months/12)

Stocks
Dividend Payment # of shares x par value x coupon rate
Zero Growth P0 = Constant Dividend / Discount rate

Constant Growth P0 = Dividend1 / (Discount rate – Growth rate)

2 4 4
Variable Growth P0 = (D1 / (r – g)) + (D2 / (r – g) …… + (D4 / (r – g) + (P4 / (1 + r) )

P4 = D4+1 / (r – g) where D4+1 = D4 x (1 + g)

Preferred Stock P0 = Dividend / Discount rate

Cost of Capital
Cost of Debt (YTM or effective IR) Interest / FV of Bond
(Interest Expense of borrowed amount + Other Charges) / Borrowings line of credit
Cost of Equity (PS, CS) Dividends / Price of shares
Next year bonds / (Price of shares – Floatation costs + Growth rate)
 CAPM = Risk-free rate + Beta (Market Risk Premium)
Cost of Equity (Retained Earnings) Next year bonds / Price of shares + Growth rate
WACC [Proportion of Debt x Cost of Debt x (1 – Tax rate)] + [Proportion of Equity category x Cost of Equity]

Working Capital Management

Net benefit of Lockbox System Savings – Cost of lockbox
Savings of Lockbox Days reduced x
Cost of Lockbox # of checks x cost per check x # of days in a year
Average balance in receivables Average daily sales x Average collection period

Safety Stock in units (Max daily use x max lead time) – (Avg. daily use x avg. lead time)
Cost of Safety Stock Carrying cost of safety stock + Expected stock out cost
Reorder Point (Avg. daily demand in units x Normal lead time) + Safety stock

Short Term Credit Management Effective IR Formulas

Commercial Paper [(FV – Net proceeds) / Net proceeds] x # of terms per year
Factoring AR Factor charge / (AR – Factor charge)
Trade credit (cost of not taking discount) [Discount % / (100% - Discount %)] x [Days in a year / (Payment period – Discount Period)]
Short term Bank Loans (Interest of borrowing + Commitment fee – Earned interest) / (Amount borrowed – Compensating balance)

SECTION C DECISION ANALYSIS

CVP Analysis
Profit in Units (Sales Price x Volume) - (Variable Cost per unit x Volume) - Total Fixed Costs
Profit in Dollars Revenue - (Variable Cost Ratio x Revenue) - Total Fixed Costs
Variable Cost Ratio Variable Costs / Revenue
*Breakeven Point in Units Fixed Costs / Unit Contribution Margin
*Breakeven Point in Dollars Fixed Costs / (Unit Contribution Margin / Selling Price)
Contribution Margin Sales - Variable Costs
Contribution Margin Rate Sales Price per unit - Variable Costs per unit
Contribution Margin Ratio Contribution Margin / Revenue
Profit (Contribution Margin Rate x Volume) - Total Fixed Costs
(Contribution Margin Ratio (%) x Volume) - Total Fixed Costs
Breakeven Point in Units Total Fixed Costs / Contribution Margin Rate
Breakeven Point in Dollars Total Fixed Costs / Contribution Margin Ratio

Targeted Profit Revenue - Variable Cost - Fixed Cost = Targeted Profit

Targeted Profit in Units (Sales Price x Volume) - (Variable Cost per unit x Volume) - Total Fixed Costs
Targeted Profit in Dollars Revenue - (Variable Cost Ratio x Revenue) - Total Fixed Costs

Pre-tax Operating Profit After-Tax Profit/(1 - Tax Rate)

Sales Mix Ratio in Dollars Sales Revenue of Service or Product N / Total Sales Revenue
Sales Mix Ratio in Volume of Units it’s easiet to use the ratio of smaller number with the basket method

Margin of Safety (in Units or Dollars) Current Sales (or Planned Sales) - Breakeven Sales
Margin of Safety Percentage Margin of Safety / Current Sales (Note: ICMA formula sheet uses this version)
Margin of Safety / Breakeven Sales
Note: Holding other C-V-P inputs constant, adjust each input by a percentage or dollar amount change, and then
Sensitivity Analysis
observe the change in profit

Cost-Based Pricing
Cost Markup Formula (Targeted Price) or
Cost x (1 + Markup %)
Cost-Plus Target Pricing
Variable Costs Basis (Profit + Fixed Production + Fixed Admin) / (Variable Cost Rate Per Unit x Volume)
Absorption Costs Basis (Profit + Total Admin & Selling ) / (Production Cost Per Unit x Volume)
Total Costs Basis Profit / (Total Cost Rate x Volume)
Targeted Cost Price / (1 + Markup %)

Competition-Based Pricing
Price Elasticity of Demand Demand % Change / Price % Change
If > 1 then Elastic, a price increase will decrease revenue
<1 then Inelastic, a price increase will increase revenue
=1 then Unitary Elastic, a price increase will not change revenue
Midpoint Method (computing percentage
New - Old / [(New + Old) / 2 ]
change)