‘Operating Working Capital (OWC) and Net Operating Working Capital (NOWC) Total Operating Capital (TOC) Rais NOWC All current assets ~ All current liabilities (noninterest bearing) Operating curent assets — operating curent ibiltes (Cash and marketable securities + Accounts receivable + Inventories) - (Accounts payable + Accruals) [ Operating capital = Net operating working capital + Operating fixed asets Sette ad Gro NIOWC = Operating capital fr curent year Operating capital for previous year So GIOWC = Net investment + Depreciation and amortization Net Operating ProfirafierTaes | NOPAT~EBIT—0 7 IGOREDERES SS ere Operating Cash Flow (OCH) OCF — EDIT Deprecaion Taxes _ = EBIT (1 ~0)+ Depreciation (add back) NOPAT + Depreciation and amortization ‘Net Cash Flow NCF Net income — Non cash revenues + Non cash expenses —_ a | (NCF) NCF Net income + Depreciation Free Gath Flow CH) FCF = Netincome ~Net investment n operating capital a NOPAT-NI FCF __= Operating cash flow — Gross investment in operating capital Cash Fow From Assets Cash flow From assets = Cash flow to ereditors + cash low to stockholders (Or, Cash ow from assets = Operating cash low ~ net capital spending ~ chang in working Capital Spending NCS ning net nc sts Being net xe ss deprecation (non cash tem) STEKct Value Aaaed @AVA)_____[ MAV = Mortal value of ock Equity capital supplied by sokoles Economic value added (EVA) EVA =NOPAT — After tax rupce cost of operating capital EBIT (It) ~ Operating capital» Aer tax cost of eapital i ang aac wong cpl | Giang inet working capital Eningret working capial—Bepinng nt working pi Current Ratio ‘Current Assets i Current ratio = Gyrrent Liabilities Working Capital Working Capital = Cum Morideg Caplets | — ‘Quick Ratio/Liquid Ratio /Acid ein Quick Test Ratio Quick ratio = Current Liabilities Debt Equity Ratio Debtor Longterm debt a Debt -equity ratio = Fguity shareholder's fund Rs a Long term debts ee Debt to total capital ratio= Critalemployed ‘Where, Capital employed = Shareholder fund + Long-term debt = Eaming before interest and 18X©3 inne Times inttest eared rato Tae aan Eaming before interest and x, es Fixed coverage ratio=" Fised charges“ Long term + Current liabilities = Fixed assets * Current assets ‘Scanned with CamScannerEM=1+DE ‘Opening stock + net purchases * direct expenses + manufacturing Or, Net sales - gross profit Opening inventory + Closing inventory — a Cost of goods sold Net sales. Net sales Inventory tamover ratio= erage avenory Tring inven eae ey Tet cet snes Ree ete Days ina year Wek na earn Average collection period = Debtors tamaversaist = .... Days/weeks/months Debiors x (12 months /52 weeks [365 days) Average collection period = Credit sales| 8 cos - closing aa Debtors tumover ratio, times Debtors Or Average colletion period ~ 565 per day ~~~ Days se Net sales Fixed assets tumover ratio= SS Fivad arses = times ean a Net sales! Total assets tumover ratio= Traces = times poles eee Net sales ital employed Goa matt Gros prot atin = SEE ap Capital employed tumover ratio= T 5 Net profit after tax Net profit ratio = sales 7 [Net profit before interest and tax } Retum on assets = Toll asin dt Retum on Assets (ROA) =NECPOFLAEL AY 9, OrRoumon Ase non) NS Balog, «100% x 100% Or =a ividend Net profit afer tax — Preference dividend , 999, ihetom on Anas (RON) Total tangible assets is Rerun on equity Me ES 99 NPAT— Preference dividend Eamings pr shar (Eps) = 7A Reine den ps = Total earings available to equity shareholders _ 'No. of equity shares share capital of ser apse ‘Scanned with CamScannerr oi Neen aE Market price per share times Eaming per share : ~ Market price per share MarkevBook Ratio= “ook value per share ; Siar l/c ook, Vali Ber Sharer ‘Number of share outstanding BOA Ey alii “oft ins To ese tunove «Egy mip Renee ne poster en Toul cee Ne Ne pot masa Neg Sales Total assets turnover “Tees ying ratio Total assets 1 Equity multiplier = auiy O8 ToDebrrato OR 1 + Debt equity ratio TIME VALUE OF MONEY Future Value at the end of n year (FV,) = PV(I+i)" oF present valu of an ordinary annuity (PVA,) = PMT] Or, = PMT * PVIFAiy FVA,(due) = FVAg(1 +i) 1 vaca [=H] FVA,(due) = PMT [FVIFAy](1 + i) Prevent value of annuity due [(PVA,N(due)] 1 Lay PVAs(due)= PMT] PVA,(due) = PMT * [PVIFA\a) (1+ i) leat ‘Scanned with CamScannerFuture value (FV,) = PV,(e)" Present value (PV, Gq ‘Nominal interest rate = Periodic rate » m an si Effective Annual Rate (EAR) = (1+ Periodic rate)” 1 Romina ay +e “Amount of foan (PV Installment or Payment Po) = Amountofloan (PV) (PVIFAin) IRSA ened Return (Rs) ~= Ending price - Beginning price + Cash receipts OR =P,-Po+C, oP Based on historical data: E(R)) or Ri =~ Based on probability data: E(R)) or R, = (Rx P,) Based on historical data: $.D. (6) = aces _| Based on probability data: $.D. (6; Based on historical data: Covay = Ra Ra) (Ru Rs) n-1 Based on probability data: Cova = 3(R4—Ra). (Re — Ra) Py n= Vox Wa? ou Wat 2WaWa Cova Or, on =Jox'Wa + ay Wart 2WaWe Corn ony Vaty = oy? oe Be) = Bi x Wi RR Ra ROB, ‘Scanned with CamScannerAlternatively Vo= MPVIFAs«) + M(PVIE ‘Valuation of Semi-annual Vo=4 (PVIFALzu2) +M (PVI Or T Ww “T+ Ky 0+ Valuation of Zero Coupon Bonds | oy “04K UF) Or Vo= Ta RF Alternatively Vo= M(PVIF ‘Alternative Vo=IPVIFAKsns) + Cy(PVIF Kn) ual Current yield (C¥) =" Current price of bond (Vo) Ta case of Zero Coupon bond >, PorteRy Tr TF eal +, P-qee OsT tet = os Por +R) +h) Scanned with CamScannerDo( +2)" oF D2 = Di(1+)! D, = Do(l+g)" Dy DL Oo, PmEe oO: EPS(1 - b)(1 + br) k-br Dy p,—Dullta) , Dil + gy" | Do(l+p,)? r © (RR? . ‘Total Expected Dividend of the firm Value of equity = “2° —SPeSec >wvidend of the firm 7 The value of firm = Value of total equity + Value of debt OFCF = EBIT (1-1) + Dep, - CE— CWC COA (Cash flow from operations — Capital expenditures = Free cash flow « of firm ~ EXBected free cash flow _ FCF (I+) Value of firm rs WACC-g FCF, FCF, FC, FCE, y, TEWAta + a + ae (EWACC) " (WACO) * WACGF -"* WACC} + WACO D; vn Be aes Vem t= ge Tk Or, Ves = Des(PVIFAxpas) + M(PVIF pan) in D Cp vo De Ck) TK Or, 1 sist rE (1+ Kos) G Bi on Ky as : Or, Vos = Drs (PVIFAKpane) + CP(PVIF sine) CREAT 1 Before ax cost of deb (Ka) = or gat Alter tax cost of debt (Ky) = Ky(1 1) Where, Net Va= Va Flotation cost Zet0 Coupon Bond M Yea Kor i ‘no Hloatation cost on issue oF new preferred stock, ost ot prefered stock (Kp) =-Yt Scanned with CamScannerCase II: If there is floatation cost on issue of new preferred stock, D, ” Net Vp Case I: IF there is no floatation cost on issue of new preferred stock, Vp= Dy x PVIFAtgn pet + M PVIFipn pid or, Ky =... %(Solving for ‘Ky’) Case I: If there is floatation cost on issue of new preferred stock, Net Vp = Dp x PVIFAsghinyerat + M % PV IF in period Cost of preferred stock (Ky) of, iS solving for ‘Ky') = 5 bens: | mk of, kr D Krapits Dividend Discount Model: Constant Growth Dd, Cost of extemal equity (Ke) “Sarpy +E If there is no floatation cost, Cost of external equity (Ke) = Cost of retained earnings (Kr) PTR TK Solving for ‘Kr’, eRe eee Beta of i equity (Bi) T — cost of equity | Ke=Ri+(Ra—RO pi Cost of Common Equity (Ke) = Ka Risk Premium T+ Kip 1 kay .e) F and vice-versa WACC =W.K il Case I: Firm uses debt and common equity in its capital structure, WACC= Wy * Ke + We Ke Wat We 100% Case II fim uses deb, preferred stock an common equity in its capital sucture, WACC= Wa Ka + Wy Kp + We * Ke Total amount of Tower cos of capital ofa given type Break point: Weight of this type s WiKi +W; area BASICS OF CAPITAL BUDGETING DECISION yen cash flows _—Neteash outlay ____ Pay Back Period (PBP) = “Arnal net cash flows ~ Annual CPAT Uneven eash lows Amount to be recover Payback period = Minimum yeat-+Noxt yer ch inflows - ‘Average net income after tax ‘Accounting Rate of Retum = ere rar ~Avetase net income after x, or, “Average investment 2 x Total net income ARR = Number of years * (Investment + Salvage valve) "NEV = Teal present value (TPV of fture cash inflows — nial cost Unvestment) oF te projet Ch, CE, CF, NPV TERT TF RT tT eR Lor unevenat Ao Scanned with CamScanner |Total present value of net cash flows Net cash outlay CF, CF Psa 9 +R) OF Ky + Ky to + Ky Initial outlay PBP Factor = Xnnual cash flow Step Il: Trial and Error Step III: Interpolation NPV, " IRR= Lr+ py, Nps (He L% TEV)" MIRR= (FEY) 1 ; Trminal value PY of cost = MRR ‘Amoun to recover Discounted payback period = Minimum year + Next yearend ia CAPITAL STRUCTURE AND LEVERAGE Sales = Variable expenses + Fixed expenses ia Q* SPPU =Q« VCPU +FC Fixed cost Br ve i ui = = re Contribution margin Contribution margin ratio _ = Contribution margin per unit Selling price per unit CM ratio _ Change in profit Change in sales CM ratio, ss e) Sales = Fixed costs Non-cash exy - Selling price per unit - variable cost per unit Financial BEP =14+ 28, Dor, = Centibuton Margin (CMay EBIT times DOL = 5 Sales — Variable Cost ves ales = Variable Cost — Fired Cost ~ S-VC-FC = -QSPR-y, LCM NSPRVORFe + ayes ql i AEBIT 7 EBr EI Percent ia BIT ‘BIT nsales ~ 4 Sates Cash BEP ‘Scanned with CamScannerEB DEL I Pp (If there is preference share) e eer 22 e Ht x les—Variable cos -Finedoot____ $= VC=FC DFL =< Stles— Variable cost Fined cost___S—VC-FC_ Sales-Variable cost Fined cost ~ Interest ~5-VO-FC—T __ (SPR VR) = FC Q(SPR— VCR) -FC-T S-VC=F bec Ce (it there is preference share capital s-ve-re-1 22 rt AEDT —Yeshange in EBT “EBT a ochange in EBIT OEE TET ~aERer (theres preference share) ‘ Br Degree of Combined Leverage DCL DOL «pri = BIT _ CM EDIT “EBT “EBT DCL = PD (If there is pref: share) emir 22 v S DEE ‘S-VC-FC-1 svc DEL =-——SYE rhe is preference share) 5 : sverc+ Pe 2 ae DCL DOL * DFL change in EBIT | % change in EBT rad ~“¥change in sales * Y%change in EBIT % change in EBT vechange in sales % change in EBIT 9% change in EPS DEL Yechange in sale“ ¥% change in EBIT (tthe is pret. share) Caan Nolen DEED (MBPS before stock dividend 1+SDR MPS before stock dividend N Nea (MPS after stock dividen MBS after stock dividend = MANAGEMENT ‘Average invent Inventory conversion period (ICP) = 75 cr goods sold per day ‘Average inventory, ~ Cost of goods sold 360) __ Average inventory * 360 Cost of goods sold WORKING CAPITAL Scanned with CamScannerInventory conversion period (ICP) = ‘ventory 360 Days in a Inventory turnover Begining inventory + Ending inventory 2 _| Cost of goods sold = Sales ~ Gross profit Inventory tumover = CeS-ot goods sold | Average inventory Sales Inventory Inventory conversion period (ICP) = Where, Average inventory Inventory tumover = _ Average receivables ~ Credit sales per day Average receivables _ Average receivables * 360 Creditsales =~ ——Credit sales 360 Receivables collection period (RCP) Receivables * 360 Sales spy Days in a yea Receivables collection period (RCP) = Reap ee — where, Begining receivables + Ending receivables Average receivables = 2 Credit sales ‘Average receivables Sales feceivables Receivables collection period (RCP) = | Receivables tumover = Receivables turnover ‘| AN bles seen ied eT penile __ Average payables. _ Average payables x 360 ~ Cost of goods sold ~~ Cost of goods sold 360 = Payables * 3 Payables deferral period (PDP) = eee Days ina Payables tumover Payables deferal period (PDP) = Where, Average pape - Beier Es es __ Cost of goods sold Payables tumover= reece pelos Credit a ‘Scanned with CamScannerfloat = Daily checks writ Collection Float Collection float = Daily checks received » Collection delay ae ‘Net Float Net float = Disbursement float ~ Collection float ra : Days Sales Outstanding (DSO) | DSO = Discount period x Percentage of customers taking discount + Credit period Percentage of customers paying on credit period + Late period * Percentage of customers paying on late period Average receivables, re ‘Credit sales per day Average receivables _ Average receivables * 360 Anmual credit sales ~ Annual erdit sales 360 Where Average receivables ! ne > — 2 ’ Receivables » 360 BsO) Sales DsoO. Ds Receivables turnover Credit sales Receivables turnover ae Aver ‘Cost of Investment in Receivables investment ~ Average accounts receivable balance * Variable cost ratio Receivables [(OSO) x Credit sales per day)] « Variable cost ratio ir ‘Annu 5 [.os0)« (Aas) vex [oso (zen) }* eR Receivables cayng cot = Reetablsiavestmen x Oppriniy cos o ands 2S ral) S [i0so)« () «ve}-x Bad Debt Losses Bad debt losses ~ Annual eredit sales * Percentage of default customers = Annual credit sales * Bad debt ratio Cash Discount Discount cont = [Annual credit sales (= Bad debt ratiay] = Parsonage of customers taking discount « Discount rate = [Amal rei sles (I~ BDR)] «Percentage discount usm x DR revere INVENTORY MANAGEMENT Carrying Cost Units per order es ‘Average inventory (A) a Order size a oe: zi Total carrying cost (TCC) = Percentage annual carrying cost * Purchase price per unit » ‘Average inventory xPPxA if. =cxprx$ 2, 2 =cPx Scanned with CamScannerFixed costs per order * Number of orders placed pet year =0xN oxd Q Tova inventory costs (TIC) = Total carrying cost (TCC)+ Total ordering cos (FO) CPXA+OxN coridioet Quip =CxPPxP +0xG (T) (O) (2) (T) (0) : At il ic une of t Atma oT Usage rate/Sales rate Average inventory (A) Average investment in inventory = (APP) Total inventory cost (TIC) = Total carrying cost (TCC) + Total ordering cost (TOC) =(C*PPXA)+OxN) =0.09) (72) (Fo ‘Goods in transit = Number of orders in transit « EOQ N Lead time Number of orders in transit = Soyo gee Time between orders/Order frequency = Weeks in a year_ ‘Number of orders (N) ciem Tnitial order size/Order size atthe outset = EOQ + Safety stock ‘Average inventory (A) FOO safety Stock S) it Time x We = Total carrying cost (TCC) + Total Ordering cost(TOC)- Annual discount e = (3) +(0) (Q)- Annus aiscoue ‘Net annual benefit from discount offet= TIC at EOQ— TIC at Q ‘Scanned with CamScanner