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FINANCIAL MANAGEMENT (FM) FORMULAS
FOR MORE INSIGHTS FOLLOW
NISHANT AGRAWAL

RATIO ANALYSIS Capital budgeting techniques

ACTIVITY/ LEVERAGE RATIOS/

PROFITABILITY LIQUIDITY LONG TERM
EFFICIENCY
RATIOS RATIIOS/ SHORT SOLVENCY RATIOS
TURNOVER RATIOS
TERM RATIOS TRADITIONAL TECHNIQUES OR
NON CASH DISCOUNTING OR NON
TIME ADJUSTED TECHNIQUE TIME ADJUSTED OR DISCOUNTED
CASH FLOW(DCF) OR MODERN
Working Capital T/O Ratio = Sales/COGS CAPITAL STRUCTURE
TECHNIQUE
Avg. Working Capital Current Ratio = Current Assets RATIOS
ACCOUNTING RATE OF
Current Liablities
RETURN OR AVERAGE PAYBACK
Total Assets T/O Ratio = Sales/COGS Equity Ratio = Equity Fund RATE OF RETURN (ARR) PERIOD
Quick/Acid test/ Liquid Ratio = Quick / Liquid Assets Capital Employed
Avg. Total Assets
Current Liabilities
ARR = AVERAGE ANNUAL PROFIT​✕ 100 PAYBACK PERIOD = INITIAL INVESTMENT​ ✕ 100
Payables T/O Ratio = Annual Net Credit Purchase Debt Ratio = Total Debt INITIAL INVESTMENT ANNUAL CASH INFLOWS
Avg. Accounts Payables Cash/ Absolute Liquidity Ratio = Cash and Cash Equivalent
Capital Employed
Current Liabilities
Receivables T/O Ratio = Annual Net Credit Sales
Basic Defence Interval = Cash and Cash Equivalent Debt to Equity Ratio = Total Debt
Avg. Accounts Receivables
Daily Cash Operating Cost Equity Fund
DISCOUNTED DPB = INITIAL INVESTMENT​ ✕ 100 INTERNAL RATE
Inventory T/O Ratio = Sales /COGS OF RETURN (IRR)
Net Working Capital Ratio = Current Assets - Current Liab. Debt to Total Assets Ratio = Total Debt PAYBACK PERIOD DISCOUNTED ANNUAL CASH INFLOWS
Avg. Inventory
Total Assets
* COGS = Cost of goods sold
Capital Gearing Ratio= PSC + Deb. + Other Borrowed Funds NET PRESENT
* T/O = Turnover NPV = Present Value of Inflow - Present Value of Outflow/Initial Investment One Point Inflow & Outflow
VALUE (NPV)
Equity Share Capital + Reserves& Surplus - losses

ON THE BASIS OF Proprietary Ratio = Proprietary Fund

ON THE ON THE BASIS OF REQUIRED FOR IRR = n√inflow -1
MPS OR CAPITAL Total Assets PROFITABILITY
BASIS OF INVESTMENT & ASSETS OWNER’S PI = Present Value of Inflow - Present Value of Outflow / Initial Investment Outflow
SALES MARKKET INDEX (PI)

Step 1 : Calculate Cumulative Compounded Value of intermediate

P/E Ratio = MPS COVERAGE
G.P Ratio = Gross Profit ✕100 RETURN ON ASSETS (ROA) Dividend Payout Ratio = DPS ✕ 100 Interest Coverage Ratio = EBIT Cash inflow by using cost of capital as rate of compounding
EPS RATIOS MODIFIED IRR
Sales EPS INTEREST Multiple Point Inflow& Outflow
ROA = EAT ✕ 100 (MIRR)
Step 2 : Calculate MIRR = n√Cumulative Compounded Value - 1
Avg. Total Assets Dividend Yield Ratio = DPS ✕ 100
EPS = EAT - Preference Dividend Preference Dividend Coverage Ratio = EAT Initial Investment
Net Profit Ratio = EAT ✕ 100 MPS
Sales RETURN ON INVESTMENT (ROI) No. of Equity Shares Outstanding Preference Dividend
ROCE = EBIT ✕ 100 Earnings Yield Ratio = EPS ✕ 100
DPS = Equity Dividend Equity Dividend Coverage Ratio = EAT - Preference Dividend
Operating Profit = EBIT ✕ 100 Avg. Capital Employed MPS
No. of Equity Shares Outstanding Equity Dividend
Ratio Sales UNEQUAL CASH INFLOW
ROE as per DU PONT MODEL
Return on Shareholders = EAT ✕ 100 Earnings Retention Ratio = EPS - DPS ✕ 100 = Net Profit Margin ✕ Asset Fixed Charge Coverage Ratio = EBIT + Depreciation
EXPENSE RATIO : Fund Avg. Shareholders Fund Step 1 : Calculate NPV by using two discount rate EQUAL CASH INFLOW
Operating = COGS+Operating Expenses ✕ 100
EPS Turnover ✕ Equity Multiplier Interest + Repayment of Loan
⇨ One Positive NPV & One Negative NPV
Step 1 : Calculate Present Value Interest factor of
Ratio Sales ROE = EAT - Preference Dividend ✕ 100 ROCE as per DU PONT MODEL DSCR = Funds for Debt Service Annuity(PVIFA)
Equity Share Holders Fund *EPS = Earnings per Share Step 2 : Calculate IRR = LR + NPV at LR ✕ (HR - LR)
= Operating Profit Margin ✕ Interest + Installments NPV at LR - NPV at HR PVIFA = Initial Outflow
*DPS = Dividend per Share

*EAT= Earnings after Tax

Capital Turnover Annual inflow
*ROCE = Return on capital employed LR = Lower Discount Rate
*EBIT = Earnings before Interest and Taxes *ROE = Return on Equity *P/E Ratio = Price to Earnings Ratio HR = Higher Discount Rate Step 2 : Check PVIFA value in table and Select IRR
*ROE = Return on Equity
*DSCR = Debt Service Coverage Ratio
NPV at LR = NPV at Lower Discount Rate
NPV at HR = NPV at Higher Discount Rate

DIVIDEND DECISIONS MODELS COMPONENTS OF COST OF CAPITAL (Kⅽ or Ko) Techniques of Risk Analysis in Capital Budgeting

Statistical Conventional Other

MODIGLIANI & WALTER GORDON TRADITIONAL LINTNER Cost of Cost of Cost of Cost of Techniques
Techniques Techniques
MILLER (M.M) MODEL Preference Share Equity Share Retained
MODEL MODEL MODEL Debts (Kⅾ)
HYPOTHESIS Capital (Kp) Capital (Ke) Earning (Kr)
Risk Adjusted Discount
Rate (RADR)
P = m (D + E/3) Irredeemable Redeemable
STEP 1 ⇒ P₁ = P₀(1+Ke) - D P = D + (E - D) ✕ r/Ke
Dividend Price Earning Price Growth Realized Yield Capital Asset RADR = Rf + Risk Premium
Ke P = Market Price of share
Approach Approach Approach Pricing Model
Kd = I(1-t) ✕ 100 Approach
STEP 2 ⇒ △n = I - (E-D)
D = DPS Certainty Equivalents (CE)
P = Market price of share (MPS) NP Installments
E = EPS
P₁ E = Earnings per share (EPS) Ke = D ✕ 100
m = Multiplier I = Amount of Interest Ke = D₁ + g Ke = Actual Return
D = Dividend per share (DPS) D₁ = D₀ + [(EPS ✕ Payout) - D₀] ✕ Af t = Tax Rate Lump-sum P₀ P₀
C.E coefficient = Certain cash Flow
STEP 3 ⇒ nP₀ = (n + △n) P₁ - I +E r = Return on Investment(ROI)
D₁ = Dividend in Year 1 NP = Net Proceeds
YTM Method Only
OR OR
Risky or Expected Cash Flow

1 + Ke D₀ = Dividemd in Year 0 In Case of New Issue In Case of New Issue

EPS = Earnings per Share Ke = Rf + ß(Rm - Rf)
Yield to Maturity(YTM) approach Ke = D ✕ 100 Ke = D₁ +g Coefficient of
P₀ = MPS at the beginning of year Af = Adjustment factor or speed of adjustment Probability Variance Standard
NP P₀ - F Rf = Risk Free Rate of Return variance
P₁ = MPS at the end of year Deviation(S.D)
Kd = LR + NPV at LR ✕ (HR - LR) Rm = Rate of Return on Market Portfolio
Ke = Cost of Equity
NPV at LR - NPV at HR Rm - Rf = Market Risk Premium X = ∑fX V =∑(X - X)²f
D = Dividend expected for the year Ke = E ✕ 100 S.D/X
△ No Growth Constant Growth Variable Growth ß = Beta Coefficient S.D = √V
n = New no. of Shares
⇒ OR
P₀
X= Expected NPV = ∑fx
E = Earnings for the year
P₀ = D/Ke P₀ = D₁ STEP 1 PV of Dividend upto OR Existing Investors
n = no. of shares at the beginning of year Approximation Method In Case of New Issue
variable growth years Kr = Ke
△
n+ n = Total no. of shares at the end of the year Ke - g
Ke = E ✕ 100
I = Investment LR = Lower Discount Rate
g=b✕r
g = Growth rate ⇒
STEP 2 PV of P(At the end of HR = Higher Discount Rate
NPV at LR = NPV at Lower Discount Rate
Irredeemable Redeemable NP In case of personal tax
Kr = Ke(1 - tp)
Sensitivity
Analysis
Scenario
b = Earning retention ratio variable growth years) D = Expected / Current Dividend Analysis
NPV at HR = NPV at Higher Discount Rate Kp = PD ✕ 100 This Analysis is used to study the
r = IRR or ROI E = Expected/ Current EPS
Lump-sum Installments impact of changes in the variables This Analysis examine the risk of

NP D₁ = Expected DPS f is rate of Floatation cost on the outcome of the project

after taking into change in ONLY
investment, to analyse the impact of
alternative combinations of Variables

P₀ = Current Market Price of Equity Share Kr = Ke(1 - tp)(1 - f)

ONE Variable on the Project‘s NPV, PI, IRR etc.

PD = Amount of Preference Dividend YTM Method YTM Method Only g = Constant Growth Rate of Dividend
NP = Net Proceeds OR g = b✕r (Gordon’s Growth Model)
Approximation
Method
FOR MORE INSIGHTS FOLLOW
NISHANT AGRAWAL
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