Formulae in
Cost Accounting
&
Financial Management
CA – IPCC
Part I
FINANCIAL
MANAGEMENT
Chapter 1 : TIME VALUE OF MONEY
FV = PV(1+r)n
Meaning of Terms
FV
= Future Value,
PV
= Present Value,
r
= % rate of interest,
n
= The time gap.
Chapter 2 : CAPITAL BUDGETING
ARR = Average PAT p.a/ Net investment.
Profitability index (PI)/ Desirability factor = Total of Discounted Cash Inflows/
Total Discounted Cash Outflows.
EAC = Cash Outflows per annum+ EAI
EAI = Initial Investment / Relevant Annuity Factor.
Meaning of Terms
EAC = Equivalent Annual Costs
PI
=
EAI =
Profitability Index
Equivalent Annual Investment
Chapter 6 :
CAPITAL STRUCTURE
k =
d
Annual Interest Charge
Market Value of debt
ke =
Equity Earnings
Market Value ov Equity
ko = kd ×
ko = kd ×
D
E
+ ke ×
V
V
ke = ko +
D
(k o − k d
E
V=D+E=
Expected Operating Income
Discount rate applicable to the risk class to which the firm belongs
ke = ko +
D
E
+ ke ×
V
V
)
D
(k o − k d )
E
Meaning of Terms
Kd = Cost of debt
Ke = Cost of equity
V = Market Value of the firm (V)
D = Market value of debt (D)
E
= Market value of Equity
ko = Overall capitalization rate for the firm
Chapter 7 : Ratio Analysis
Current Assets
Current Liabilities
Quick Assets
Quick Ratio =
Quick Liabilties
Cash + Marketable Securities
Cash Ratio =
Current Liabilitie s
Owner' s Equity
Equity
Owner’s Equity to Total Equity Ratio =
or
Total Equity
Total Assets
Debt
Debt Equity Ratio =
Equity
Earnings available for debt service
Debt Service Coverage Ratio =
Interest + Instalments ( principal component )
Earnings Before Interest and Tax [ EBIT ]
Interest Coverage Ratio =
Interest
Pr ofit After Tax[ PAT ]
Preference Dividend Coverage Ratio =
Pr eference Dividends
Pr ofit After Tax [ PAT ] − Pr eference Dividend
Equity Dividend Coverage Ratio =
Equity Dividend
Capital Gearing Ratio =
Pr eference Share Capital + Debentures + Long term loans
Equity Share Capital + Re serves and Surplus − Losses
Current Ratio =
Or
Fixed income bearing sec urities
Non − Fixed income bearing sec urities
Fixed Assets
Fixed Assets to Long term fund Ratio =
Long Term Funds
Pr oprietary Funds or Capital Employed or Owners' Equity
Proprietary Ratio =
Total Assets
Proprietary funds = Share Capital + Reserves and Surplus – Fictitious Assets
Total Assets = Total Assets as per Balance Sheet except fictitious assets and losses.
Capital Turnover Ratio =
Fixed Assets Turnover Ratio =
Sales
Capital Employed
Sales
Fixed Assets
Sales
Working Capital
Working Capital Turnover Ratio =
Inventory Turnover Ratio = Average Stock = ½ X [Opening Stock + Closing Stock]
Raw Material Turnover Ratio =
Debtors’ Turnover Ratio =
Average Collection Period =
Average Accounts Re ceivable
365
or
Average Daily credit sales
Debtors Turnover Ratio
Creditors’ Turnover Ratio =
Average Payment Period
Average Accounts Payable
365
=
or
Average Daily Credit Purchase
Creditors Turnover Ratio
Return on Equity =
PAT − Pr eference Dividend
Equity Share Capital + Re serves and Surplus − Fictitious Assets
Earnings per share =
Pr ofit After Taxes − Pr eference Dividend
Number of equity shares
Dividend per share =
Total dividends distributed to the equity shareholders
Number of equity shares
Price Earnings Ratio =
Return on Capital Employed =
Return on Investment =
Raw Materials Consumed
Average Raw Materials Stock
Credit Sales
Average Accounts Re ceivable
Credit Purchases
Average Accounts Payable
Market Pr ice per Share
Earning per share
Re turn
× 100%
Capital Employed
Pr ofit Before Interest and Tax
× 100%
Capital Employed
Gross Pr ofit
× 100%
Sales
Gross Profit Ratio =
Operating Profit Ratio =
Net Profit Ratio =
Dividend Yield =
ROE = Net Profit = Net Profit × Sales × Assets
Equity
Assets Equity
Sales
Operating Pr ofit
× 100%
Sales
Net Pr ofit
× 100%
Sales
Dividend per share
× 100%
Market price per share
Meaning of Terms
Current Assets = Inventories + Sundry Debtors + Cash and Bank Balances + Loans and
Advances + Marketable non-trade securities at market value.
Current Liabilities = Trade creditors + Bills payable + Outstanding expenses + Provision
for taxation + Proposed Dividend + Other Provision + Cash Credit +
Bank Overdraft + Unclaimed Dividend
Quick Assets
=
Current Assets – Inventories – Prepaid Expenses
Quick Liabilities = Current Liabilities – Bank Overdraft – Cash Credit
Owner’s Equity =
Total Equity
=
Share Capital (both equity and preference) + Reserves and Surplus (–)
Fictitious Assets
Owner’s Equity + External Equity [i.e., outside liabilities inclusive of
current liabilities and provisions]
Or
Balance Sheet Total – Miscellaneous Expenditure
Equity
=
Owner’s Equity
Debt
=
Long term loan fund.
Proprietary funds = Share Capital + Reserves and Surplus – Fictitious Assets
Total Assets = Total Assets as per Balance Sheet except fictitious assets and losses.
Average Stock =
½ X [Opening Stock + Closing Stock]
Chapter 9 : COST OF CAPITAL
P0 = 1. (1-t). PVIFA (kd, n) + F.PVIF (kd,n)
F − P0
I(1 − t ) +
n
kd
F + P0
2
Cost of term loans = Interest rate × (1- tax rate)
P0 = D.PVIFA(kp,n) + F.PVIF(kp,n)
F − P0
D+
n
kp =
F + P0
2
D
ke 1 + g
P0
ke = Rf + B (Rm – Rf)
Wt =
Dt − Pt
Pt − 1
Ke =
E1
P
WACC =
n
∑W k
r =1
r
r
EPS =
EBIT(1 − t )
N1
EPS =
(EBIT − Int .)(1 − t )
N2
Meaning of Terms
P0(Cost of debentures)
=
I
=
t
=
F
=
kd
=
n
=
P0(Cost of preference capital)
D
=
F
=
kp
=
D1
=
D0
=
P0
=
g
=
b
=
r
=
Rf
=
B
=
Rm
=
Wt
=
E1
=
Wr
=
Kr
=
Int
=
N1
=
N2
=
t
=
Present value of the debenture (net of floatation cost)
Annual interest payable on the debenture
Tax rate
Principal amount repayable at the maturity time
Cost of debenture
Maturity period
= Net amount realized per share (net of floatation cost)
Preference dividend per share
Redemption price
Cost of preference capital
Expected dividend per share next year = D0 × (1 + g)
Last paid dividend per share
Current market price per share
Growth rate
Retention Ratio
Return on Equity
Risk free rate
Beta
Return on market
Wealth Ratio
Expected EPS for the next year
Weight of rth source of capital
Cost of rth Source of capital
Total interest charge on debt financing.
Total No. of Equity Shares under financial Plan 1
Total No. of equity Shares under Financial plan 2
Tax Rate
Chapter 10 : Leverage Analysis
Equity Earnings = Sales – Variable Costs – Fixed costs – Interest – Tax – Preference
Dividend
Equity Earnings = [Q (P-V)-F-I] × (1-t)-DP
Earnings Per Share
[Q (P - V) - F - I] × (1 - t) - DP
Equity Earnings
=
Number of Equity Shares
n
∆EBIT
Percentage Change in EBIT
Q( P − V )
Contribution
DOL =
= EBIT =
=
∆Q
Percentage Change in Sales
Q( P − V ) − F
EBIT
Q
∆EPS
Percentage Change in EPS
EBIT
= EPS =
∆
EBIT
D
Percentage Change in EBIT
EBIT − I − P
EBIT
1− t
DFL =
DCL =
∆EPS
Percentage Change in EBIT
Q( P − V )
= EPS =
∆Q
D
Percentage Change in Sales
Q( P − V ) − F − I − P
Q
1− t
Meaning of Terms
Q
=
Number of units sold
P
=
Price per unit
V
=
Variable Cost per unit
F
=
Total fixed cost
I
=
Total Interest
t
=
Tax rate
DP
=
Preference Dividend
n
=
Number of equity shares