Summary of Formulas - Exam One
Principles of Finance
I. FINANCIAL CASH FLOWS
The cash flow identity:
cash flow from assets = cash flow to creditors (bondholders)
+ cash flow to stockholders (owners)
cash flow from assets = operating cash flow
- net capital spending
- addition to net working capital (NWC)
where: operating cash flow = earnings before interest and taxes (EBIT)
+ depreciation - taxes
net capital spending = ending NFA - beginning NFA + depreciation
addition to NWC = ending NWC - beginning NWC
cash flow to creditors = interest paid - net new borrowing
cash flow to stockholders = dividends paid - net new equity raised
= dividends paid - (end equity - beg equity addition to retained earnings)
II. FINANCIAL RATIOS
a) Short-term solvency or liquidity ratios:
current ratio = current assets/current liabilities
quick ratio = (current assets - inventory)/current liabilities
b) Long-term solvency or financial leverage ratios:
total debt ratio = (total assets - total equity)/total assets
debt/equity ratio = total debt/total equity
equity multiplier = total assets/total equity = 1+ (debt/equity ratio)
times interest earned ratio = EBIT/interest
cash coverage ratio = (EBIT + depreciation)/interest
c) Asset utilization or turnover ratios
inventory turnover = cost of goods sold/inventory
days in inventory = 365 days/inventory turnover
receivables turnover = sales/receivables
average collection period = 365 days/receivables turnover
total asset turnover = sales/total assets
d) Profitability ratios
profit margin = net income/sales
return on assets (ROA) = net income/total assets
return on equity (ROE) = net income/total equity
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DuPont Identity:
ROE = (net income/sales) x (sales/assets) x (assets/equity)
profit margin x total asset turnover x equity multiplier
e) Market value ratios
price/earnings ratio = price per share/earnings per share
market-to-book ratio = market value per share/book value per share
dividend yield = dividend per share/market price per share
retention ratio = retained earnings/net income
payout ratio = cash dividends/net income
sustainable growth rate = ROE x retention ratio
III. TIME VALUE OF MONEY CALCULATIONS
Symbols
PV = present value
FVt= future value at time t
r = interest rate, rate of return, or discount rate per period
t = number of periods
C = constant cash amount (Note: C starts at one period from today)
Future value formula
FVt= PV x (1+r) t
Present value formula
PV = FVt/(1+r) t
Present value of annuity formula
C
1 
PV = 1 

r  (1  r ) t 
Future value of annuity formula
C
(1  r ) t  1
FVt =
r

Present value of a perpetuity
PV = C/r
Compounding periods
FVt= PV x (1+r/m) tm
where m = number of times compounded per period
Effective annual rate (EAR) = [1+(APR/m)] m -1
EAR under continuous compounding: EAR = e APR - 1
where e = 2.71828
2
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