FINA 2201 and FINA 2209 Final Exam, Spring 2015

Net working capital = current assets less current liabilities

Capital = debt and equity
Debt = interest-bearing liabilities only (note: non-interest bearing liabilities are considered spontaneous
liabilities or cost-free liabilities)
Net operating working capital (NOWC) = (current assets less excess cash) less (current liabilities less
notes payable) >>>>>>>>> this is unedited definition from page 64 of the text
Earnings per share (EPS) = Net income divided by common shares outstanding
EBIT = earnings before interest and taxes (EBIT is equivalent to operating profit)
EBITDA = earnings before interest, taxes, depreciation and amortization
Free Cash Flow (FCF) = (EBIT times (1 minus the tax rate)) plus depreciation and amortization less (change
in net operating working capital plus capital expenditures)
Liquidity ratios
Current ratio = current assets divided by current liabilities
Quick ratio = (current assets less inventory) divided by current liabilities
Asset management ratios
Inventory turnover = Sales divided by inventory
Days sales outstanding (DSO) = Receivables divided by average sales per day
= Receivables divided by (annual sales/365)
Fixed assets turnover ratio = sales divided by net fixed assets
Total assets turnover = sales divided by total assets
Debt management ratios
Total debt to total assets = total liabilities divided by total assets (the books definition)
Times interest earned ratio (TIER) = EBIT divided by interest expense
Profitability ratios
Operating margin = EBIT divided by sales
Profit margin = net income divided by sales
Return on total assets (ROA) = net income divided by total assets
Basic earning power = EBIT divided by total assets
Return on common equity (ROE) = net income divided by common equity
Market value ratios
Price earnings or P/E ratio = price per share divided by earnings per share (EPS)
Market to book or M/B ratio = market price per share divided by book value per share
Where book value per share = common equity from the balance sheet divided by shares
outstanding
DuPont equation
Return on equity (ROE) = Return on assets (ROE) multiplied by the equity multiplier
Where ROA = profit margin multiplied by total assets turnover
Where the equity multiplier = total assets divided by total common equity
Alternatively:

Time Value of Money

FV = PV multiplied by ((1 plus interest rate) raised to the nth power)
PV = FV multiplied by 1/((1 plus interest rate) raised to the nth power)
I = ((FV/PV) raised to the nth root) 1
Alternatively:

Note: this is the generic formula which you can transform to solve for FV, n and i
Solving for n requires the use of natural logarithms (not shown)
Solving for i:

Perpetuity present value

PV = Annuity payment divided by interest rate
Alternatively:
PV = PMT/i
Value of a bond = Present value of coupon interest at market interest plus Present value of single
principal payment at maturity at market interest

Yield to maturity = solve for interest rate given the following:

n = term to maturity
PMT = coupon interest payments
FV = single principal payment at maturity
PV = current price of the bond

C = coupon interest
M = principal payment upon maturity
N = term at maturity
P = price of the bond
Given the above formula as the price of a bond, solve for y which equates P (or bond price) to the present
values of the coupon payments (C) and the payment upon maturity (M)
Yield to call = adapt the above to a shortened term and a different bond value at the time it is called
Semi-annual coupon bonds = divide interest by 2, multiply n by 2
Expected rates of return = take a weighted average of each possible return (i.e. multiply each rate of
return by its probability) and then sum
Standard deviation = take the square root of the (sum of (return rate less expected return) squared
multiplied by its probability)

Sigma = standard deviation

X = the return rate
Mu = the expected return

P(x) = the probability of that return rate

Coefficient of variation = standard deviation divided by expected return

Capital Asset Pricing Model (CAPM) = risk free rate plus (Beta times the market premium)

The market premium = the market rate of return less the risk free rate
Portfolio expected rates of return = multiply the expected rates of return of each asset by their
percent contribution to the total portfolio value and then sum
Portfolio Beta = multiply the betas of each asset by their percent contribution to the total portfolio value
and then sum
Dividend yield = expected dividend in year 1 divided by stock price in year 0

The book defines the annual dividend payout as the dividend in year 1 and not the dividend in year 0.
Capital gains yield = (P1 less P0) divided by P0 = percent change in price
Expected total return = expected dividend yield plus expected capital gains
Dividend discount model (no growth) = price of a stock = dividend divided by required rate of return
Dividend discount model (constant growth) = price of a stock = dividend divided by (required rate of
return less growth rate)

For the no growth dividend discount model g = 0.

Weighted Average Cost of Capital (WACC) =
(D/(D + E) times cost of debt times (1 minus tax rate)) plus (E/(D + E) times cost of equity)
Where D/ (D + E) and E/ (D + E) = proportions of debt and equity to total capital

Required rate of return = CAPM = risk-free rate of return plus market premium = expected rate of
return = (expected dividend in year 1/ price in year 0) + growth rate

Bond yield plus risk premium = cost of equity

Payback = Accumulate cash flows while counting the number of periods it takes for the net of the
negative initial investment and the cash flows from the investment to become zero (not time value of
money adjusted)
Free Cash Flow = (EBIT times (1 minus the tax rate)) less (capital expenditures plus the change in net
operating working capital)
Taxes paid on salvaged assets = Tax rate times (Salvage value less tax basis)
WACC = Weight the costs of debt, preferred stock and equity by their relative proportions to total capital
(debt and equity combined) and then sum to get the WACC

The Hamada (

) equation solves for levered and unlevered betas given one or the other

Unlevered beta = Levered beta divided by (1 + (1 minus tax rate)(D/E))

Levered beta = Unlevered beta multiplied by (1 + (1 minus tax rate)(D/E))
Note: be careful about the order with which you do the calculation
Net operating working capital = current assets less (current liabilities less interest bearing liabilities
(also known as debt))
Cash conversion cycle = inventory conversion period plus average collection period less payables
deferral period
Inventory conversion period
First calculate inventory turnover = cost of goods sold divided by inventory
Then take 365 days in a year and divide it by the inventory turnover
Average collection period
First calculate receivables turnover = sales divided by accounts receivable
Then take 365 days in a year and divide it by the receivables turnover
Payables deferral period
First calculate payables turnover = cost of goods sold divided by payables
Then take 365 days in a year and divide it by the payables turnover ratio
Nominal annual cost of trade credit
Discount % divided by (100 less discount %) times (365 divided by (days credit is outstanding less
discount period)

Additional Funds Needed (AFN)

Projected increase in assets less spontaneous increase in liabilities less increase in retained earnings