Essential Corporate Finance Formulas and Ratios
Chapter 2: Key Financial Formulas
- Asset Equation:
Assets = Liabilities + Shareholder Equity - Market Capitalization (Market Value of Equity):
Market Price per Share * Number of Shares Outstanding - Net Working Capital (NWC):
Current Assets - Current Liabilities - Net Working Capital to Total Assets Ratio:
NWC / Total Assets - Debt-to-Equity Ratio:
Total Debt / Total Equity - Enterprise Value (EV):
Market Value of Equity + Debt - Cash - Current Ratio:
Current Assets / Current Liabilities - Quick Ratio (Acid-Test Ratio)
Practical Accounting Calculation Examples
Closing Stock Undervaluation Calculation
Calculate the correct value of closing stock when it is undervalued by 10%, and the current book value is Rs. 45,000.
Formula:
Revised Value = Book Value × 100 / (100 – % of Undervaluation)
Calculation:
= 45,000 × 100 / (100 – 10)
= 45,000 × 100 / 90
= Rs. 50,000
Answer: The correct value of the closing stock is Rs. 50,000.
Machinery Depreciation Calculation
Machinery worth Rs. 80,000 was purchased on 01-07-2022. Calculate the depreciation at 4% p.a. for the financial
Read MoreShort-Term Financing and Financial Ratio Analysis
Short-Term Financing Options
- Line of Credit: Offers a maximum loan balance the firm can access for a specific period. Involves interest payments and a commitment fee.
- Commercial Paper: Short-term, unsecured debt issued by large corporations, often a cheaper funding source than short-term bank loans.
- Sale of Short-Term Financial Investments: Financial assets acquired to temporarily invest excess cash flows. Generally very liquid, flexible in amount and maturity, and risk-free.
- Invoice Discounting: The
Derivatives and Hedging: Mock Exam Questions
Mock Exam (Theory)
Hedging and Risk Management
Hedging is used to:
- (a) Reduce risk.
- (b) Speculation.
- (c) Increase exposure to price movements.
Futures vs. Forwards
What is the difference between Futures and Forwards?
- (a) Futures are traded on an organized exchange, and forwards are traded OTC (Over-the-Counter).
- (b) Forwards are traded on an organized exchange, and futures are traded OTC.
- (c) Forwards have daily settlement, and futures settlement at the end of the period.
Bear Spread Payoff
A bear spread:
- (a)
Capital Budgeting: Cash Flow, NPV, and WACC
Chapter 12: Cash Flow in Capital Budgeting Projects
Opportunity Costs
Allocation of a firm’s resources represents lost opportunities.
Sunk Cost
An expense or obligation the firm is compelled to pay regardless of whether a project is undertaken.
Straight-Line Depreciation Method
Depreciation = (Depreciable basis – Ending book value) / Life of asset
Operating Cash Flow (OCF)
OCF = EBIT * (1 – Tax rate) + Depreciation
Gross Fixed Asset Changes
Almost always change at the beginning and end of a project. At the
Read MoreStock Splits, Dividends, and Financial Statement Analysis
Stock Splits and Book Value
Before Action
Common Stock = 60,000 x $12 = $840,000
Retained Earnings: Given as $400,000.
Total Stockholders’ Equity = $840,000 + $400,000 = $1,240,000
Book Value per Share = $1,240,000 / 60,000 = $20.67
After Stock Split
Total Shares = 60,000 x 3 = 180,000
New Par Value: Reduced to $4 per share.
Common Stock: Total par value remains unchanged = $840,000
Total Stockholders’ Equity = $1,240,000
Book Value per Share: $1,240,000 / 180,000 = $6.89