MGT201 Formulas Lectures 1-22

MGT201 Financial Management Formulas Lecture 1 to 22

1. Fundamental Accounting Equation and Double Entry Principle.

• Assets +Expense = Liabilities + Shareholders’ Equity + Revenue

Liabilities = Equity = Net Worth

Revenue – Expense = Income

1. Statement of Retained Earnings or Shareholders’ Equity Statement

Total Equity = Common Par Stock Issued + Paid In Capital + Retained Earnings

2. Current Ratio:

= Current Assets / Current Liabilities

3. Quick/Acid Test ratio:

= (Current Assets – Inventory) / Current Liabilities

4. Average Collection Period:

= Average Accounts Receivable /(Annual Sales/360)

5. PROFITABILITY RATIOS:

Profit Margin (on sales):

= [Net Income / Sales] X 100

Return on Assets:

= [Net Income / Total Assets] X 100

Return on equity:

= [Net Income/Common Equity]

6. ASSET MANAGEMENT RATIOS

Inventory Turnover:

= Sales / inventories

Total Assets Turnover:

= Sales / Total Assets

7. DEBT (OR CAPITAL STRUCTURE) RATIOS:

Debt-Assets:

= Total Debt / Total Assets

Debt-Equity:

= Total Debt / Total Equity

Times-Interest-Earned:

= EBIT / Interest Charges

8. Market Value Ratios:

Price Earning Ratio:

= Market Price per share / *Earnings per share

Market /Book Ratio:

= Market Price per share / Book Value per share

*Earning Per Share (EPS):

= Net Income / Average Number of Common Shares Outstanding

9. M.V.A (Market Value Added):

MVA (Rupees) = Market Value of Equity – Book Value of Equity Capital

10. E.V.A (Economic Value Added):

EVA (Rupees) = EBIT (or Operating Profit) – Cost of Total Capital

11. Interest Theory: · • Economic Theory: · i = iRF + g + DR + MR + LP + SR

• i is the nominal interest rate generally quoted in papers. The “real” interest rate = i – g Here i = market interest rate

g = rate of inflation DR = Default risk premium MR = Maturity risk premium LP = Liquidity preference SR = Sovereign Risk The explanation of these determinants of interest rates is given as under:

12. Market Segmentation: Simple Interest (or Straight Line):

F V = PV + (PV x i x n)

Discrete Compound Interest:

Annual (yearly) compounding:

F V = PV x (1 + i) n

Monthly compounding:

F V = PV x (1 + (i / m) m x n

Continuous (or Exponential) Compound Interest:

F V (Continuous compounding) = PV x e i x n

13. Estimated current assets for the next year

= [Current assets for the current year/Current sales] x Estimated sales for the next year

14. Expected Estimated retained earnings

= estimated sales x profit margin x plowback ratio

15. Estimated discretionary financing

= estimated total assets – estimated total liabilities –estimated total equity

16. G (Desired Growth Rate)

= return on equity x (1pay out ratio)