CMA USA Part 2 All Formulas

CMA USA Part-2 All Formulas

Net Working Capital*

Net Working Capital = Current Assets - Current Liab

Liquidity Ratios: Current Ratio*

Current Ratio = Current Assets / Current Liab

Liquidity Ratios: Quick Acid Test Ratio*

Quick Acid Test ratio = (Cash + Marketable Securities + Net Receivables) / Current Liab

Liquidity Ratios: Cash Ratio

Cash Ratio = (Cash + Marketable Securities) / Current Liab

Liquidity Ratio: Cash Flow Ratio

Cash Flow Ratio = Cash flow from operations / current liab

AR Turnover*

AR Turnover = Net Credit Sales / Average AR

DSO in Receivables*

DSO in AR = days in a year / AR turnover

Inventory Turnover*

Inventory Turnover = COGS / Average inventory

Days Sales in Inventory*

Days sales in inventory = Days in a year / Inventory turnover

AP Turnover

AP Turnover = Purchases / Average AP

Days Purchase in AP

Days Purchase in AP = Days in a year / AP Turnover

Operating Cycle*

Operating Cycle = Days Sales in Receivables + Days Sales in inventory


Inventory turnover days + AR turnover days

Cash Cycle

Cash Cycle = Operating Cycle - Days purchases in payables

Fixed Assets Turnover Ratio

Fixed Assets Turnover Ratio = Net Sales / Average Net PPE

Total Assets Turnover Ratio

Total Assets Turnover Ratio = Net Sales / Average total assets

Debt Ratio*

Debt ratio = total liab / total assets

Total Debt to Total Capital Ratio

Total Debt to Total Capital Ratio = Total Debt / Total Capital

lower the ratio the better

Debt to Equity Ratio*

Debt to Equity Ratio = Total Debt / Stockholders' equity

lower the ratio the better

LT Debt to Equity Ratio*

LT debt to Equity Ratio = LT Debt / Stockholders' equity

Times Interest Earned Ratio*

Times Interest Earned Ratio = EBIT / Interest expense including capitalized interest

Degree of operating leverage (DOL) - Single period version

DOL = Contribution Margin / Op Inc or EBIT

Contribution Margin = Net Sales - Variable Costs

DOL Percentage Change Version

DOL Percentage Change Version = % Change in Op Inc or EBIT / % change in Sales

Degree of Financial Leverage (DFL) - Single period version*


DFL Percentage Change Version*

DFL Percentage Change Version = % Change in NI / % change in EBIT

Return on Sales

Return on Sales = EBIT / Sales

Return on Assets*

ROA = Net Income / Average total assets

ROA Dupont* = Net Profit Margin x Total Asset turnover

Return on Equity*

ROE = Net Income / Average total equity

ROE Dupont = Net Profit Margin x Asset Turnover x Equity Multiplier

Equity Multiplier = Average total assets / average total equity

Return on Common Equity*

ROCE = (Net Income - Preferred Dividends) / Average Common Equity

Common Equity= Total Equity - Preferred Equity

Income available for common shareholders (IACS) = Net income - preferred dividends

ROCE Dupont =( IACS / net sales) x total asset turnover x common equity multiplier

common equity multiplier = average total assets / average common equity

Return on Investment for Common Stock

aka Dividend Growth Model*

Return on investment required for common stock = dividend yield + dividend growth rate

dividend yield = dividend / market price of common stock

Book Value per share*

Book Value per Share = (Total Equity - Liquidation value of preferred equity) / Common Shares Outstanding

Market / Book Ratio or Price Book Ratio*

Market Book Ratio = Market price per share / book value per share

Price / Earnings Ratio****

Price Earnings Ratio = Market Price per share / Diluted earning per share

eg: NI = $588K

10,000 shares preferred $100 par @6%

120,000 shares common $10 par and 5000 shares in treasury stock

Market price = $40

Diluted EPS = 588k - (10,000 shares x $100 x 6%) /120,000 common stock = $4.40 per share

PE ratio = $40/$4.4 = 9.09

Basic Earnings Per Share (BEPS)*

BEPS = IACS / Weighted average number of common shares outstanding

Earnings Yield*

Earnings Yield = EPS / Market price per share

Dividend Payout ratio*

Dividend Payout Ratio = Dividends to common shareholders / IACS or NI

Dividend Yield*

Dividend Yield = Dividend per share / Market price per share

Diluted Earnings per share (DEPS)*

DEPS = IACS / number of common shares outstanding after adjustment for all dilutive securities that could possibly be issued

eg: $2MM of 7.5% convertible bonds

converted into 50,000 shares of common stock

$1MM preferred at 9% 100 par

$1MM common at $10 par

NI = $317M and tax rate of 36%

NI = $317M

Less Pref dividends $1MM x 9% = $90M

Add after tax savings on bond = $2MM bonds x 7.5% x (1- 36%)

IACS = $317M - $90M + $96M = $323M

EPS = $323M / (100,000 shares CS + 50,000 converted stocks)

Expected Rate of Return*

Company A has 2 investments:

Investment A: Rate of Return = 80%; Probability of 60%

Investment B: Rate of return = -50%; probability of 40%

Wt Average (A) = 80% x 60% = 48%

Wt Average (B) = -50% x 40% = -20%

Expected Rate of Return = Wt avg (A) + Wt Avg (B) = 48% + (20%) = 28%

Compare the Expected ROR to another company or stock. the higher the Expected rate of return the better

Standard Deviation*

Standard Deviation of Company A

Square root of:

((ROR Investment A - Expected ROR)^2 x Probability of investment A) + ((ROR Investment B - Expected ROR)^2 x Probability of investment B)

Square root of:

((80% - 28%)^2) x 60%) + ((-50% - 28%)^2 x 40%))

= square root of 4,056 = 63.69%

compare this with Company B

The higher the standard deviation the higher the risk

Coefficient of Variation (CV)*

CV = Standard Deviation / Expected ROR

CV = 63.69% / 28% = 2.275

The lower the ratio the better the risk-return trade-off

Beta coefficient*

Beta coefficient = Return on the security / Return on the stock market

Beta less than 1 means that the stock is less volatile than the stock market


Stock with Beta Value of 1.2

Treasury Bills are paying 8.6% return

Expected average return on stock A = 10.1%

CAPM = 8.6% + 1.2(10.1% - 8.6%) = 10.4%

Investor must therefore receive at least 10.4% return on his stock instead the stock is paying only 10.1%


Risk Premium = (Return on Market - Risk Free Rate) x Beta

CAPM = Risk Free Rate + Risk Premium

Dividend Discount Model

Stock value = dividend per share / (cost of capital - dividend growth rate)

assumes fixed growth rate

Preferred Stock valuation

Stock value = dividend per share / Cost of capital

assumes fixed dividend is paid out over time

Put Call Parity

PV of exercise price = value of the Put + Value of the underlying - Value of the Call

Component Cost of Long Term Debt

Component cost of LT debt = effective rate x (1-marginal tax rate)

Component cost of preferred equity

Component cost of preferred equity = cash dividend /market price of preferred stock less any underwriting fees

Component cost of common stock

component cost of common stock = (dividend amount / market price) + dividend growth rate

Component cost of retained earnings = component cost of common stock

which is:

next dividend / Market price


WACC = Market value x % to total retained earnings x component cost = weighted costs

Add all weighted costs for bonds payable, preferred stock, common stock and retained earnings and that equals WACC

After Tax WACC

WACC = (Market Value of Firm's Equity)/ (Market value of debt and equity) x Cost of equity

+ (market value of debt / (market value of debt and equity) x cost of debt x (1-corp tax rate)

Cost of new debt

Cost of new debt = annual interest / net issue proceeds

to determine the after tax rate multiply this % by 1-tax rate

Cost of new preferred stock

Cost of new preferred stock = next dividend / net issue proceeds

Cost of new common stock

Cost of new common stock = (next dividend / net issued proceeds) + dividend growth rate

EOQ receivables

Optimum cash balance = square root of (2 x fixed cost x cash demand for the period) / interest rate of securities for the period

Average cash balance = Optimum cash balance / 2

Benefit of speeding up cash collections

Benefit = Daily cash receipts x days of reduced float x opportunity cost of funds

Average Balance of receivables

Avg Balance in receivables = daily credit sales x average collection period

if using annual sales:

avg balance in receivables = annual sales x (average collection period / 360 days)

Impact of change in credit terms

Impact of change in credit terms = incremental variable costs x (incremental average collection period / days in a year)

Cost of new credit plans

Cost of credit plan = incremental receivable balance x variable costs x opportunity cost of funds

Benefit or Loss from a new credit plan

Benefit or loss from a new credit plan = incremental contribution margin - cost of change

Inventory Reorder point

Inventory reorder point = (average daily demand x lead time in days) + safety stock

EOQ inventory

EOQ inventory = square root of (2 x variable costs per purchase order x periodic demand in units) / periodic carrying costs

Simple interest loans

Amount needed or usable funds = Invoice amount x (1-Discount %)

Interest expense annualized = amount needed x stated rate

Effective interest rate

Effective interest rate = Net Interest expense / usable funds

Effective rate on discounted loans*

Effective rate on discounted loans = stated rate / (1- stated rate)

Effective rate on loans with compensating balance

Effective rate with Comp Balances = Stated rate / (1- compensating balance %)

Face amount of a loan with compensating balance

Face amount of loan with compensating balance = amount needed / (1- compensating balance %)

Cost of not taking a discount

Cost of not taking a discount:

(Discount % / 1- discount %) x (days in a year / { total payment period - discount period} )

Forward Premium or Discount

((Forward rate - Spot Rate) / Spot Rate ) x (days in a year / days in forward period)

Break even point in units

BE Point in units = Fixed costs / Unit Contribution margin

UCM = unit selling price - unit variable cost

variable costs include DL, DM, VOH and variable SGA

Break even point in dollars

Break Even Point in dollars = Fixed costs / Contribution Margin Ratio

CMR = unit CM / unit selling price

Elasticity of Demand

E = Numerator: Absolute value of (Q1 -Q2) / (Q1 + Q2)

Denominator: Absolute value of (P1 - P2) / (P1 + P2)

or %change in quantity / % change in price

PV and FV of Ordinary annuity

4 payments of $1000 discounted 10%

(1000 x factor of 4 periods at 10%)

***If NPV is negative then discount rate exceeds the IRR

PV of Annuity Due

4 payments of $1000 discounted 10%

(1000 x (factor of 3 periods at 10% + 1)

FV of Annuity Due

3 payments of $1000 discounted 10%

Periods is 3 payments + 1 = 4

(1000 x (factor of 4 periods at 10% - 1)

Profitability index

Profitability index = NPV of future cash flows / net investment

****higher the number the better


Investment = $500

Cashflow = 150, 175, 125, 100, 100 and so on

Payback = 500-150= 350 (year1)

350 - 175 = 175 (year 2)

175 - 125 = 50 (year 3)

remainder of 50 / 100 which is the next cash flow

this equals 0.5

total is 3.5 years

Payback reciprocal

Payback reciprocal = 1/ payback time in years

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