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thanks a lot :)

my pleasure..

plz share whole course formuls of ACC 501

 

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my pleasure..anum...

i have checked ur file that is good effort to make it but it covers lesson 01 to 45.. if u have any file that cover whole course i.e. leson 01 to lesson 45.. plz share with us...

BUISNESS FINANCE FORMULAS 1-22

                                                     By IQRA JAHANGIR

 

The Balance Sheet Identity is:

 

Assets ≡ Liabilities + Stockholder’s Equity

 

Net Working Capital ≡ Current Assets – Current Liabilities

 

–         NWC > 0 when Current Assets > Current Liabilities

–         NWC < 0 when Current Assets < Current Liabilities

–         NWC = 0 when Current Assets = Current Liabilities

 

The Income Statement

 

Revenue – Expenses ≡ Income

 

Average vs. Marginal Tax Rates

 

Suppose a Corporation has a taxable income of $200,000. So the Tax calculation will be:

$ 50,000 x 15% = $ 7,500

($ 75,000 – 50,000) x 25% = 6,250

($ 100,000 – 75,000) x 34% = 8,500

($ 200,000 – 100,000) x 39% = 39,000

$ 61,250

  • Our total tax is $61,250
  • Average tax rate is $61,250 / 200,000 = 30.625%
  • Marginal rate is 39%

 

 

Cost of a Tax Deductible Expense

 

 

                                                                Corporation A       Corporation B

Earnings before interest and taxes                  $400,000            $400,000

- Interest Expense                                              100,000                     0

Earning before taxes (taxable income)              300,000            400,000

- Taxes @35%                                                   105,000             140,000

Earning after taxes                                           $195,000           $260,000

 

Difference in earning after taxes $65,000

 

It can also be computed as: Interest Expense (1 – Tax rate)

$100,000 (1 – 35%) = $65,000

 

 

 

Depreciation as a Tax Shield

 

                                                                Corporation A       Corporation B

Earnings before interest and taxes                  $400,000            $400,000

- Interest Expense                                              100,000                     0

Earning before taxes (taxable income)              300,000            400,000

- Taxes @35%                                                   105,000             140,000

Earning after taxes                                           $195,000           $260,000

+ Dep. charged without cash outlay                   100,000                   0

Cash flow                                                         $295,000           $260,000

 

Difference                        $35,000

 

It can also be computed as: Depreciation x Tax rate

$100,000 x 35% = $35,000

 

  • Cash Flow identity

Cash flow from Assets = Cash Flow to creditors + Cash flow to Stockholders

 

  • Cash flow from Assets

Cash flow from assets = Operating Cash Flow- Net Capital Spending- Change in Net Working Capital

Where,

Operating cash flow = Earnings before Interest and taxes+ Depreciation – Taxes

Net Capital Spending = Ending Net Fixed Assets- Beginning Net Fixed Assets +Depreciation

Change in NWC = Ending NWC – Beginning NWC

 

  • Cash flow to creditors (bondholders)

Cash flow to creditors = Interest paid – Net new borrowings

 

  • Cash flow to stockholders (owners)

Cash flow to stockholders = Dividends Paid

–         Net new equity raised

 

Current Ratio

 

                           Current Assets

Current Ratio= ------------------------

                    Current Liabilities

 

 

 

 

 

Quick (or Acid-Test) Ratio

 

                          Current Assets – Inventory

Quick Ratio= ------------------------------------

                         Current Liabilities

 

Cash Ratio

 

                                 Cash

Cash Ratio= -----------------------

              Current Liabilities

 

Total Debt Ratio

 

                              Total Assets – Total Equity

Total Debt Ratio= ------------------------------------

                                 Total Assets

 

 

Total Debt Ratio

  • A2Z has 28% debt against total assets, thus there is 72% equity against total assets.

 

Total Debt Ratio

Debt–Equity ratio = Total Debt / Total Equity

 

Equity Multiplier = Total Assets / Total Equity

 

Interest Coverage Ratio

  • Also known as Times Interest Earned (TIE) ratio, refers to the ability of the firm to cover is interest obligations.

 

                                         Earning before Interest & Taxes

Interest Coverage ratio = -----------------------------------------

                                                 Interest

 

Cash Coverage Ratio

 

                                              EBIT + Depreciation

Cash Coverage ratio = -----------------------------------------

                                                 Interest

 

Inventory Turnover Ratio

 

                                                    Cost of goods Sold

Inventory Turnover ratio = --------------------------------

                                                  Inventory

 

Days’ Sales in Inventory

 

  • If we know sales were turned over 3.2 times during the year, we can calculate easily how long it took to turnover on average.

 

                                                       365 days

Days’ Sales in Inventory = --------------------------------

                                          Inventory Turnover

 

 

Receivables Turnover

 

                                                      Sales

Receivables Turnover = -------------------------------

                                  Accounts Receivables

 

 

Days’ Sales in Receivables

 

                                                        365 days

Days’ Sales in Receivables = -------------------------------

                                          Receivables Turnover

 

A Variation: Payables Turnover

 

 

                                      Cost of Goods Sold

Payables Turnover = -------------------------------

                                Accounts payables

 

Capital Intensity Ratio

 

                                          Total Assets

Capital Intensity Ratio = --------------------

                                        Sales

 

Profit Margin

 

                              Net income

Profit Margin= --------------------

                         Sales

 

 

 

 

Return on Assets

Return on Assets (ROA) is a measure of profit per dollar of assets:

 

                                 Net income

Return on Assets = --------------------

                          Total Assets

 

Return on Equity

  • Return on equity (ROE) is a measure of how the stockholders fared during the year.

 

                                       Net income

Return on Equity = --------------------

                            Total Equity

Earnings Per Share

 

                Net income

EPS = ---------------------------

             Shares Outstanding

 

Price-Earning Ratio

 

Price-earnings or PE ratio is defined as:

 

                    Price per share

PE ratio = --------------------------

                   Earnings per share

 

Book Value per share

 

                                 Total equity

Book Value = ------------------------------------

                        No. of shares outstanding

 

 

Market-to-Book ratio

 

                                        Market value per share

Mark-to-Book ratio = ------------------------------------

                                 Book value per share

 

The Du Pont Identity

 

                Net Income

ROE = --------------------

              Total Equity

 

  • Multiplying it by Assets / Assets (without changing anything)

              Net Income            Net Income        Assets

ROE = -------------------- = ---------------- x -----------

              Total Equity         Total Equity       Assets

 

    Net Income          Assets

= ---------------- x ----------------

     Assets             Total Equity

 

 

The Du Pont Identity

 

           Net Income           Assets

ROE = ---------------- x ----------------

           Assets Total           Equity

 

  • So, we have expressed ROE as a product of two other ratios – ROA and the equity multiplier

 

ROE = ROA x Equity multiplier

= ROA x (1 + Debt-Equity ratio)

 

The Du Pont Identity

 

  • We can further decompose ROE by multiplying the top and bottom by total sale:

       Sales         Net Income         Assets

ROE = -------- x ---------------- x ----------------

       Sales           Assets          Total Equity

 

  • Rearranging a bit,

        Net Income         Sales         Assets

ROE = --------------- x ----------- x ----------------

          Sales            Assets       Total Equity

 

 ROE =Profit Margin x Total Assets Turnover x Equity Multiplier

 

 

The Du Pont Identity

 

ROE =Profit Margin x Total Assets Turnover x Equity Multiplier

 

  • This last Expression is called Du Pont identity after the Du Pont Corporation, which popularized its use.

 

 

 

Dividend Payout

 

                                         Cash Dividends

Dividend Payout ratio = -----------------------

                                            Net Income

 

Retention Ratio

 

                               Retained Earnings

Retention ratio = -----------------------

                                 Net Income

 

  • The retention ratio is also known as the plowback ratio, as this is the amount which is plowed back into the business

 

 

Payout and Retention

 

  • Q: LMN Corporation pays out 40% of net income in form of dividends. What is its retention ratio?

     A: If payout ratio is 40%, retention ratio is

               1 – 40% = 60%

 

  • Q: If net income of LMN is $800, how much did stockholders actually receive?

     A: Dividends are $800 x 40% = $320

 

Internal Growth Rate

 

                                        ROA x b

Internal Growth rate = ------------------

                                 (1 – ROA) x b

 

Where ROA is return on assets and b is the retention ratio

 

 

Sustainable Growth Rate

 

                                              ROE x b

Sustainable Growth rate = ------------------

                                         (1 – ROE) x b

 

 

 

 

 

 

Simple interest.

 

I = P x r x t

Where

 

P => principal amount

r => interest rate

t => time periods (years)

I => simple interest

 

Compound interest.

 

I = P x rt

 

Future Value

 

FV = P(1 + rt)

 

In the one-period case, the formula for FV can be written as:

 

FV = C0× (1 + r)

 

Where C0 is cash flow today (time zero) and r is the appropriate interest rate.

Generalizing the future value of an investment over many periods:

 

FV = C0× (1 + r)t

 

Where

 

C0 is cash flow at date 0,

r is the appropriate interest rate, and

t is the number of periods over which the cash is invested.

The expression (1 + r)t is the future value interest factor.

 

Present Value

 

                    FV

PV =     ----------------

                  (1+rt)

 

In the one-period case, the formula for PV can be written as:

Where

 

C1 is cash flow at date 1 and

r is the appropriate interest rate or discount rate

 

General formula for calculating present value of C cash flow in t periods time is:

 

  • 1 /(1 + r)t is used to discount a future cash flow, so it is called the discount factor Or present value interest factor (PVIF r,t),
  • Calculating the present value of a future cash flow to determine its worth today is commonly called discounted cash flow (DCF) valuation

 

Present Value vs. Future Value

 

What we called the present value factor is just the reciprocal of the future value factor.

  • Future value factor = (1 + r)t
  • Present value factor = 1/(1 + r)t

If we let FVt stand for the future value after t periods, then the relationship between the future value and the present value is:

 

PV x (1 + r)t = FVt

PV = FVt / (1 + r)t = FVt x [1/ (1 + r)t]

  • This is also known as basic present value equation.

Finding the Number of Periods: Rule of 72

  • For reasonable rates of return, the time it takes to double the money, is given approximately by

                       t = 72 / r%

  • Continuing with the example, we have discount rate of 10%, so:

                   t = 72 / 10 = 7.2 years

  • This rule is fairly applicable to discount rates in 5% to 20% range.

 

Time Value Calculations

 

  1. I.                   Symbols:

 

PV = Present value, what future cash flows are worth today

FVt = Future value, what cash flows are worth in the future

r = Interest rate, rate of return, or discount rate per period

t = number of periods

C = cash amount

 

  1. II.                Future value of C dollars invested at r percent per period for t periods:

 

FVt = C* (1 + r)t

The term (1 + r)t is called the future value factor.

 

  1. III.             Present value of C to be received in t periods at r percent per period:

 

PV = C/(1 + r)t

The term 1/(1 + r)t is called the present value factor.

 

IV. The basic present value equation giving the relationship between present and future

value is:

 

PV = FVt/ (1 + r)t

 

Present Value for Annuity cash flows

 

  • For annuity calculation, we use a variation of present value equation.
  • The present value of an annuity of C dollars per period for t periods when interest rate is r is:
  •  

PV=C *(1 - Present value factor)/r = C *[1 - 1/(1 + r)t ]/r

Where

C = Periodic payment or annuity

r = rate of interest

t = number of periods

The term in the parenthesis is called present value interest factor of an annuity (PVIFAr,t).

 

PVIFA = (1 – Present value factor)/r

 

Future Value for Annuities

FVt = C (Future value factor - 1)/r

    = C [(1 + r)t - 1]/r

 

Perpetuities

 

The present value of perpetuity is:

 

Perpetuity PV = C / r

 

Summary of Annuity and Perpetuity

 

  1. I.                   Symbols

PV = Present value, what future cash flows bring today

FVt = Future value, what cash flows are worth in the future

r = Interest rate, rate of return, or discount rate per period

t = Number of time periods

C = Cash amount

 

II. FV of C per period for t periods at r percent per period:

FVt = C [(1 + r)t - 1] / r

 

III. PV of C per period for t periods at r percent per period:

PV = C (1 - [1/ (1 + r)t]) / r

 

IV. PV of perpetuity of C per period:

PV = C / r

 

Effective Annual Rates

 

  • If a rate is quoted as 10% compounded semiannually, then what this means is that the investment actually pays 5% every six months.Is 5% every six months the same thing as 10% per year?

$1 x 1.10 = $1.10

$1 x 1.052 = $1.1025

  • 10% compounded semiannually is equivalent to 10.25% compounded annually.
  • 10.25% is called effective annual rate (EAR)

 

 

 

Effective Annual Rates

 EAR is computed in three steps

  • Divide the quoted rate by the number of times the interest is compounded
  • Add 1 and raise it to the power of number of times the interest is compounded.
  • Subtract 1

So

EAR = (1 + Quoted rate / m)m – 1

 

Where m is the number of times the interest is compounded

 

Annual Percentage Rates

 A typical credit card agreement quotes an interest rate of 18% APR. Monthly payments are required. What is the actual interest rate you pay on such a credit card?

  • APR of 18% with monthly payments is really 0.18 / 12 = 0.015 or 1.5% per month.

 So,

EAR = (1 + 0.18/12)12 – 1

= 10.1512 – 1 = 19.56%

 

Valuing a Bond

 

If a bond has

– a face value of F paid at maturity

– a coupon of C paid per period

– t periods to maturity

–         a yield of r per period

 

Its value is

Bond value = C x [1 – 1/(1+r)t]/r + F/ (1+r)t

 

Valuing Bonds

Bond value = C x [1 – 1/(1+r)t]/r + F/ (1+r)t

= Present value of coupons + Present value of face amount

 

Summary of Bond Valuation

 

I. Finding the value of a bond

Bond value = C x [1 - 1/(1 + r)t]/r + F/(1 + r)t

 

Where:

C = the promised coupon payment

F = the promised face value

t = number of periods until the bond matures

r = the market’s required return, YTM

 

II. Finding the yield on a bond

Given a bond value, coupon, time to maturity, and face value, it is possible to find the implicit discount rate, or yield to maturity, by trial and error only. To do this, try different discount rates until the calculated bond value equals the given bond value. Remember that increasing the rate decreases the bond value.

 

The Fisher Effect

• The relationship between real and nominal returns is described by the Fisher Effect.

Let:

 

R = the nominal return

r = the real return

h = the inflation rate

• According to the Fisher Effect:

1 + R = (1 + r) *(1 + h)

 

Rearranging the fisher effect

1 + R = (1 + r) *(1 + h)

R = r + h + r x h

 

• It tells that nominal rate has three components

– Real rate on investment r

– Compensation for the decrease in value of original investment because of inflation h

– Compensation for the decrease in value of income earned on investment due to inflation

• Dropping the third component (being very small), nominal rate gives us then approximately equal to:

                            R ≈ r + h

Cash Flows

 

Generalizing this valuation, let

– P0 => current price of stock

– P1 => price in one period

– D1 => Dividend paid at the end of the period

• So

P0

= (D1 + P1)/(1 + R)

– Where R is the market rate of return

• But this possible only if we know P1, making the problem more complicated

• So, if we want to know the price in one year i.e. P1 and we somehow know the price in two years P2 with D2 dividend expected in two years, then

P1

= (D2 + P2)/(1 + R)

• Now substituting this expression for P1 into our previous expression for P0 , we would have the following equation:

If we continue the substitution for 2 periods:

Note that no matter what the stock price is, the present value is essentially zero if we push the sale of stock far enough away.

• So, the current price of stock can be written as the present value of the dividends beginning in one period and extending out forever

• Alternatively, we can say that the price of stock today is equal to the present value of all of future dividends.

 

Zero Growth Stocks

A share of common stock in a company with a constant dividend is termed as zero growth type of stocks. This implies:

D1 = D2 = D3 = D = constant

• So the value of the stock is:

Since dividend is always the same, the stock can be viewed as an ordinary perpetuity with a cash flow equal to D every period.

• So the per share value is

P0 = D/R

Where R is the required rate of return

i need ACC 501 fromulas that cover whole course i.e. lesson 01 to 45.... plz sent it....\

 

 

 

 

 

 

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