Exam Tips

Formula & Proforma Sheet

Sub Financial Management

Chapter 1

Working Capital

Format of Working Capital Particulars Amount Amount Current Assets StockRaw Material (At R.M. cost)

Work in Progress

Raw Material [100%]

Labour [50%]

Overheads [50%]

Finished Goods (Total Cost)

Debtors [At Selling Price]

Cash/Bank [Given]

Prepaid Expenses [Given]

Total Current Assets (A)

Current Liabilities

Creditors [R.M. Cost]

Outstanding Wages [Labour Cost]

Outstanding Overheads [O/H Cost]

Total Current Liabilities (B)

Working Capital

Tips For above all the common formula is

Quantity Rate Period Period given in terms of months weekly or daily For monthly take 12 months weekly either 52 weeks or 50 weeks and for daily 365 or 360 days For domestic and expert type of sums the closing stock should be on total cost of goods sold Other things are one and the same.

Chapter 2

Income Statement

Income Statement

Sales

Less: Variable Cost

Contribution

Less: Fixed Cost

EBIT

Less: Tax

EAT

Formulas Operating Leverage or Degree of operating leverage = Contribution/EBIT

Financial Leverage or Degree of financial leverage = EBIT/ EBT

Earning Per Share = EAT Preference Dividend /No. of Equity Shares

P/V Ratio = Contribution/Sales 100 Debt Equity Ratio = Long Term Debt/Equity

Combined Leverage = Contribution / EBT

or

= Operating Leverage Financial Leverage

Asset Turnover = Sales/Total Assets

Tips Variable cost always in terms of % on sales If P/V ratio is 70% i.e. sales Rs. 100/- contribution Rs. 70/- and variable cost Rs. 30/-. Interest on loan means debentures & other loan funds. Fixed cost always remains the same.

Chapter 3

Receivables Management

Formats

A. When Fixed cost is given

Particulars Existing OP I OP II SalesLess:Variables CostContribution

Less: Fixed Cost

Profits (A)

Total Cost = FC + VC

Investment in Receivables Cost

Opportunity CostBad Debts

Other Costs

Total Cost (B)

Net Benefit (A B)

Incremental Benefits

Tips The incremental benefits more option is to be selected Investment in receivables is to be calculated on total cost (FC + VC) Opportunity cost is to be calculated on investment in receivables. Bad Debts is to be calculated on total sales.

B.

When Fixed Cost is not given

Particulars Existing OP I OP II SalesLess: Variable CostContribution (A)

Investment in Receivables Cost

Opportunity CostBad DebtsOther Costs

Total Cost (B)

Net Benefits (A B)

Incremental Benefits

Tips Investments in receivables is to be calculated on sales Opportunity cost is to be calculated in investment in receivables Remaining things are one and the same.

Chapter 4

Cost of Capital

Formula

Cost of Debt:

Cost = K

Kd = I (1 t)

Interest = I

Tax = t

Cost of Equity

Dividend = d

Ke = (D 100) + g

Market Price = P

Growth Rate = g

Cost of Performance always the given rate because it is always after tax.

Statement of WACC

Amount Proportion Cost of capital WACC Equity % Ke Preference %

Given Loan % Kd

100%

WACC = Proportion Cost of Capital

100

Further Formula EPS = EAT Preference Dividend/No. of Equity Shares Debt/Equity Ratio = Long Term Debt/Equity

Chapter 5

Capital Structure Planning

There are two formats Capital Structure EPS

The plan (option ) having highest EPS is going to be selected for the purpose of investment. Proforma of Capital Structure Particulars I II III Equity Share CapitalExisting (if given)

New

Preference Capital

Existing (if given)

New

Debentures

Existing (if given)

New

Retained Earnings (if given)

Total No. of Equity Shares (B)

Proforma of E.P.S. Particulars I II III EBITLess: Interest on Loans

EBT

Less: Tax

EAT

Less: Preference Dividend

Earnings available for Equity Holders (A)

EPS = A/BD.P.S. = E.P.S. Dividend Payout

Tips If statement of capital structure is given no need to prepare. Dividend payout is given find D.P.S. only For indifference point equate two E.P.S. for two different plan. For Break even point take E.P.S. zero & apply reverse way to calculate EBIT.

Chapter 6

Cash Management Format

Particulars I II III Opening BalanceReceipts

Cash Sales (working notes)

Collection from Debtors (Working Notes)

Deferred Receipts

Total Receipts PaymentsPayments to creditors

Payments of Expenses

Other payment

Total Payment

Balance (Receipts Payments)

Tips Closing balance of one month become opening of other month. Following subsequent, next and forward means one and the same. Arrears outstanding means one and the same i.e. in next month. Temporary loan is to be paid in next possible option. Existing notes to be prepare wherever required.

Chapter 7

Capital Budgeting

Decision Criteria

Pay Back Period

Net Present Value

Profitability Index

A.R.R.

Payback Profitability

I.R.R.

Discounted Payback

Formulas

Payback Period Method

a.

If cash flows are not same

= No. of years + Required Amount 12

Next Inflow

b.

If cash flows are same for all years

Payback Period = Cost of Project / Initial outlay

years inflow

Net present value = Present value of Inflow Initial Outlay

Profitability Index or Benefit Cost Ratio = Present value of Inflow

Initial Outlay

A.R.R.

a.

Accounting Rate of Returns or A.R.R. (based on original investment)

= Average Annual PAT 100

Original Investment

b.

Average Rate of Returns or A.R.R. ( based on Average Investment)

= Average Investment [Original Investment (if scrap is not given)]

OR

= Original Investment Scrap + Scrap + Working Capital (if any)

Payback Profitability = Average Annual Cash Inflow [ Estimated Life Payback Period]

Internal Rate of Return = L.R. + P.V. at L.R. Initial Outlay Difference in Rates

P.V. at L.R. P.V. at H.R.

L.R. = Lower Rate

H.R. = Higher Rate

P.V. = Present Value

Discounted Payback = No. of years + Required Amount 12

Next years P.V.

Tips

The project cost, initial outlay, investment all are one and the same

PBDT = Profit Before Depreciation & Tax

CFBDT = Cash Flow Before Depreciation & Tax = PBDT

CFAT = Cash Flow After Tax & Depreciation = PAT

Cash Flows = Cash inflows = PAT + Depreciation

PAT + Depreciation also called as

Profit After Tax But Before Depreciation

If sales & other costs are given then PBDT is to be calculated as under

PBDT = Sales Variable Cost Fixed Cost Other Costs (Excluding Depreciation)

To calculate Depreciation the formula is

Depreciation = Original Cost Estimated Scrap

Estimated Life

If estimated life is not given then depreciation rate is given and accordingly decide the estimated life.

e.g. If 10% given the life is 10 years

If 25% given the life is 5 years

If working capital given along with scrap or salvage value then both working capital & scrap added to last years inflow & last years P.V. factor us applied to both.

For NPV calculation the working capital should be added to the initial outlay.

If present value factor is not given assumed to be 10%.

Mostly taxes is given, but if not given then in the question they mention about assumption & then put assumption and take tax 50% but if nothing is given then ignore taxation.

Payback period in years & months or only in terms of years also be calculated.