Part 2 Formula Reference Guide

Term Formula Unit

Accounting
Accounting profit = Revenue – Explicit costs 2
profit

Accounts Credit purchases

payable Accounts payable turnover = 1
Average accounts payable
turnover

Accounts Credit sales

receivable Accounts receivable turnover = 1
Average accounts receivable
turnover

After-tax
benefit After-tax benefit (revenue) = Pretax benefit (revenue) × (1 – Tax rate) 3
(revenue)

After-tax cost After-tax cost = Pretax cost × (1 – Tax rate) 3

After-tax cost of
After-tax cost of debt = Pretax cost of debt × (1 − Tax rate) 2
debt

After-tax
After-tax income = Pretax income × (1 – Tax rate) 3
income

Annual cost
(APR) of quick 360 Discount
APR of quick payment discount = × 2
payment Pay period − Discount period 100 − Discount %
discount

Annual growth  (Current year amount  Prior year amount) 

Annual growth rate     100 1
rate  Prior year amount 

Annual
Annual percentage rate = Effective periodic interest rate × Number of periods in a year 2
percentage rate

Ending value – Beginning value + Income

Annual return Annual return = 2
Beginning value

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Part 2 Formula Reference Guide

Term Formula Unit

Average fixed Total fixed costs

Average fixed cost = 3
cost Quantity produced

Average total Total costs

Average total cost = 3
cost Quantity produced

Average Total variable costs

Average variable cost = 3
variable cost Quantity produced

Basic earnings Net income − Preferred dividends

Basic earnings per share = 1
per share Weighted average common shares outstanding

Book value per Total stockholders' equity − Preferred equity

Book value per share = 1
share Number of common shares outstanding

Breakeven
Breakeven point in dollars = Unit price × Breakeven point (in units) 3
point (in dollars)

Revenues to breakeven
Units to breakeven =
Unit selling price

Breakeven Or: 3
point (in units)
Total fixed costs
Breakeven point in units =
Contribution margin per unit

Capital asset pricing model = Rce = Rf + β[Rm − Rf ]

Where:
Capital asset Rce = Required rate of return on common equity
2
pricing model Rf = Risk-free rate of return
β = Beta of the security
Rm = Market return

Ending value – Beginning value

Capital return Capital return = 2
Beginning value

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Formula Reference Guide Part 2

Term Formula Unit

Cash cycle = Operating cycle – Days purchases in accounts payable

Cash cycle (cash Or:

conversion 1, 2
Days sales Days of
cycle) Days in
Cash cycle = + in accounts – payables
inventory
receivable outstanding

Cash flow from operating activities

Cash flow ratio Cash flow ratio = 1
Current liabilities

Cash flow to Cash flow

+
Fixed
+
Tax
fixed-charges from operations charges payments 1
Cash flow to fixed-charges ratio =
ratio Fixed charges

Cash + Marketable securities

Cash ratio Cash ratio = 1
Current liabilities

Common
 Current year line item amount 
base-year Common base-year statements     100 1
 Base year line item amount 
statements

Common-size Balance sheet line item 

Common-size balance sheet     100 1
balance sheet  ets
Total asse 

Common-size Income statement line item 

income Common-size income statement  
Net sales revenue   100 1
 
statement

D(t + 1)
Pt =
R−G

Constant
(Gordon) Where:
2
growth dividend Pt = Current price (price at period "t")
discount model
D(t+1) = Dividend one year after period "t"
R = Required return
G = Sustainable growth rate

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Part 2 Formula Reference Guide

Term Formula Unit

Contribution margin = Sales revenue – All variable costs

Contribution
Or: 3
margin
Contribution margin = Contribution margin per unit × Number of units sold

Contribution
Contribution margin per unit = Selling price per unit – Variable cost per unit 3
margin per unit

Contribution Contribution Total contribution margin

=
Contribution margin per unit
= 3
margin ratio margin ratio Total revenues Selling price per unit

Conversion Convertible bond Convertible bond

Conversion premium = – 2
premium current price conversion value

Conversion Par value

Conversion ratio = 2
ratio Conversion price

Conversion Current stock Number of shares issued

Conversion value = × 2
value price if bond is converted

Cost of Preferred stock dividends

Cost of preferred stock = 2
preferred stock Net proceeds of preferred stock

D1
Cost of retained earnings = + g
P0
Cost of retained Where:
2
earnings P0 = Current market value or price of the outstanding common stock
D1 = The dividend per share expected at the end of one year
g = The constant rate of growth in dividends

Currency
appreciation Appreciation or End-of-period exchange rate – Beginning-of-period exchange rate
= 2
or depreciation depreciation rate Beginning-of-period exchange rate
rate

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Formula Reference Guide Part 2

Term Formula Unit

Current assets
Current ratio Current ratio = 1, 2
Current liabilities

Average accounts payable

Days purchases in accounts payable =
Days purchases Purchases ÷ 365
in accounts Or: 1, 2
payable 365
Days purchases in accounts payable =
Payables turnover

Days sales outstanding Average accounts receivable

=
in accounts receivable Credit sales ÷ 365
Days sales
in accounts Or: 1, 2
receivable 365
Days sales outstanding
=
in accounts receivable Accounts receivable turnover

Average inventory
Days sales in inventory =
Cost of goods sold ÷ 365
Days sales in
Or: 1, 2
inventory
365
Days sales in inventory =
Inventory turnover

Debt-to-equity Total liabilities

Debt-to-equity ratio = 1
ratio Total equity

Debt-to-total- Total debt

Debt-to-total-assets ratio = 1
assets ratio Total assets

Percentage change in net income

DFL =
Percentage change in EBIT
Degree of
financial Or: 1
leverage (DFL)
EBIT
DFL =
EBIT – Interest

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Part 2 Formula Reference Guide

Term Formula Unit

Percentage change in EBIT

DOL =
Percentage change in sales
Degree of
operating Or: 1
leverage (DOL)
Contribution margin
DOL =
EBIT

Diluted Net income − Preferred dividends

earnings per Diluted earnings per share = 1
Diluted weighted average common shares outstanding
share

Dividend payout Common dividend

Dividend payout ratio = 1
ratio Earnings available to common shareholders

Annual dividends per share

Dividend yield Dividend yield = 1
Current market price per share

Basic earnings per share

Earnings yield Earnings yield = 1
Current market price per common share

EBITDA margin EBITDA

EBITDA margin percentage = 1
percentage Net sales

Economic profit Economic profit = Revenue − Explicit costs − Implicit costs 1

Effective annual interest rate = [1 + (i / p)] p – 1

Where:

i = Stated interest rate

Effective annual
p = Compounding periods per year 2
interest rate
Or:

Annual interest expense

Effective annual interest rate =
Amount available for use

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Formula Reference Guide Part 2

Term Formula Unit

Effective Interest paid

Effective interest rate = 2
interest rate Net proceeds received

Expected return for a portfolio (Rp) = W1R1 + W2R2 + … + WnRn

Expected return Where:

2
for a portfolio W1, W2, ... Wn = Weights of each investment in the total portfolio

R1, R2, ... Rn = Expected returns of each investment in the portfolio

Financial Total assets

Financial leverage ratio = 1
leverage ratio Total equity

Fixed asset Fixed Sales

= 1
turnover asset turnover Average property, plant, and equipment (net)

Fixed-charge Earnings before fixed charges and taxes

Fixed-charge coverage ratio = 1
coverage ratio Fixed charges

Forward P/E ratio = P0 / E1

Forward price- Where:

2
earnings ratio P0 = Stock price or value today
E1 = EPS expected in one year (next four quarters)

Free cash flow (FCF) = [EBIT × (1 – Tax rate)]

+ Noncash expenses (such as amortization or
depreciation expense)
Free cash flow – Increases in working capital 2
(FCF)
– Capital expenditures

Note: If the exam does not give a tax rate, then free cash flow can be calculated on a
pretax basis.

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Part 2 Formula Reference Guide

Term Formula Unit

FCF1
The present value of cash flows (constantly growing) =
R–G
Gordon growth Where:
model (using 2
free cash flows) FCF1 = The expected future free cash flows for the next year
R = The required rate of return (CAPM)
G = The expected, constant growth rate

Gross margin
(gross profit Gross profit
Gross margin = 1
margin Net sales
percentage)

Income
Income return Income return = 2
Beginning value

Inventory Cost of goods sold

Inventory turnover = 1
turnover Average inventory

Total life-cycle costs

Life-cycle cost Life-cycle cost per unit =
Total number of units expected to be produced 3
per unit
and sold over the life of the product

Long-term debt- Total debt − Current liabilities

Long-term debt-to-equity ratio = 1
to-equity ratio Total equity

Change in total cost

Marginal cost Marginal cost = 3
Change in quantity produced

Marginal Change in total revenues

Marginal revenue = 3
revenue Change in quantity sold

Margin of safety Margin of safety (in dollars) = Total sales (in dollars) – Breakeven sales (in dollars) 3

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Formula Reference Guide Part 2

Term Formula Unit

Margin of safety Margin of safety in dollars

Margin of safety ratio = 3
ratio Total sales

Market-to-book Current stock price

Market-to-book ratio = 1
ratio Book value per share

Markup price:
Percentage of Price = Product cost × (1 + Markup percentage) 3
cost

Markup price: Product cost

Percentage of Price = 3
(1 − Markup percentage)
selling price

Net present value = [(After-tax cash flows + Depreciation benefit) × Present value factor]
− Initial cash outflow
Net present Where: 5
value
After-tax cash flows = Annual net cash flow × (1 − Tax rate)

Depreciation benefit = Depreciation × Tax rate

Net profit Net income

margin Net profit margin percentage = 1
Net sales
percentage

Net working
Net working capital = Current assets − Current liabilities 2
capital

Net working Net working capital

Net working capital ratio = 1
capital ratio Total assets

Nominal
Nominal interest rate = Real interest rate + Inflation rate 2
interest rate

Operating cycle Operating cycle = Days sales in accounts receivable + Days sales in inventory 1, 2

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Part 2 Formula Reference Guide

Term Formula Unit

Operating
income
Operating income = Contribution margin – All fixed costs 3
(contribution
approach)

Operating Operating income

profit margin Operating profit margin percentage = 1
Net sales
percentage

Net initial investment

Payback period =
Payback period Average incremental cash flow* 5
* Where the cash flow per period is even.

Percentage
change (Current year – Prior year)
(financial Percentage change = × 100 1
Prior year
statement line
item)

Percentage New price – Old price

% Change in price = 3
change in price (New price + Old price) / 2

Percentage
change in New quantity – Old quantity
% Change in quantity demanded = 3
quantity (New quantity + Old quantity) / 2
demanded

D
Present value of a perpetuity = Stock value per share = P =
R

Present value of Where:

2
a perpetuity P = Stock price
D = Dividend
R = Required return

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Formula Reference Guide Part 2

Term Formula Unit

1 – Present value
Annuity present value = C ×
r

1
1−
(1 + r) t
Present value of = C×
r 2
an annity
Where:

C = Amount of annuity (equal future cash flows)

r = Rate of return
t = Number of years

After-tax income
Pretax profit Pretax profit = 3
1 – Tax rate

Price elasticity % Change in quantity demanded

Ep = Price elasticity of demand = 3
of demand % Change in price

Price-earnings Market price per share

Price-earnings ratio = 1
ratio Earnings per share

P0
P/B ratio =
B0
Price-to-book Where: 2
ratio
P0 = Stock price or value today
B0 = Book value of common equity

P0
Price-to-sales ratio =
S1

Price-to-sales Where:
2
ratio
P0 = Stock price or value today
S1 = Expected sales in one year

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Part 2 Formula Reference Guide

Term Formula Unit

Cash and cash equivalents + Short-term marketable securities

Quick ratio Quick ratio = + Receivables (net) 1
Current liabilities

Ratio of Offer price per share

Ratio of exchange = 2
exchange Market price of the acquiring entity

Real interest
Real interest rate = Nominal interest rate – Inflation rate 2
rate

Reorder point Reorder point = Safety stock + (Lead time × Sales during lead time) 2

Net income
ROA =
Average total assets

Return on Or:
1
assets (ROA) ROA = Net profit margin × Total asset turnover

Net income Sales

= ×
Sales Average total assets

Net income
Return on equity =
Average equity

Or:
Return on
1
equity (ROE) ROE = ROA × Financial leverage

Net income Average total assets

= ×
Average total assets Average equity

Sales dollars = Variable costs + Fixed costs + Pretax profit

Sales dollars
needed to Or:
3
obtain a desired
profit Fixed costs + Pretax costs
Sales dollars =
Contribution margin ratio

Sales units
needed to Fixed costs + Pretax profit
Sales (units) = 3
obtain a desired Contribution margin per unit
profit

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Formula Reference Guide Part 2

Term Formula Unit

Selling price
based on Fixed costs + Variable costs + Pretax profit
Sales price per unit = 3
assumed Number of units sold
volume

Ending stock price – Beginning stock price +

Shareholder Annual dividends per share
Shareholder return = 1
return
Beginning stock price

Sustainable growth rate = (1 – Dividend payout ratio) × ROE

Sustainable
Or: 1
growth rate
Sustainable growth rate = Retention ratio × ROE

Target cost per

Target cost per unit = Target price – Target operating income per unit 3
unit

Times interest Earnings before interest expense and taxes (EBIT)

Times interest earned ratio = 1
earned ratio Interest expense

Total asset Sales

Total asset turnover = 1
turnover Average total assets

Ending value – Beginning value + Income

Total return Total return = Capital return + Income return = 2
Beginning value

P0
Trailing P/E ratio =
E0
Trailing price- Where: 2
earnings ratio
P0 = Stock price or value today
E0 = EPS for the past year (past four quarters)

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Part 2 Formula Reference Guide

Term Formula Unit

Dn  1
n D0 (1  g s )T (r  gL )
Stock value =  (1  r )T

(1  r )n
t 1

Where:

Two-stage D0 = Current period dividend

dividend gs = Short-term growth rate
2
discount model
gL = Long-term growth rate
r = Required rate of return
n = Number of years in the first stage (short-term, high-growth rate)
Dn+1 = D0 (1+ gs )n (1 + gL)
T = Payment period (i.e., one for Year 1, two for Year 2, etc.)

P 
P0    B0   B0
 0 
Value of equity
with price-to- Where: 2
book ratio
P0 = Stock price or value today
B0 = Book value of common equity

P 
P0    S0   S1
 1
Value of equity
with price-to- Where: 2
sales ratio
P0 = Stock price or value today
S1 = Expected sales in one year

E P D

V V
 
WACC    R e     Rp    R d 1  T 
V
Where:
Weighted
V = The summed market values of the individual components of the firm's
average cost of 2
capital structure: common stock equity (E), preferred stock equity (P), and
capital (WACC) debt (D)
R = The required rate of return (also known as the "cost") of the various
components
T = The corporate tax rate

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Formula Reference Guide Part 2

Term Formula Unit

Weighted Effective annual interest payments

average interest Weighted average interest rate = 2
Debt outstanding
rate

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