2018 finquiz CFA level 2 formula sheet

Summary of Accounting Treatment of Investments ofSH’sEquity Held-to- maturity § i income = Market rate at purchase × Initial fair value FV of a debt security Ori income = i pmt – Amort

Reading 9: Correlation & Regression

=SSU+SSRSSU =VSSSSUwhere, 0 ≤ R2≤ 1

(for single independent variable R2 = r2)

7 SST = SSE + SSR(or RSS)

8 Hypothesis Testing:

•   Null and Alternative hypotheses

•   H0: b 1 = 0 (no linear relationship)

•   H1: b 1 ≠ 0 (linear relationship does exist)

Z\1

− 𝑦 >

𝑆𝑆𝑅 𝑘

𝑆𝑆𝑅 𝑘 𝑆𝑆𝐸

Z\1

− 𝑦 >

Source of Variability DoF

Sum of Squares

Mean Sum

of Squares Regression

(Explained) 1 RSS

MSR = RSS/1 Error

(Unexplained) n-2 SSE

MSE = SSE/n-2

Total n-1

SST=

RSS + SSE

10 F-Statistic or F-Test = bcdbce (

fgg h

(jkhk/ggi )

(df numerator = k = 1) (df denominator = n – k – 1 = n – 2)

11 Prediction Intervals = Y ± t3sm

m>= s> 1 +1

0+ ()+))?

0+1 96? and 2

•   HA = Conditional Heteroskedasticity exists

•   Test statistic = n × R2residuals

b b

!

Reading 11: Time Series Analysis

1   Linear Trend Models = yt = b0 + b1t+ εt

•   Predicted/fitted value of yt in period

(T + 1) = y ˆt+1= b ˆ0+ b ˆ1( T + 1 )

2   Log-Linear Trend Models = yt= eb0+b1t

3   Autoregressive Time-Series Models:

•   First order autoregressive AR (1) = xt

5   Chain Rule of Forecasting:

•   One-period ahead forecast =

ˆxt+1= ˆ b0+ ˆ b1xt

•   Two-period ahead forecast=

ˆxt+2= ˆ b0+ ˆ b1xt+1

6   Random Walks and Unit Roots:

•   Random Walk without drift = xt = x

ε = + 2 −1+

1 0

Reading 13: Currency Exchange Rates

1   Bid-offer Spread = Offer price – Bid price

2  

1u,uuu

3  

− 1

4   To convert spot rate into forward quote:

•   Spot exchange rate × (1 + % premium)

•   Spot exchange rate × (1 - % discount)

5   Covered interest rate parity:

•   Using day count convention:

+ , =

+ ,,

3601

/

i

Actual i

S F

d

f d f d f

6   Uncovered Interest Rate Parity :

e

i − % Δ / =

•   Forward premium or discount:

•   For one year horizon =

-(i f − i d)

7   Forward discount or premium as % of spot

rate:

) (

/

/ /

d f d

f

d f

d

f

i i S

d d f

P

P S P

P S

/ /

CPI S

3   Expressing in terms of logarithmic rates:

4   A two-factor aggregate production function: Y = AF (K, L)

5   Cobb-Douglas Production Function = F (K, L) = Kα L1 - α

6   Under the Cobb-Douglas production function:

•   Marginal product of capital = MPK =

α AK α-1 L 1-α = α Y/K

•   α Y/K = r èα = r (K) / Y = Capital income / Output or GDP

7 Output per worker or Average labor productivity (Y/L or y):

•   GDP/Labor input = TFP × labor ratio × share of capital in GDP

capital-to-•   Or y = Y/L = Akα

8   Contribution of Capital Deepening = Labor productivity growth rate – TFP

9   Contribution of Improvement in technology = Labor productivity growth rate – Capital Deepening

10   Growth Accounting based on Solow Approach = ∆Y /Y = ∆A / A + α ∆K/K + (1 – α) ∆L/ L

11   Labor productivity growth accounting equation

•   Growth rate in potential GDP = LT g rate of labor force + LT g rate in labor productivity

12   Balanced or Steady State Rate of Growth

in Neoclassical Growth Theory:

•   Growth in physical capital stock = ∆K

= sY – δK

13   In the steady state:

•   Growth rate of capital per worker = ∆k

/ k = ∆y / y = ∆A / A + α ∆k / k =

è Steady state growth rate of

labor productivity

•   Growth rate of Total output = ∆Y / Y

= Growth rate of TFP scaled by labor

force share + Growth rate in the labor

•   Capital-to-labor ratio = ∆k / k =

œ

š 1+™ + s (y/k – Ψ)

15   Proportional impact of the saving rate change on the capital-to-labor ratio and per capita income over time:

•  

knew

kold =

Y K

*

+

, , , ,

1 α−1

new

k

k y

Reading 16: Interoperate Investments

1   Summary of Accounting Treatment of Investments

ofSH’sEquity Held-to-

maturity

§   i income = Market rate at purchase × Initial fair value (FV) of a

debt security

Ori income = i pmt – Amort

  i pmt = (Coupon rate × Par value)   Amort = i pmt – i income

§   If debt security is sold: Realized g/l reported on I.S = SP – CV or

§   i income = Market rate × Initial FV

§   Unrealized g/l = FV at the end of Yr t – Amort Cost at end of Yr t

If debt security is sold:

§   Realized g/l reported on I.S= SP – Recorded FV

§   i income = Market rate at purchase × Initial FV

§   Unrealized g/l = FV at the end of Yr t – Amortized Cost at end of

Yr t

If debt security is sold:

§   Realized g/l reported on I.S= SP – Recorded FV

§   Reported at FV at the end of Yr t

§   Subsequently, at FV at the subsequent reporting date on B.S

Available

-for-sale

§   i income = Market rate at purchase × Initial Fv

If debt security is sold:

§   Cumulative unrealized g/l is removed from OCI and entire g/l

recognized in P&l statement

Where, Realized g/l in I.S = (SP – Recorded FV) + Unrealized g/l

§   Reported at FV at the end of Yr t

§   Subsequently, at FV at the subsequent reporting date on the B.S

2   Goodwill = Cost of acquisition – investor’s share of the FV of the net

= Excess Purchase Price Xxx

Less: Attributable to Net Assets:

-Plant & Equipment (% of Ownership Interest × difference

b/wBV & FV)

(xxx) -Land (% of Ownership Interest × difference b/wBV & FV) (xxx)

= Residual Amount (Treated as Goodwill) Xxx

3   Amort of Excess PP:

Investment in associate:

Add: Investor’s share of Investee’s NI (% of Ownership

Interest × Investee’s NI)

Xxx Less: Div received (% of Ownership Interest × Div paid) (xxx)

Less: Amort of excess PP attributable to plant & equipment

(Amount attributable to PP&E* ÷ Remaining life of PP&E)

(xxx)

Where, *Amount attributable to Plant & Equipment = % of Ownership

Interest of investor × (FV of P&E – BV of P&E)

Investor’s proportionate share of Investee’s recorded net assets

(% of Ownership Interest × Ending net assets)

Less: Unrealized profit (% of Ownership Interest × Profit from upstream sale in Associate’s NI)

(xxx)

= Equity Income to be reported as a line item on Investor’s I.S* xxx

•   Balance in the investment in Associate to be reported at the end of year:

Less: Div received (% of Ownership Interest × Div paid) (xxx)

= Value of Investment in Associate’s company at the end of year xxx

•   Composition of Investment account:

Investor’s proportionate share of Associate’s net equity = [% of Ownership Interest × (beg BV of net assets) + (Reported NI of associate – Profit from upstream sale in Associate’s NI) – Div paid

by the associate)]

xxx

Add: Unamortized excess PP (Excess PP – Amort of excess PP) xxx

5   Downstream Transactions

Investor’s share of Associate’s

reported NI (% of Ownership Interest

× Reported NI)

xxx

Less: Amort of excess PP (xxx)

Less: Unrealized profit (% of

Ownership Interest × Profit from the

downstream sale in Associate’s NI)

(xxx)

= Equity Income to be reported as a

line item on Investor’s I.S

xxx

Unrealized profit = % of goods unsold × Profit

on the sale to investee

Investor’s share of the unrealized profit =

Unrealized profit × % of goods unsold

Investor’s share of associate’s

reported NI (% of Ownership Interest

× Reported NI)

xxx

Less: Amort of excess PP (xxx)

Add: Realized profit (% of goods

unsold × Unrealized profit)

xxx

= Equity Income to be reported as a

line item on Investor’s I.S

10   Partial Goodwill Method:

•   Goodwill = FV of acquisition – Acquirer’s share of FV of all identifiable tangible and intangible assets, liabilities and contingent liabilities acquired

Add: BV of Investee’s net assets xxx

Less: FV allocated to identifiable net assets

(xxx)

12   Allocation of excess PP: Excess PPP = Sum of diff b/w FV and BV of identifiable assets + Goodwill

13   Combined Assets & Liabilities (A&L) reported on Consolidated B.S under acquisition method: Consolidated B.S

under acquisition method = BV for A&L

of Investor + FV for A&L acquired from Acquiree

14   Combined Paid-in Capital (PIC) = (FV of the stock issued to effect the transaction – Par value of the stock issued) + Additional PIC of investor

15   Minority Interest = % of subsidiary not owned by the Parent × Subsidiary’s Equity

16   Value of non-controlling interest under full goodwill method = Non-controlling interest’s proportionate interest in subsidiary × FV of subsidiary on acquisition date

17   Value of non-controlling interest under partial goodwill method = Non-controlling interest’s proportionate interest in

subsidiary × FVof the subsidiary’s identifiable net assets on acquisition date Goodwill Impairment:

18 Goodwill Impairment Test under IFRS:

•   Impaired when CA of the Cash-generating Unit > RA of the Cash-generating Unit

•   Impairment loss = CA of Cash-generating Unit - RA of Cash-generating Unit where,

RA = Higher of Net SP and its VIU Net SP = FV – costs to sell

VIU = PV of expected future CF of cash-generating unit

19 Goodwill Impairment Test under U.S

GAAP (Two Step Approach)

•   Step 1: Goodwill Impairment Test

•   Impaired when CV of Reporting Unit

(including Goodwill) > FV of

Reporting Unit (including Goodwill)

•   Step 2: Measurement of Impairment

loss = CV of Reporting unit’s

Goodwill - Implied FV of Reporting

unit’s Goodwill

•   Where Implied FV of Reporting unit’s

Goodwill = FV of Reporting Unit –

FV of Reporting unit’s net assets

Reading 17: Employee Compensation: Post

Employment & Share-Based

1   Under DC Plans: Pension exp = Co.’s

annual contribution to plans adjusted for ∆

in yr-end accruals

2   Funded Status = PV of DB obligations –

FV of plan assets

3   Period pension cost of a Co.’s DB pension

plan = ∆ in Net pension liability or asset

adjusted for employer’s contributions

4   Net i exp = Discount rate × Net Pension

liability

where Discount Rate = rate used to

calculate PV of future pension benefits

5   Net i income = Discount rate × Net

Pension asset

6   Net return on plan assets = Actual return

on plan assets – (Plan assets × i rate)

7   Actuarial g/l = Actual return – (Plan assets

contributions

•   Total Net periodic pension cost (End Funded Status* – Beg Funded Status*) – Employer Contribution

where *Pension liability is treated as a negative

9   Adjusted Total P&L pension exp (income)

•   = Current service costs + i costs + (-)

actuarial losses (actuarial gains) + past service costs (or plan amendments) – (+) Actual return (loss) on plan assets

Or

•   = Reported Total P&L pension exp (income) + Expected return on plan assets – Actual return on plan assets

10   Adjusted Pre-tax Income:

•   = Reported Pre-tax income + (Actual return on plan assets – Expected return

on plan assets)

Or

•   = Reported Pre-tax income + Total reported pension and other post-retirement benefits - Current service

costs - i exp component of pension

cost + Actual return on plan assets

11   Adjusted Net Operating Exp=Reported Net operating exp – Total reported pension and other post-retirement benefits + Current service costs

12   Adjusted i Exp = Reported i exp + i exp

component of pension cost

13   Adjusted i and investment Income

=Reported i and investment income +

Actual return on plan assets

14   Compensation exp = FV of stock on the Grant Date

16

Reading 18: Multinational Operations

1   Cumulative Translation Adjustment = CTA = Assets – Liabilities –

Common Stock – Retained Earnings

2   Balance Sheet Exposure:

Foreign Currency (FC) B.S Exposure Strengthens Weakens When assets translated at

current X rate > liabilities

translated at current X rate

Net Asset B.S exposure

+ve translation adj

-ve translation adj When liabilities translated at

current X rate > assets

translated at current X rate

Net Liability B.S exposure

-ve translation adj

+ve translation Adj (X = exchange)

3   Re-measurement Gain = NI − NI before re-measurement gain

4   Re-measurement Loss = NI − NI before Re-measurement loss

5   Rules For Translation Of A Foreign Subsidiary’s FC Financial

Statements (F.Ss) Into Parent’s Presentation Currency Under IFRS &

U.S GAAP

Foreign Subsidiary’s Functional Currency

FC Parent’s Presentation

Currency Translation Method: Current Rate

method

Temporal Method

X rate at which F.Ss are

translated from foreign

i) Measured at current value

i.e marketable securities &

Current rate Current rate

Current rate Current rate

Foreign Subsidiary’s Functional Currency

FC Parent’s Presentation

Currency inventories measured at

market value under the lower

of cost or market rule

ii) Measured at historical costs e.g PP&E Current rate Historical rate LIABILITIES

Monetary liabilities: a/c

payable, LT debt, accrued exp., and deferred income taxes

Nonmonetary liabilities:

i) measured at current value ii) not measured at current value i.e deferred revenue

Current rate

Current rate Current rate

Current rate

Current rate Historical rate

translated at historical rate

Historical rates Beg R.E + translated NI – div translated at historical

rate

EXPENSES

Most Expenses Expenses related to assets translated at historical X rate

e.g COGS, Dep.,

& Amort etc

Average rate Average rate

Average rate Historical rate

rate & historical rate) Exposure Net Assets or Net

Liabilities

Net monetary assets or Net monetary liabilities

Treatment of translation adj

in parent’s consolidated F.Ss separate component Accumulated as a

of equity

Included as g/l in NI

TEMPORAL METHOD: CURRENT

RATE METHOD Net Monetary

Liability Exposure

Net Monetary Asset Exposure

6 Impact of Changing Exchange Rates on Exposure

Foreign Currency Strengthens Weakens CURRENT RATE METHOD:

Net Assets

Net Liabilities Gain Loss Gain Loss

TEMPORAL METHOD:

Net Monetary Assets

Net Monetary Liabilities

Gain Loss

Loss Gain Hyperinflationary Economy

7   Restatement Factor =

8   Restated Capital Stock = Capital stock original value ×

«

9   Restated Revenue = Revenue original value × «

10   Loss from holding beg balance in cash = -Beg balance in cash ×

13   Avg effective tax rate =

14   Organic sales growth = Net sales growth + Foreign X impact + Acquisition/Divestiture impact

Reading 19: Evaluating Quality of Financial

Reports

1   DSR (days sales receivable index) =

(Receivablest/Salest) / (Receivablest–

1/Salest–1)

2   GMI (gross margin index) = Gross

margint–1 / Gross margint

3   AQI (asset quality index) = [1 – (PP&Et+

CAt)/TAt ] / [1 – (PP&Et–1+ CAt-1)/TAt-1]

4.   SGI (sales growth index) = Salest/Salest–1

5   DEPI (depreciation index) = Dep ratet–

1/Dep ratet

where, Dep rate = Dep/(Dep + PP&E)

6   SGAI (sales, general, and admin exp

index) = (SGAt/Salest) / (SGAt–1/Salest–1)

7   Accruals = (Income before extraordinary

items – Cash from operations)/TA

8   LEVI (leverage index) = Leveraget /

Leveraget–1 where, Leverage = Debt /

•   ROE = NI/EBT × EBT/EBIT × EBIT/Sales × Sales/Assets × Assets/Equity

•   ROE = Net profit margin × asset turnover × leverage

•   Adjusted Asset base = Adjusted Total Assets = Total Assets of the company – Investments in Associates

•   Adjusted NI = NI of Co – NI from Associates

Accruals and Earnings Quality

2   B.S based aggregate accruals

•   Aggregate Accrualst = NOAt – NOAt-1 where, NOAt = Net operating Assets t

= Op Assets t – Op Liab t = [{TA t –

(Cash t + ST invstmnt t)} – {Total liab

t – (Total LT debt t + Debt in current liab.)}]

•  

²Ò¯~+²Ò¯~k/

²Ò¯~’²Ò¯~k/

>

3   CF based aggregate accruals:

•   Aggregate Accruals = NI t – (CFO t + CFI t)

•  

²·Í+(©†ÒÍ’©†·Í) (²Ò¯Í’²Ò¯Ík/)

>

•   Op CF before interest and taxes = Op

CF + cash i paid + cash taxes paid

•   Op income adjusted for accounting ∆

= Profit before i& taxes + amort of

Decomposition and Analysis of the Co’s

Valuation:

9   Parent Co pro-rata share of

subsidiary/affiliates = (Subsidiary’s share

price in FC× Shares held by Parent Co ×

X- rate)/Parent Co total market

capitalization

10   Implied Value of Parent Co (excl

subsidiary/affiliates) = Parent Co.’s Mkt

Cap - Value of subsidiary/affiliate holdings

11   P/E ratio of Parent Co =

12   Implied P/E ratio of Parent Co =

14   Adj Fin Lev =

15   Adj D-to-E ratio =

U.R

16   Adj i-coverage Ratio =

Reading 21: Capital Budgeting

1   Depreciable Basis = Purchase price + any Shipping or handling or installation costs Expansion Project

2   Initial Outlay = FCInv + NWCInv NWCInv = ∆non-cash current assets –

∆non-debt current liabilities= ∆NWC

3   Annual after-tax operating cash flow = CF

= (S – C – D) (1 – T) + D or CF = (S – C) (1 – T) + TD

4   Terminal year after-tax non-operating cash flow = TNOCF = Sal T + NWCInv – T (Sal

T – B T) Replacement Project

5   Initial Outlay = FCInv + NWCInv – Sal 0 +

8   (1 + Nominal rate) = (1 + Real rate) (1 + Inf rate)

9   Profitability index = PI = 1 + (NPV/Initial investment)

when PI > 1, invest and when PI < 1, do not invest

10   CAPM = ri = R F + βi [E (R M) – R F] Economic and Accounting Income

11   Accounting income = Rev – Exp

12   Economic Income = AT CF from investment + ∆ in MV = AT CF from investment + (End MV – Beg MV)

EBIT = earnings before interest and taxes

$WACC= dollar cost of capital = WACC

× capital Capital (after Year 1) = investment = Initial Investment – depreciation

(1’³¯©©) Í

á Š\1

15   Total value of Co = original investment + NPV

16   Residual income (RI) = NI – Equity Charge

•   RI t = NI t – (re × B t-1)

where,

•   MVA = V·Í

1’<ÃÍ

á Š\1

•   Total value of Co = NPV (PV of RI)

+ Original Equity investment +

Original Debt investment

2   Total value of Co = V = D + E

3   WACC without taxes = r³¯©©=

8   Systematic Risk = βa = ”» βd +

•   βe = βa + (βa – βd) (D/E)

9   AT cost of debt = BT cost of debt × (1 – Marginal tax rate)

10   MM Proposition I with Taxes: Co.’s value

12   Static trade-off theory of capital structure

VL = V U + tD – PV(Costs of financial distress)

Reading 23: Dividends & Share Repurchases Analysis

Share is sold just before it goes ex-dividend:

1   Cash flow from Sale = Sale price – capital gains tax owned on the sale = Pw – (Pw –

Pb)(TCG) where, Pw = price with the right to receive dividend

Pb = purchase price where b is for buy

TCG = marginal tax rate on capital gains Share is sold (after share goes ex-div.)

2   CF from Sale = Sale price – cap gains tax (owed on sale) + AT amount of div = Px– (Px– Pb) (TCG) + D (1 – TD)

5   Dividend imputation tax system: ETR = SH’s Marginal Tax Rate

6   Split tax system: ETR = Corp tax rate on div + {(1 – Corp tax rate on div.) (personal tax rate)}

Payout Policies:

7   Stable Div Policy

•   Expected ↑ in Div = (Expected

Earnings × Target payout ratio –

Previous dividend) × Adj factor

•   Adj factor = 1/no of yrs over which

adj in div will take place

8   Residual Div Policy

•   Div = Earnings – (Capital budget ×

Equity % in capital structure) or

•   Div = Zero, whichever is greater

9   Div Payout Ratio = ”y5.

²·

10   Div Coverage Ratio =

”y5.

11   FCFE Coverage Ratio =

FCFE = CFO – FCInv + Net Borrowings

Reading 24: Corporate Performance,

Governance & Business Ethics

Reading 25: Corporate Governance

1   Share Overhang =

Reading 26: Mergers & Acquisitions

1   Statutory Merger = Co X + Co Y= Co X

2   Subsidiary Merger = Co X +Co Y=(Co

X + Co Y)

3   Consolidation = Co X + Co Y = Co Z

4   New shares issued by Acquirer =

5   Post-merger no of shares outstanding = Acquirer’s pre-merger total shares outstanding + new shares issued by Acquirer

9   HHI = [Z

100 2

10   Unlevered NI = NI + Net Interest after-tax

•   Net interest after-tax = (i exp – i

income) × (1 – Tax rate) Or

•   Unlevered NI = EBIT × (1- tax rate)

•   NOPLAT = Unlevered NI + ∆ in deferred taxes

11   FCF = NOPLAT + NCC – ∆ in Net WC –Capex

12   FCF = NI + net interest after-tax + ∆ in deferred taxes + net noncash charges – ∆ in NWC – Capex

Terminal Value:

13   Using constant growth formula

U= †©†Ç (1’•) (³¯©©ĩ‘ỡÌÍÑ+•)

14   Using Market Multiple

c˜

17   Estimated takeover price of Target = Estimated stock price of Target based on Comparables + Estimated takeover premium

•   When takeover premium is given in

%, Estimated takeover price of Target

= (Estimated stock price of Target

P T = price paid for target company

V T = pre-merger value of target

V A = pre-merger value of the acquirer

C = cash paid to target SH i.e cash paid =

cash price paid per share of target co × no

of shares outstanding of target co

21   In Stock offer = P T = (N × P AT)

where,

P T = price paid for target co

N = No of new shares target receives

P AT = price per share of combined firm

after merger announcement

Reading 27: Equity Valuation: Applications &

P = market price

V = intrinsic value

2   Residual Income Model = NI – (cost of equity × Beg value Equity)

Reading 28: Return Concepts

1   Dividend yield or investment income = (DH/P0)

2   Price appreciation R = (PH-P0)/P0

3   HPR = r = {(DH + PH) / P0} – 1 OR r = {(P1 – P0+CF1) / P0

4   Expected Alpha = Exp R – Req R

5   Realized Alpha (Ex-post alpha) = (Actual HPR) – (Contemporaneous Req R)

6   Expected HPR:

•   When an asset’s intrinsic value ≠ market price, the investor expects to earn = RR + return from the convergence of price to value

•   When an asset’s intrinsic value = price, the investor expects to earn RR only

•   E (RT) ≈ rT + {(V0 – P0) / P0} where,rT = periodic required RoR,

•   {(V0 – P0)/P0} = estimate of return from convergence over period

10   ERP = [{(1+EINFL) (1+EGREPS) (1+EGPE)-1} +EINC]-Expected Rf R

•   where EINFL= expected inf.(

forecasted as) {(1+YTM of 20-yr bonds) / (1+YTM of 20-yr TIPS)} –

Labor supply growth rate = population growth rate + increase in labor force participation rate

•   EGPE = expected growth rate in P/E ratio (For efficient markets 1+EGPE

= 1+0 = 1

•   EINC = expected income component

(includes dividend yield &

reinvestment R)

11   CAPM: Required Return on share i =

Current expected Rf R + Bi (ERP)

•   where ERP = Expected R on mkt

13   Beta Estimation for Thinly Traded Stocks

and Nonpublic Companies

15   The Fama-French Model (FFM): ri =Rf +

Bimarket × RMRF + Bisize× SMB + Bivalue ×

HML

•   RMRF = RM –Rf

•   SMB(small minus big) = Avg R on 3

small-cap portfolios – avg R on 3

RP) + (sensitivity to business cycle risk × business cycle RP) + (sensitivity to mkt

timing risk × mkt timing RP)

18   Build-Up Approaches for Private Business Valuation: ri = rf + ERP + Size premi+Specific Co premi

19   Bond yield Plus RP (BYPRP) cost of equity = YTM on the co.’s LT debt + RP Country Spread Model

20   ERP estimate = ERP for a developed mkt + Country prem

•   Country Prem = yield on emerging mkt bonds (denominated in currency

of developed market) – yield on developed mkt govt bonds

21   Cost of Capital = WACC = {D/(D+E)}rd(1-Tax rate) + {E / (D+E)}rE

Reading 29: Industry & Company Analysis

1   % of sales (specific geographic region) = Sales of a particular region / Total sales of

a co

2   Co.’s projected Rev growth = Projected mkt share × Projected sales of a given product mkt

3   Forecasted variable costs = % of rev Or = Unit volume × Unit variable costs

4   COGS =Raw materials + Direct labor + Overhead (in producing the goods)

5   Finance costs = (Fixed i rate on debt × Gross debt at beg of period) – (i income

rate × cash position at beg of period)

6   Gross debt = LT financial debt + ST financial debt + Accrued interest

7   Net debt = Gross debt – Cash and cash equivalents

8   Effective i rate = i exp / Avg gross debt

9   i rate on avg cash position =i income / Avg

cash position

10   i rate on avg net debt = Net i exp / Avg

net debt

11   Deferred tax asset/liability = Profit and

loss (reported) tax amount – Cash tax

amount

12   Projected A/C receivable = Forecasted

annual sales (assuming all credit sales) ×

(Assumed DSO/ 365)

13   Projected inventory = Assumed COGS /

Assumed Inventory TO ratio

14   ROIC= NOPLAT / Invested Capital = EBI

/ (Operating assets – Operating liab.)

15   ROCE = Op profit / Capital employed (i.e

debt and equity capital)

16   Rev loss for co due to cannibalization of

demand = Projected no of units of product

cannibalized by the new substitute product

•   No of units of a product cannibalized

by the new substitute product =

Expected no of product shipments ×

% representation of each category

(e.g consumer & non-consumer) ×

Cannibalization factor for the category

17   Post cannibalization shipments

=Pre-cannibalization shipments – Expected

cannibalization

18   Post cannibalization revenue cannibalization revenue – Estimated impact on rev from cannibalization

=Pre-19   Overall organic rev growth = [(1 + volume growth) (1 + % of price/mix contribution to rev growth)] -1

20   Construction of Pro Forma I.S:

Sales Less: COGS

= Gross profit Less: Admin exp

Less: Distrib Exp

Add: Other income from operation

= EBIT Add (Less): Other operating income (exp.)

Less: Finance costs & other financial exp

= Profit before tax Less: Income Tax

Add: Income from associates

= Profit from continuing operations

Add (Less): Profit (loss) from discontinued operations

= Net profit for the year Less: Non-controlling interests

= Owners of the co

21   EBITDA = EBIT + Dep & amort exp

22   Forecasted CF Statement

CF from operating activities:

NI (profit after taxes) Adj to determine CF:

Add:

dep

↓ in inventory

↑ in a/c payable Total adjustments Net CF from operating activities

CF from investing activities: 𝐴𝑑𝑑: ↓ in plant and equipment Net CF from investing activities

CF from financing activities:

↑ in notes payable

↑ in LTD Less: Dividends paid Net CF from financing activities Forecasted ↑ in cash

23   Forecasted B.S

PP&E Add: Investment in associates Add: Other financial assets Add: Deferred tax assets

= Total non-current assets Inventories

Add: Trade and other receivables Add: Cash & cash equivalents Add: Other current assets

=Total current assets Total assets = Total non-current + Total current assets

Share capital