CS Executive (New Syllabus)

Module 2 – Paper 8

Financial Management
Formula Sheet
(As per ICSI Module)

- CS (Dr.) Mohit Shaw

Financial Management Important Formula CS (Dr.) Mohit Shaw
Dividend Policy (Refer Class Discussion)
Sl no. Particulars Formula
1.
Walter’s Model

Where -
P = market price per share of common stock
D = dividend per share
E = earnings per share
R = return on investment
Ke = market capitalization rate.
2.
Gordon’s Model

Where –
P = Market price of a share
E =Earnings per share
b = Retention ratio or percentage of earnings retained or (1 – Payout ratio)
(1- b) = dividend payout ratio, i.e., percentage of earnings distributed as dividend
ke = Capitalisation rate/cost of capital
br = growth rate in r, i.e., rate of return on investment of an all equity firm.
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Financial Management Important Formula CS (Dr.) Mohit Shaw
Sl no. Particulars Formula
3. Modigilani - Miller
Model

Where -
P0 = market price per share at 0 time
r = Capitalisation rate for firm in that risk class (assumed constant throughout)
D1 = Dividend per share at time 1
P1 = Expected market price per share at time 1.
4. Dividend Per Share (Earnings Per Share) × (Dividend pay-out ratio)
(DPS) Or
Total Annual Dividend

No of Shares
5. Earnings Per Share
Total Earnings
(EPS)
No of Shares

Note:
Profit Earning After Tax (PAT/EAT) or Profit Earning After Interest & Tax (EAIT).

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Class-Notes/Formula

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Financial Management Important Formula CS (Dr.) Mohit Shaw
Source of Long-Term Finance & Cost of Capital

1. Cost of Debt (Kd)

Kd after taxes = Kd (before tax)(1 – tax rate)
Note:
Students must remember in the exam from any rate (interest) given in relation to loan or debt bonds,
you must reduce the same with given tax rate.
The final answer for cost of debt shall be post tax.

2. Redeemable Debenture or Bonds

Step 1:
𝑅𝑉−𝑆𝑉
𝑛
Kd before tax = 1 + 𝑅𝑉+𝑆𝑉
2

Step 2:

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Financial Management Important Formula CS (Dr.) Mohit Shaw
Kd After tax = Kd before tax (1- tax)

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 Financial Management Important Formula CS (Dr.) Mohit Shaw

Where -
I = Annual fixed interest
RV = Redeemable Value of debenture net of commission and floatation costs, if any.
SV = Sale Value of debentures net of discount or premium
n= Term of debt till maturity.

3. Cost of Irredeemable Preference Shares (Kp)

𝑎𝑛𝑛𝑢𝑎𝑙 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒

𝐾𝑝 (𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑝𝑟𝑒𝑓. 𝑠ℎ𝑎𝑟𝑒) =
𝑚𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒

OR

𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
𝐾𝑝 =
𝑁𝑒𝑡 𝑝𝑟𝑜𝑐𝑒𝑒𝑑𝑠 𝑎𝑓𝑡𝑒𝑟 𝑓𝑙𝑜𝑎𝑡𝑎𝑡𝑖𝑜𝑛 𝑐𝑜𝑠𝑡, 𝑖𝑓 𝑎𝑛𝑦

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Financial Management Important Formula CS (Dr.) Mohit Shaw
Sl no. Particular Formula
4.
Cost of
Redeemable
Preference Where -
Shares
RV = Redemption value
SV = Sale value
N = No of years to Maturity
D = Annual Dividend.
5. Ke = Rf + (Rm - Rf) ß
Cost of Equity
Where –
(Ke)
Ke = Cost of equity
CAPM Model Rf = Risk-free rate
Rm = Equity market required return (expected return on the market portfolio)
ß = beta is Systematic Risk Coefficient.
Note:
Beta is the measure of market risk. Market risk is the risk that cannot be diversified
away.

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Financial Management Important Formula CS (Dr.) Mohit Shaw
Sl no. Particular Formula
6.
Bond Yield Plus Ke = Yield on long-term bonds + Risk Premium
Risk Premium
Approach
7. Ke = 𝐷1 + g
Dividend Growth 𝑃𝑜
Model Approach
Where –
P0 = Current price of the stock
D1 = Expected dividend at the end of year 1(Current dividend + Growth rate)
8.
Earnings-Price
Ratio Approach

Where –
E1 = Expected earnings per share for the next year
P0 = Current market price per share
E1 = (Current EPS) * (1 + growth rate of EPS).
9. Cost of Retained
Earnings Ke = Kr
(Kr)

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Class-Notes/Formula

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Financial Management Important Formula CS (Dr.) Mohit Shaw

Capital Structure
Sl no. Particulars Formula
1.
Capital Structure Total Financial Structure - Current Liabilities

2. Particulars Amt (Rs)

Income Statement
Sale xx
(-) Variable Cost (xx)
Contribution xx
(-) Fixed Cost (xx)
EBIT xx
(-) Interest (xx)
PBT xx
(-) Tax (xx)
PAT xx

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Sl no. Particulars Formula

3. Operation Leverage

Or

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4. Financial Leverage

Or

Or

Sl no. Particulars Formula

5. Combine Leverage

Or

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Financial Management Important Formula CS (Dr.) Mohit Shaw
𝑆𝑎𝑙𝑒𝑠
6 Asset Turnover Ratio
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡
7. Working Capital
Leverage

Or

Where –
CA = Current Assets
TA = Total Assets
CA = Changes in the level of Current Assets.

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Financial Management Important Formula CS (Dr.) Mohit Shaw
Financial Leverage when
Preference Shares are given in the question

𝐸𝐵𝐼𝑇
DFL =
𝐸𝐵𝐼𝑇−(𝑃𝐷× 1 )
1−𝑇

Where -
I = Interest
D = Preference Dividend
T = Tax rate.
Net Income Approach

Note:
Ko the average cost of capital.

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Class-Notes/Formula

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Working Capital
Sl no. Particulars Formula
1. Net Working Capital Current Asset - Current Liabilities
2. Gross Working Capital Sum total of Current Asset
3. Acid Test Ratio 𝑄𝑢𝑖𝑐𝑘 𝐴𝑠𝑠𝑒𝑡
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

4. Current Asset to Fixed asset 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡

𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡
5. Return on Tangible Asset 𝐸𝐵𝐼𝑇
𝑇𝐴
6. Conservative Policy More liquidity, less return, less risky
7. Aggressive Policy Less liquidity, more return, more risky
Operating or Working Capital Cycle
8. (A) 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑣𝑜𝑙𝑢𝑚𝑒 𝑜𝑓 𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑠𝑡𝑜𝑐𝑘
Raw Materials 𝐶𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 𝑜𝑓 𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑝𝑒𝑟 𝑑𝑎𝑦

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑙𝑒𝑣𝑒𝑙 𝑜𝑓 𝑐𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠

(-) Period of Credit Granted by 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑜𝑓 𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑝𝑒𝑟 𝑑𝑎𝑦
Supplier
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Sl no. Particulars Formula
9. (B) Period of Production 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑤𝑜𝑟𝑘 𝑖𝑛 𝑝𝑟𝑜𝑔𝑟𝑒𝑠𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑑𝑎𝑦
10. (C) Period of turnover of Finished 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑡𝑜𝑐𝑘 𝑜𝑓 𝑓𝑖𝑛𝑖𝑛𝑠ℎ𝑒𝑑 𝑔𝑜𝑜𝑑𝑠
Good Stock 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑠𝑜𝑙𝑑 𝑝𝑒𝑟 𝑑𝑎𝑦
11. (D) Period of Credit taken by 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
Customer 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦

Total Operating Cycle Period = A+B+C+D

12. Average Stock (Op Stock + CL Stock) /2
13.
Economic Order Quantity (EOQ)
2𝐴𝑂
Model 𝐸𝑂𝑄 = √
𝐶

Where
C = carrying or holding cost per unit,
O = Ordering Cost,
A = Annual Consumption.

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Sl no. Particulars Formula

14.
William J. Baumal Model for
Optimal Cash Balance Management
Where -
T= Projected cash requirement
b= Conversion cost per lot
I= Interest earned on marketable securities per annum.
15. Debt-equity ratio Total long-Term Debts
Shareholders Fund
16. Receivable Turnover Sales
Debtor
17. Inventory Turnover Cost of Goods Sold
Avg Inventory
18. Current Assets Turnover Annual Sales
Current Assets
19. Re-order Level Normal Lead Time X Normal Usage
20. Normal Usage Annual usage
Normal working days in a year

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Sl no. Particulars Formula
21. Maximum Level Re-order level + Re-order quantity –
(Minimum consumption × Minimum delivery period)
22. Minimum Level Re-order level – (Normal consumption × Normal delivery
period)
23. Average Level (Maximum Stock Level + Minimum Stock Level)/2
24. Gross Profit Margin 𝐺𝑃 * 100
𝑆𝑎𝑙𝑒
25. Net Profit Margin 𝑁𝑃
* 100
𝑆𝑎𝑙𝑒
26. Return on Equity Net Profit for ordinary shareable
𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥
27. Return on Total Asset EBIT (1 − t)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡
28. Tangible Asset Turnover Total Sales
𝑇𝑜𝑡𝑎𝑙 𝐴𝑆𝑠𝑒𝑡
29. ROI EBIT
Total Asset
30. Return on Total Asset EBIT (1 − t)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡

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Capital Budgeting
Sl no. Particulars Formula
1. Present Value PV =Cashflow/(1+r)t
2. Future Value FV = CF0* (1+r)t Or FVt= PV * (1+r)
3. Perpetuity
Perpetuity = 𝑅
(Multiple Period Maturity) 𝑖
Where -
R = the payment or receipt each period
i = the interest rate per payment or receipt period.
4. Net Present Value (NPV)

Where -
R = Cash inflow at different time period
k = Rate of discount or cost capital
n = The last period in the sum
Sn = Salvage value in period n
Wn= Working capital in period n
C = Cost of investment plus Working Capital.
5. If today payment is made (PV of normal perpetuity + Perpetuity received in the beginning)

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Sl no. Particulars Formula
6. Traditional method 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
Payback period 𝐴𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤
7.
Disposal Ratio

8.
Average Rate of Return
(ARR) OR
Accounting Rate of Return
Method

Decision Rule for Average of Rate of Return Method:

Accept the Proposal
if ARR > Minimum rate of return (cut off rate) and
Reject the Project
if ARR < Minimum rate of return (cut off rate)

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Sl no. Particulars Formula
In case of more than one project -
the different projects may be ranked in descending or ascending order
of their rate of return.
Project below the minimum rate will be dropped.
In case of project yielding rate of return higher than minimum rate, it
is obvious that project yielding a higher rate of return will be preferred
to all.
9.
Internal Rate of Return
(Method of Interpolation)

rL= The lower rate of discount

PVCFAT = Calculated present value of cash inflow
PVC = Present value of cash outlay
DPV = Difference in calculated present value
Dr = Difference in rate of interest
rH = The higher rate of discount.

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Sl no. Particulars Formula
10. C = (r x NPV) / (1 - (1 + r)-n)
Formula for Equivalent Where -
Annual Annuity Approach C = equivalent annuity cash flow
NPV = net present value
r = interest rate per period
n = number of periods.
11.
Profitability Index
(PI) Method
Decision Rule:
If PI > 1 Accept the Project,
PI = 1 indifferent,
PI < 1 Reject the project.
Where -
At= Present value of cash inflows.
k = rate of return
C = initial cash outlay
t = time period.

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Sl no. Particulars Formula
12. Standard Deviation and
Coefficient of Variation

13. Risk Adjusted Discount Rate RADR = Risk free rate + Risk premium
(RADR) Method

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Class-Notes/Formula

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Portfolio Management
Sl no. Particulars Formula
1. Expected Return on a Portfolio

Where –
WA = Weight of security A
RA = Expected return of security A
WB = Weight of security B
RB = Expected return of security B
Wn = Weight of security n
Rn = Expected return of security n.
2. Co-Variance as a
Measure of Risk

Where the probabilities are equal and

COVxy = covariance between x and y
xi = return on security x
yi = return on security y
E(X) = expected return to security x
E(Y) = expected return to security y
n = number of observations.
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Sl no. Particulars Formula
3.
Coefficient of Correlation

Where -

4. Portfolio Risk

Where –

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Sl no. Particulars Formula
5. Risk Penalty Risk squared
Risk tolerance
6. Beta

Note:
Beta is a measure of the non-diversifiable or systematic risk of an
asset relative to that of the market portfolio. A beta of 1 indicates
an asset of average risk. If beta is more than 1, then the stock is
riskier than the market. On the other hand, if beta is less than one,
market is riskier.
7.
Beta of Security

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8. Single-Index Model

9. Simple Sharpe Portfolio Optimization

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Sl no. Particulars Formula
10. Economic Value Added EVA = Net Operating Profit – Taxes – Cost of Capital

Class-Notes/Formula

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Class-Notes/Formula