Chapte

r 2

Chapte

r 2

Chapter 3Return on assets (investment) = Profit margin × Asset turnover

Return on equity = Return on assets (investment) (1 – Debt/Assets)

x = / =

Income

Dividends Total =Payout Dividend

SharePer PriceMarket

SharePer Dividend=Yield Dividend

SharePer Earnings

SharePer PriceMarket = Ratio Earnings Price

Quick Ratio = Cash + marketable securities + A/R

current liabilities

Chapter 3

Chapter 3 Extra FormulasCash = (Total CA – Inv) – ARAR = (Sales / 360 days) x Avg. collection period ratioInventory = (Sales) x (Total CA / Total Assets) / Inventory turnover ratioFixed Assets = Sales / Fixed asset turnover ratioTotal Assets = Sales / Sales to total asset ratio Total Debt = Total assets x Total Debt to Total asset ratioCurrent debt = Total CA / Current ratioTotal Debt = Current debt + LT DebtLT Debt = Total Debt – Current DebtEquity = Total Assets – Total debt

Chapte

r 4

Units+ Projected sales

+ Desired ending inventory – Beginning inventory

= Production requirements

Chapte

r 4

(RNF) = A (ΔS) – L (ΔS) – PS2(1 – D) S SWhere: A/S = Percentage relationship of variable assets to sales; ΔS = Change in sales; L/S = Percentage relationship of variable liabilities to sales; P = Profit margin; S2 = New sales level; D = Dividend payout ratio

DOL = Q(P – VC)____

Q(P – VC) –FCDOL is degree of operating leverageQ is quantity at which DOL is computedP is price per unitVC is variable cost per unitFC is fixed cost DOL = __S - TVC__

S – TVC – FCDOL is degree of operating leverageS is sales (QP) at which DOL is computedTVC is total variable costFC is fixed cost DCL = ____S - TVC____

S – TVC – FC - IDCL is degree of combined leverageS is sales (QP) at which DCL is computedTVC is total variable costFC is fixed costI is interest

Volume-cost-profit analysis: leveraged firmUnits sold Total VC Fixed Costs Total Costs Total

RevenueOperating Income

0 0 60,000 60,000 0 (60,000)20,000 16,000 60,000 76,000 40,000 (36,000)40,000 32,000 60,000 92,000 80,000 (12,000)50,000 40,000 60,000 100,000 100,000 060,000 48,000 60,000 108,000 120,000 12,00080,000 64,000 60,000 124,000 160,000 36,000100,000 80,000 60,000 140,000 200,000 60,000

BE = Fixed costs = Fixed costs = FC Contribution Margin Price – VC per unit P - VC

Volume-cost-profit analysis: conservative firmUnits sold Total VC Fixed Costs Total Costs Total

RevenueOperating Income

0 0 12,000 12,000 0 (12,000)20,000 32,000 12,000 44,000 40,000 (4,000)30,000 48,000 12,000 60,000 60,000 040,000 64,000 12,000 76,000 80,000 4,00060,000 96,000 12,000 108,000 120,000 12,00080,000 128,000 12,000 140,000 160,000 20,000100,000 160,000 12,000 172,000 200,000 28,000

DOL = Percent change in operating income Percent change in unit volume

DOL = Q (P – VC)Q (P – VC) – FC

Q = quantity at which DOL is computedP = price per unitVC = variable cost per unitFC = fixed costs

DFL = __EBIT___ EBIT – IDFL is degree of financial leverageEBIT is earnings before interest and taxesI is interest DCL = ___Q(P – VC)____ Q(P – VC) – FC – I

DCL is degree of combined leverageQ is quantity at which DCL is computedP is price per unitVC is variable cost per unitFC is fixed costI is interest

QP or Sales = Quantity x PriceTVC or QVC = Quantity x VC per unit