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ENTREPRENEURIAL FINANCE KEY FORMULAE

Balance Sheet Equation Total Assets = Total Liabilities + Owner’s Equity

Survival Breakeven Revenues 1

EBDAT = Revenues (R) – Variable Costs (VC) – Cash Fixed Costs (CFC) = 0 VCRR = VC/R (variable cost revenue ratio) Survival Revenues (SR) = VC + CFC; CFC = SR – VC = SR (1-VCRR) SR = CFC / (1-VCRR)

NOPAT Breakeven Revenues NOPAT 2 = Revenues – Variable Costs (VC) – Total Operating Fixed Costs (TOFC) 3 = 0 NOPAT Breakeven Revenues (NR) = TOPC / (1-VCRR)

Cash Burn/Build Cash Burn =

Inventory-related expenses + Admin expenses + Marketing expenses + R& D expense + Interest expenses + Change in prepaid expenses – (Change in accrued liabilities + Change in payables) + Capital investment + Taxes Cash Build = Net sales – Change in receivables Net Cash Burn = Cash Burn – Cash Build

Liquidity Ratios Current Ratio = Average current assets / Average current liabilities Quick Ratio = (Average current assets – Average inventories) / Average current liabilities Net Working Capital (NWC) = Current assets - Current liabilities NWC-to-Total Assets Ratio = (Ave. current assets – Ave. current liabilities) Ave. total assets

Conversion Period Ratios Inventory-to-Sale Conversion Period = Ave. Inventories / (COGS / 365) Sale-to-Cash Conversion Period = Ave Receivables / (Net Sales/365) Purchase-to-Payment Conversion Period = (Ave Payables + Ave Accrued Liabilities) (COGS / 365) Cash Conversion Cycle (CCC) = Inventory-to-Sale Conversion Period + Sale-to-Cash Conversion Period – Purchase-to-Payment Conversion

Leverage Ratios Total Debt-to-Total Assets Ratio = Ave total debt / Ave total assets Equity Multiplier = Ave total assets / Ave owners’ equity Current Liabilities-to-Total Debt Ratio = Ave. current liabilities / Ave. total debt Interest Coverage Ratio = EBITDA / Interest Fixed-Charge Coverage Ratio = EBITDA + Fixed Charge (before tax) Fixed Charge (before tax) + Interest

1

earnings before depreciation, amortization, & taxes. net operating profit after taxes. 3 cash operating fixed costs (excluding interest expenses) plus noncash fixed costs (e.g., depreciation). 2

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Profitability & Efficiency Gross Profit Margin = (Net Sales – COGS) / Net Sales Operating Profit Margin = EBIT / Net Sales Net Profit Margin = Net Profit / Net Sales Sales-to-Total Assets Ratio = Net sales / Ave total assets Return on Total Assets (ROA) = Net profit / Ave total assets = (Net Profit / Net Sales) x (Net sales / Ave total assets) Return on Equity (ROE) = Net Income / Ave owners’ equity = Net Profit Margin x Asset Turnover x Equity Multiplier = (Net Profit / Net Sales) x (Net sales / Ave total assets) x

(Ave. total assets / Ave. equity) Sustainable Sales Growth Rate g = (Ending Equity – Beginning Equity) / Beginning Equity = (NI/E beg) x Retention Rate = NI/NS x NS/TA x TA/CE beg x RR = Operating Performance x Financial Policies

Additional Funding Needed (AFN) AFN = Required Increase in Assets – Spontaneously Generated Funds – Increase in Retained Earnings = TA 0/NS 0 x (∆NS) – (AP 0 + AL 0)/NS 0 x (∆NS) – (NS 1) x (NI0 /NS0 ) x (RR0 ) where TA = Total assets NS = Net sales ∆NS = Change in net sales between next year and current year AP = Accounts payable AL = Accrued liabilities NI = Net income RR = Retention rate

Terminal Value Terminal VT-1 =

  

where VCF T = time T' s valuation cash flow r = constant discount rate from time T -1 into the infinite future g = growth rate (r  - g) = cap rate i.e. the spread between the discount rate and the growth rate of cash flow in terminal value period

Equity Valuation Cash Flow Equity VCF =

Net Income + Depreciation and Amortization Expense - Change in Net Operating Working Capital (w/o surplus cash) - Capital Expenditures + Net Debt Issues

VC Valuation Method Acquired % Final Ownership =

I T [P/Ecomp x ET ] / (1 + r) where I = venture capital investment E T = venture income at exit time T r = hurdle rate set by VC investor (depend on stage of development) Shares to be issued = n = m x (Acquired %) 1 – Acquired % where m = number of existing shares issued

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Net Present Value (NPV) and Internal Rate of Return (IRR)   NPV =      where C t = cash flow at time t C0 = initial investment or cash outlay at time t 0 r = discount rate T = duration of the project The NPV is difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. IRR = The discount rate used in capital budgeting that makes the net present value (NPV) of all cash flows from a particular investment or project equal to zero i.e.   NPV =     = 0  IRR is often used to rank investments or projects.

Cost of Capital based on the CAPM and the SML re = rf + [rm – r f] β re = rf + [MRP] β where r f = risk-free interest rate rm = expected annual rate of return on stock market β (beta) = systematic risk of firm to the overall stock market MRP = market risk premium = excess average annual return of common stocks over long-term government bonds

Weighted Average Cost of Capital (WACC) WACC

= (1 – tax rate) x (debt rate) x (debt–to– value) + equity rate x (1 – debt–to–value) = weighted average cost of the individual components of interest-bearing debt and common equity capital

Enterprise Valuation Cash Flow Enterprise VCF =

EBIT (1-Enterprise tax rate) + Depreciation and Amortization Expense Change in Net Operating Working Capital (w/o surplus cash) - Capital Expenditures

EV Equation EV = Market Value(Equity + Preferred + Debt) – Cash & Cash-equivalents New Conversion Price of Preferred Equity Conversion Price Formula (CFP) = Shares before Issue x Old Conversion Price + New Issue Price x New Shares Total Shares after Issue Market Price Formula (MPF) = Old Conversion Price x

Shares before Issue +

 !"# !"#$#%"&!"#

Total Shares after Issue

Required Shares of Staged Investments Fraction of Equity = Required

Ending Fraction of Equity Required x (1 – Sum of Fractions Required by Investors in Future Rounds)

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