Quick Revision Notes CA Final- SFM
Quick Revision Notes for CA Final SFM
Dividend Decision
Basic Formulas
S. No. Formula
1. Dividend Rate DPS * 100
Face Value
2. Dividend Per Share Total Dividend
(DPS) No. of Share
3. Dividend Payout Ratio DPS*100
(DPR) EPS
4. Dividend Yield Ratio DPS*100
Market Price
5. Retention Ratio (EPS – DPS)*100
EPS
6. Market Capitalization Share Price * No. of Share Outstanding
7. Price Earnings Ratio Price
EPS
8. Quadratic Equation – - b ± √ (b2 – 4ac)
X= 2a
9. ROI EPS
BVPS
10. Growth (g) bxr (where b is retention ratio)
11. Compounded (Closing Value)1/n – 1
Annualized Growth Opening Value
Rate (CAGR)
Cost of Capital
S. Name of Method Formula Remarks
No.
1. Dividend Growth Ke = Where g is Growth
Model/Dividend D1 + g
Discount Model Price
2. Capital Assets Ke = Rf + β(Rm – Rf) Where β is Systematic Risk of Security
Pricing Model and Rf is Risk Free Return from Market,
(CAPM) (Rm – Rf) is Market Risk Premium and
β(Rm – Rf) is Security Risk Premium
3. Earning Yield Ke= EPS X 100
Method Price
4. Base on Price Ke= 1 Where PER is Price Earnings Ratio,
Earnings Ratio PER PER = Price
EPS
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,Quick Revision Notes CA Final- SFM
Share Price
S. Name of Method Formula Remarks
No.
1. Traditional Approach Price = M(D + E) M is Multiplier
(Graham & Dodd 3 D is Dividend Per Share
Model) Or E is Earning Per Share
M (4D + RE) RE is Retained Earning
3
2. Walter‟s Approach Price = D + (E – D) x r r = Rate of Return on Investment
Ke Ke E = Earnings Per Share
Ke Ke = Weighted Average Cost of Capital
Note: - If r > Ke then share price would be maximum at 0% dividend payout.(Growth Firm)
Note: - If r < Ke then share price would be maximum at 100% dividend payout.(Declining Firm)
Note: - If r=Ke then there is no impact on share price due to dividend policy i.e. Dividend policy is
irrelevant. (Normal Firm)
Walter‟s Approach is also called all or nothing approach (all = 100% payout & Nothing = 0% Payout)
3. Gordon Growth Price D1 D1 is Next Year Dividend,
Model Ke - g
Assumption of Gordon’s Growth Model: -
1. The firm is all equity firm and it has no debt.
2. Source of finance is retained earnings and no other alternative to raise finance.
3. Internal rate of return (r) & cost of capital (Ke) remains constant.
4. The firm has perpetual life.
5. Retention ratio once decided remains constant.
6. Discount Rate is greater than growth rate (Ke > g).
4. Dividend Discount Price = D
Model (When No Ke
Growth)
When Constant Price= D1
Growth Ke – g
When Different Price = D1/(1+Ke)1 +
Growth D2/(1+Ke)2 +
D3/(1+Ke)3 + ……
Up to Different
Growth + (Dn-1/Ke-
g)/(1+Ke)n
5. Lintner‟s Model D1 = D0 + (EPS x DPS –
D0) x Adjustment
Factor
6. Modigilani - Millar P0 = P1 + D1 P0 = Current Market Price
Model 1+ Ke P1 = Market Price at Year end
Np0 = (n + m) x P1 – I1 + X1 nP0 = Current Value of Firm
1 + Ke n = Present No. of Shares
m = Additional Shares at year end
market price
I1 = Investment to be made at year end
X1 = Earing During Year
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,Quick Revision Notes CA Final- SFM
Steps for Value of Firm by M-M Approach
Step I – Share Price after 1 Year (P1)
Step II - Income after 1 Year (X1)
Step III – Dividend after 1 Year (D1)
Step IV – Retained Earnings after 1 Year (X1 – D1)
Step V – Investment to be done after 1 Year (I1)
Step VI – Balance amount to be raised from Equity Market (I1 –R1) at (P1)
Step VII – New Share to be issued (m = Step/ P1)
Step VIII – Market Value after 1 Year (n + m) x P1
Step IX – Calculation of P0 from value in Step VIII. Value from this step should be equal to the value of
firm at P0.
Decision Making
I. If fundament Price is greater than actual market price then –
Stock is undervalued
Buy Recommendation
II. If Fundamental price is less than actual market price then-
Stock is overvalued
Sell Recommendation
III. If fundamental price is equal to actual market price then-
Stock is valued correctly
Hold Recommendation if already purchased earlier.
Residual Payment Policy: - Residual Payment Policy means distribute retained earnings (profits) after
making investment needs.
Trigger Point to identify D1 or D0
Points to Trigger D0 = Historical/Past/Paid/Last Year
Points to Trigger D1 = Future/Expected/will pay/next year
Mutual Fund
Mutual Fund: - Mutual is a trust that pools the savings of a number of investors who share a common
financial goals. Mutual Fund offers an opportunity to invest in a diversified professionally managed
basket of securities at relatively low cost.
Type of Mutual Funds
Functional Based Ownership Based Portfolio Based
Open Ended Public Sector Equity Debt Specialized
Close Ended Private Sector Growth Bond Index
Foreign Mutual Fund Aggressive Gilt International
Income Off Shore
Balanced Sector
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, Quick Revision Notes CA Final- SFM
Advantages and Drawbacks of Mutual Funds
Advantages of Mutual Fund Drawbacks of Mutual Funds
Professional Management No Guarantee of Return
Diversification No Guarantee of Maximizing of Returns through diversification
Convenient Administration Future cannot predicted
Higher Return Selection of proper mutual fund
Low Cost Management Cost Factor
Liquidity Unethical practices
Transparency Taxes
Highly Regulated Transfer Difficulties
Economies of Scale
Flexibility
Other Benefits – SIP , SWP etc.
Net Assets Value (NAV): -
Net Assets Value (NAV) = Total Assets – Outside Liability
Or
Net Assets Value (NAV) = Market Value of Investment + Receivables + Accrued Income + Cash & Cash
Equivalent + Other Assets – Accrued Expenses – Payable – Other Liabilities
NAV per Unit = Total NAV/No. of Units Outstanding
Note: - For Calculation of Net Assets Market Value should be taken unless not provided or stated in
question to take otherwise.
Load on Mutual Fund
A) Entry Load: - Entry Load is levied on purchase of Mutual Fund.
If there is entry load then NAV will be –
NAV = NAV + Entry Load
B) Exit Load: - Exit Load is levied on sale/exists of Mutual Fund.
If there is exist load the NAV will be –
NAV = NAV – Exit Load
Expenses Ratio = (Expenses x 100) /(NAV1 + NAV0)/2
Where, NAV1 = NAV at Year End
NAV0 = NAV at beginning of Year
Return = [(Dividend + Capital Gain + NAV1 – NAV0) x 100]/NAV0
Where,
Dividend and Capital Gain Consist which are distributed to unit holders
Dividend should be calculated on face value if dividend rate is given unless otherwise stated in question
or dividend yield is given.
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Quick Revision Notes for CA Final SFM
Dividend Decision
Basic Formulas
S. No. Formula
1. Dividend Rate DPS * 100
Face Value
2. Dividend Per Share Total Dividend
(DPS) No. of Share
3. Dividend Payout Ratio DPS*100
(DPR) EPS
4. Dividend Yield Ratio DPS*100
Market Price
5. Retention Ratio (EPS – DPS)*100
EPS
6. Market Capitalization Share Price * No. of Share Outstanding
7. Price Earnings Ratio Price
EPS
8. Quadratic Equation – - b ± √ (b2 – 4ac)
X= 2a
9. ROI EPS
BVPS
10. Growth (g) bxr (where b is retention ratio)
11. Compounded (Closing Value)1/n – 1
Annualized Growth Opening Value
Rate (CAGR)
Cost of Capital
S. Name of Method Formula Remarks
No.
1. Dividend Growth Ke = Where g is Growth
Model/Dividend D1 + g
Discount Model Price
2. Capital Assets Ke = Rf + β(Rm – Rf) Where β is Systematic Risk of Security
Pricing Model and Rf is Risk Free Return from Market,
(CAPM) (Rm – Rf) is Market Risk Premium and
β(Rm – Rf) is Security Risk Premium
3. Earning Yield Ke= EPS X 100
Method Price
4. Base on Price Ke= 1 Where PER is Price Earnings Ratio,
Earnings Ratio PER PER = Price
EPS
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,Quick Revision Notes CA Final- SFM
Share Price
S. Name of Method Formula Remarks
No.
1. Traditional Approach Price = M(D + E) M is Multiplier
(Graham & Dodd 3 D is Dividend Per Share
Model) Or E is Earning Per Share
M (4D + RE) RE is Retained Earning
3
2. Walter‟s Approach Price = D + (E – D) x r r = Rate of Return on Investment
Ke Ke E = Earnings Per Share
Ke Ke = Weighted Average Cost of Capital
Note: - If r > Ke then share price would be maximum at 0% dividend payout.(Growth Firm)
Note: - If r < Ke then share price would be maximum at 100% dividend payout.(Declining Firm)
Note: - If r=Ke then there is no impact on share price due to dividend policy i.e. Dividend policy is
irrelevant. (Normal Firm)
Walter‟s Approach is also called all or nothing approach (all = 100% payout & Nothing = 0% Payout)
3. Gordon Growth Price D1 D1 is Next Year Dividend,
Model Ke - g
Assumption of Gordon’s Growth Model: -
1. The firm is all equity firm and it has no debt.
2. Source of finance is retained earnings and no other alternative to raise finance.
3. Internal rate of return (r) & cost of capital (Ke) remains constant.
4. The firm has perpetual life.
5. Retention ratio once decided remains constant.
6. Discount Rate is greater than growth rate (Ke > g).
4. Dividend Discount Price = D
Model (When No Ke
Growth)
When Constant Price= D1
Growth Ke – g
When Different Price = D1/(1+Ke)1 +
Growth D2/(1+Ke)2 +
D3/(1+Ke)3 + ……
Up to Different
Growth + (Dn-1/Ke-
g)/(1+Ke)n
5. Lintner‟s Model D1 = D0 + (EPS x DPS –
D0) x Adjustment
Factor
6. Modigilani - Millar P0 = P1 + D1 P0 = Current Market Price
Model 1+ Ke P1 = Market Price at Year end
Np0 = (n + m) x P1 – I1 + X1 nP0 = Current Value of Firm
1 + Ke n = Present No. of Shares
m = Additional Shares at year end
market price
I1 = Investment to be made at year end
X1 = Earing During Year
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,Quick Revision Notes CA Final- SFM
Steps for Value of Firm by M-M Approach
Step I – Share Price after 1 Year (P1)
Step II - Income after 1 Year (X1)
Step III – Dividend after 1 Year (D1)
Step IV – Retained Earnings after 1 Year (X1 – D1)
Step V – Investment to be done after 1 Year (I1)
Step VI – Balance amount to be raised from Equity Market (I1 –R1) at (P1)
Step VII – New Share to be issued (m = Step/ P1)
Step VIII – Market Value after 1 Year (n + m) x P1
Step IX – Calculation of P0 from value in Step VIII. Value from this step should be equal to the value of
firm at P0.
Decision Making
I. If fundament Price is greater than actual market price then –
Stock is undervalued
Buy Recommendation
II. If Fundamental price is less than actual market price then-
Stock is overvalued
Sell Recommendation
III. If fundamental price is equal to actual market price then-
Stock is valued correctly
Hold Recommendation if already purchased earlier.
Residual Payment Policy: - Residual Payment Policy means distribute retained earnings (profits) after
making investment needs.
Trigger Point to identify D1 or D0
Points to Trigger D0 = Historical/Past/Paid/Last Year
Points to Trigger D1 = Future/Expected/will pay/next year
Mutual Fund
Mutual Fund: - Mutual is a trust that pools the savings of a number of investors who share a common
financial goals. Mutual Fund offers an opportunity to invest in a diversified professionally managed
basket of securities at relatively low cost.
Type of Mutual Funds
Functional Based Ownership Based Portfolio Based
Open Ended Public Sector Equity Debt Specialized
Close Ended Private Sector Growth Bond Index
Foreign Mutual Fund Aggressive Gilt International
Income Off Shore
Balanced Sector
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, Quick Revision Notes CA Final- SFM
Advantages and Drawbacks of Mutual Funds
Advantages of Mutual Fund Drawbacks of Mutual Funds
Professional Management No Guarantee of Return
Diversification No Guarantee of Maximizing of Returns through diversification
Convenient Administration Future cannot predicted
Higher Return Selection of proper mutual fund
Low Cost Management Cost Factor
Liquidity Unethical practices
Transparency Taxes
Highly Regulated Transfer Difficulties
Economies of Scale
Flexibility
Other Benefits – SIP , SWP etc.
Net Assets Value (NAV): -
Net Assets Value (NAV) = Total Assets – Outside Liability
Or
Net Assets Value (NAV) = Market Value of Investment + Receivables + Accrued Income + Cash & Cash
Equivalent + Other Assets – Accrued Expenses – Payable – Other Liabilities
NAV per Unit = Total NAV/No. of Units Outstanding
Note: - For Calculation of Net Assets Market Value should be taken unless not provided or stated in
question to take otherwise.
Load on Mutual Fund
A) Entry Load: - Entry Load is levied on purchase of Mutual Fund.
If there is entry load then NAV will be –
NAV = NAV + Entry Load
B) Exit Load: - Exit Load is levied on sale/exists of Mutual Fund.
If there is exist load the NAV will be –
NAV = NAV – Exit Load
Expenses Ratio = (Expenses x 100) /(NAV1 + NAV0)/2
Where, NAV1 = NAV at Year End
NAV0 = NAV at beginning of Year
Return = [(Dividend + Capital Gain + NAV1 – NAV0) x 100]/NAV0
Where,
Dividend and Capital Gain Consist which are distributed to unit holders
Dividend should be calculated on face value if dividend rate is given unless otherwise stated in question
or dividend yield is given.
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