For the purpose of demonstrating the following formulas:
CF = Cash Flow PV = Present Value of Cash Flow FV = Future Value of Cash Flow R = interest rate or discount value n = number of years or periods t = Tax
| d = Debt Cd = Cost of Debt e = Equity Ce = Cost of Equity tc = Debt + Equity NOI = Net Operating Income WACC = Weighted Average Cost of Capital |
Ratio | Formula | Comments |
Weighted average cost of capital (WACC) | = [(d/tc) x (Cd (1-t))] + [(e/tc) x Ce] | The WACC is used as the discount rate when assessing the net present value of a project's future cash flows. |
Debt service cover ratio (DSCR) 49
| = NOI / Debt Service | Ability of operating earnings to service debt requirements. |
Loan life cover ratio (LLCR) | = NPV of cash flow for the remainder of loan life / Outstanding loan |
|
Project life cover ratio (PLCR) | = NPV of cash flow for the remainder of project / Outstanding loan |
|
Return on Equity (ROE) | = Net Income available to equity holders / Equity | Measures the investment return on the capital invested by shareholders. |
Discounted Payback |
| Length of time required to recover initial investment on project - using discounted cash flow. |
Simple Payback |
| Length of time required to recover initial investment on project - using non-discounted cash flow. |
Present Value | = FVn / (1 + r)n
| The value today of a future cash flow or series of cash flows discounted using WACC or another appropriate discount rate. |
Net Present Value (NPV) | = ∑ [FVn / (1 + r)n] | Sum of the present value of all future cash flows. |
Project Internal Rate of Return (PIRR) |
| Rate at which the NPV = 0. However, if the cash flows are not uniform, the IRR may not provide an accurate assessment. |
Current Ratio | = Current Assets / Current Liabilities | A commonly used measure of short-term solvency. |
Debt Ratio | = Total Debt / Total Assets | Measures the percentage of funds provided by creditors. Total Debt includes short-term and long-term debt. |
Debt-to-Equity Ratio | = Total Debt / Total Equity | Similar to the above mentioned debt ratio in that it measures the percentage of funds provided by creditors in relation to equity. |
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49 Formula calculations can differ slightly between sectors and stakeholders and therefore formulas and required cash flow levels and service coverage ratios should be clearly outlined within the loan agreement.