Exam 2 Flashcards
What is ratio analysis used for?
Identifying a company’s strengths and weaknesses, standardizing comparisons, and analyzing trends over time.
What are liquidity ratios?
They measure a company’s ability to meet short-term liabilities using current assets.
What are debt management ratios?
They measure financial leverage, indicating the proportion of debt versus equity.
What are asset management ratios?
They assess how efficiently a company manages its assets.
What do profitability ratios indicate?
A company’s ability to generate profits relative to expenses, assets, or equity.
What is the DuPont Equation used for?
Breaking down ROE into profitability, asset management efficiency, and financial leverage.
What do market value ratios indicate?
The valuation of a company’s equity by investors.
Why is $1 today worth more than $1 in the future?
Due to the potential for earning interest or investment returns.
What is the simple interest
Earns interest only on the principal.
Compound Interest
Earns interest on both the principal and accumulated interest.
What affects present value calculations?
Interest rate (higher rate = lower PV) & Time (longer period = lower PV).
What is an annuity?
A series of equal periodic payments.
Ordinary Annuity
Payments occur at the end of the period.
Annuity Due
Payments occur at the beginning of the period.
What is a perpetuity?
A stream of cash flows that continues indefinitely.
What is the future value of an annuity?
The total amount accumulated after investing equal payments over time.
What is the present value of a stream of uneven cash flows?
The sum of each discounted future cash flow.
What factors influence interest rates?
- Production opportunities
- Time preference for consumption
- Risk
- Expected inflation
What is the Fisher Equation?
Nominal Rate ≈ RealRate + InflationRate
What is the risk premium?
The additional return required for taking on risk.
Default Risk
The risk that a borrower won’t repay.
