Finance Flashcards
Real interest rate
Stated or nominal rate of interest-inflation rate
An annuity due will earn one more period of interest than an ordinary annuity resulting in higher future value. Annuity due will also result in higher present value because the first amount does not have to be discounted.
True
Accounting Rate of Return
Average Annual After Tax Net income/ average (initial) investment
- considers depreciation
- considers residual value
Effective rate of interest
Cost of loan/net proceeds from loan
Spontaneous financing
Occurs automatically in carrying out day to day operations.
factoring accounts receivable
Selling it.
How to determine the proceeds:
1) subtract reserves
2) subtract factor fee
3) subtract interest for 30 days
Hedging principal
Assets or projects with short term benefits go with short term financing and vice versa
Wanna match long term and current a and L
Financial leverage
Use of debt with a fixed or determinable cost for capital financing. Fixed rate debt would better facilitate this
Debenture Bonds
Unsecured bonds
What is an indenture?
A bond contract
As market interest rate of bonds go up the price of the bond does what?
It goes down
Common stock expected return
(Dividend in 1st year/market price)+growth rate
Common stock value
Divided in 1st year/ (required rate of return-growth rate)
What is float?
Length of time between the writing of a check and the actual transfer of funds. With disbursements of cash increase float and with receipts decrease float.
Sharpe ratio
Average rate of return-average risk free rate of return/standard deviation
The greater the ratio the better its investment performance
Operating Cycle
Inventory + accounts receivable conversion cycle
