Finance (Buti) Flashcards
What is the formula for calculating Present Value (PV)?
PV = FV / (1 + r)^n
How do you calculate Future Value (FV)?
FV = PV * (1 + r)^n
What is the formula for Net Present Value (NPV)?
NPV = Σ (CFt / (1 + r)^t) - Initial Investment
What is the formula for calculating Return on Equity (ROE)?
ROE = Net Income / Shareholder’s Equity
How is Return on Assets (ROA) calculated?
ROA = Net Income / Total Assets
What is the formula for Return on Invested Capital (ROIC)?
ROIC = Net Operating Profit After Tax (NOPAT) / Invested Capital
What does a positive NPV indicate?
The investment is expected to generate more cash than it costs.
Which formula would you use to determine the profitability of equity investments?
Return on Equity (ROE)
If an investment’s NPV is negative, what should an investor do?
Consider not proceeding with the investment.
In the context of finance, what does ‘r’ typically represent?
The discount rate or interest rate
What is considered a good ROE percentage?
Typically above 15% is considered good.
True or False: A higher ROIC indicates better efficiency in using capital.
True
What does a ROA of 10% indicate?
The company generates 10 cents of profit for every dollar of assets.
How can ROIC be improved?
By increasing NOPAT or reducing invested capital.
What does ROIC stand for?
Return on Invested Capital
EBIT is an acronym for Earnings Before Interest and Taxes.
Earnings Before Interest and Taxes.
EBITDA stands for __________.
Earnings Before Interest, Taxes, Depreciation, and Amortization
What is the primary purpose of calculating ROIC?
To assess how efficiently a company uses its capital to generate profits.
Which financial metric would you use to evaluate a company’s operational performance without the effects of capital structure and tax rates?
EBIT
What is the formula for calculating EBIT?
Revenue - Operating Expenses
What does a negative EBITDA indicate about a company’s operations?
The company is not generating enough revenue to cover its operational costs.
How do we determine the future value of a sum at present?
Compounding
How do we determine the PV of a sum in the future?
Discounting
Formula for EAR if APR is known?
EAR = (1 + i/n)^n - 1
APR = i n = number of compounding periods per year
CAGR Formula
[(Final Value/Start Value)^(1/t)]-1
What is an annuity?
Streams of equal or growing cash flows with a maturity (end) date
Price of constant perpetuity formula?
PV=CF/r (cash flow/discount rate)
Could be an endowment amount
Price of growing perpetuity formula?
PV = CF/r-g
g=growth rate of cash flows or inflation rate
