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Financial Maths > Finance I > Flashcards

Finance I Flashcards

1
Q

What is the time value of money

A

The value of money today is worth more than the value of money tomorrow

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2
Q

What is the present value

A

the current value of future cash flows

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3
Q

what is the future value

A

the value of a future cash flow at a specific time

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4
Q

Compounding factor and discount factor

A

the compounding factor = (1+r)ⁿ
the discount factor = 1/compounding factor or (1+ r)⁻ⁿ

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5
Q

Ordinary annuity

A

In an ordinary annuity payments are made at the end of the payment intervals

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6
Q

Annuity due

A

In an annuity due payments are made immediately or at the beginning of payment intervals

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7
Q

Deferred annuity

A

A financial transaction where payments are delayed until a certain period has elapsed

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8
Q

Growing annuity

A

refers to streams of cashflows where the initial value R grows at constant rate g.

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9
Q

Perpetuity

A

A perpetuity is an annuity where the payments start at a fixed date and continue forever

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10
Q

Ordinary perpetuity

A

The holder receives the first payment in the first year PV = R/r

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11
Q

Growing perpetuity

A

The holder receives the first payment in the first year, and the payment grows at a constant rate PV = R/(r-g)

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12
Q

Net Present Value (NPV)

A

measures the difference between the PV of all future cashflows PV(in) and the investment outlay I(out).

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13
Q

Probability index (PI)

A

measures the ratio between the PV of future cash flows and the initial investment

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14
Q

Payback period

A

The length of time required to retrieve the initial investment ( cover the cost of the investment).

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15
Q

Simple payback

A

Does not allow for the time value of money and uses future cash flows without discounting

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16
Q

Discounted payback

A

Discounted cashflows are considered and it uses the time value of money

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17
Q

Average rate of return (ARR)

A

the ratio of the average annual investment profit to the investment cost.
ARR = [(Total profit/no. of years)/Investment] x 100

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18
Q

Equivalent annual cost (EAC)

A

The cost per year of owning and maintaining an asset over its lifetime.
EAC is used to compare the cost effectiveness of various assets/ investments with unequal lifespans.
EAC = NPV/An,r

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19
Q

Internal rate of return (IRR)

A

measures the interest or discount rate that equates the future returns to the present investment outlay.
It is the rate when the NPV of an investment is 0.

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20
Q

Steps for IRR

A
  1. Pick a discount rate and fix it into the formula
    2.Try with different rates and use two that give a positive NPV and one with a negative NPV
  2. Plot the NPV against the the two discount rates.
  3. Chose the point in which NPV = 0
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21
Q

Modified internal rate of return (MIRR)

A

the rate that measures the total future cash flows to the PV of the negative cash flows.
r = ⁿ√(R/PVout) - 1
where R is the FV of all positive cash inflows
n is the number of periods and PVout is the PV of all negative cash flows.

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22
Q

Steps for MIRR

A
  1. Calculate R compounded at the reinvestment rate
  2. Calculate PVout at the financing rate
  3. Calculate the rate of return for the lifetime n
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23
Q

Sensitivity analysis

A

Measures the “what if?” and it examines the impact of an individual estimated parameter on the NPV of a project

24
Q

Scenario analysis

A

Affects many variables at once. Normally a ‘worst’ and ‘best’ case scenario are included. All ranges of possible outcomes of NPV are considered in all scenarios.

25
Q

Basic formula of a balance sheet

A

Assets = Liabilities + shareholders equity

26
Q

What is an asset

A

An asset is anything owned by a firm or individual with quantifiable value.
Assets can be Physical, non-physical, current or non-current.

27
Q

What is a physical asset

A

A physical asset is a tangible good. such as property or plant and machinery

28
Q

what is a non physical asset

A

A non-physical asset is an intangible good such as brands, patents, trademarks and copyrights

29
Q

what is a current asset

A

A current asset is an asset which can be converted into cash within one year.
such as cash or cash equivalents (gold), Inventory and accounts payable

30
Q

what is a non-current asset

A

A non-current asset is a long term of fixed asset which takes longer to liquify such as property, plant and equipment, intangible assets and long term investments

31
Q

What is a liability

A

A liability is anything for which a company owns a debtor.
Liabilities can either be current or non-current.

32
Q

What is a current liability

A

Current liabilities are usually due within one year.
ie. accrued expenses, accounts payable, short term debts, wages owned or bank account overdrafts etc.

33
Q

What is a non-current liability

A

Non-current liabilities are due after more than one year.
ie. Long term debt or mortgage payable, long-term lease, deferred tax liabilities.

34
Q

What is the shareholders equity

A

The net worth of the company. The amount left when all liabilities are paid of and assets are sold.
= Total Assets - Total Liabilities

35
Q

Components of shareholders equity

A

Share capital, Retained earnings, Treasury stock and Additional paid-in capital.

36
Q

How to create a balance sheet

A
  1. Determine the reporting date and period
  2. Identify your assets
  3. Identify your liabilities
  4. Identify your shareholders’ equity
  5. Add ‘total liabilities’ and ‘total shareholders equities’
  6. If the liabilities + Equities = Assets then the balance sheet is fine.
37
Q

What is an income statement

A

An income statement reports a companies financial performance over a period.
The main components are revenue, expenses, gains and losses.
It is also known as the profit loss statement.

38
Q

What is revenue

A

Revenue is the value of sold goods and services recognised by a company in a given period.
Revenue can be operating or non-operating

39
Q

What is operating revenue

A

Operating revenue refers to revenue the company generates through the companies primary operation. such as the sale of goods or services

40
Q

What is non-operating revenue

A

non-operating revenue refers to the revenue not accrued from a companies primary operation such as interest income or investment income.

41
Q

What is a cash-flow statement

A

Explains all cash inflows and outflows that a company receives.
Net cash flows = Operating + investing + financing cashflows

42
Q

What is an operating cashflow

A

An operating cash flow is the cashflows from a companies primary operation (sale of goods and services)
includes tax payments, rent, wages and salary payments.

43
Q

What is an investing cashflow

A

An investing cashflow is derived from purchasing and selling company investment such as PPE ( property, plant and equipment) and other non-current assets

44
Q

What is a financing cash flow

A

From debt, dividend and equity financing, payment for stock repurchase.

45
Q

What is horizontal anaylsis

A

Horizontal analysis compares financial reports over time, normally from past quarters or years.
HA(%) = (VN - VN-1)/VN-1, where VN and VN-1 are values of periods N and N-1

46
Q

what is vertical analysis

A

vertical analysis is a proportional analysis and in each collum a value is chosen to be the base figure.
ie the Revenue in year 1 was 3489 and the COGS was 1000 then the VA for COGS in year 1 would be 1000/3489

47
Q

what is the current ratio

A

measures the firms ability to cover its current liabilities with its current assets
current ratio = current assets/ current liabilities

48
Q

what is the quick or acid ratio

A

measures the firms ability to cover its liabilities with its most liquid (quick) assets
quick ratio = (current asset - inventory)/current liabilities

49
Q

what is the cash ratio

A

measures the firms liquidity or the amount of cash available to pay interest
cash ratio = cash and cash equivalent assets/ current liabilities

50
Q

what is working capital

A

The net current assets needed to run the day to day operating activities in a business
calculated as the difference between current assets and current liabilities

51
Q

what is net working capital

A

current assets - current liabilities

52
Q

what is gross working capital

A

sum of all current assets

53
Q

What is the inventory

A

The list of raw material, component parts, semi-finished goods and finished goods of a particular firm.

54
Q

why do we need to manage inventory

A

Buying inventory in small quantities can lead to higher cost per unit and potential delays in production
Buying inventory in large quantities can lead to lower cost per unit due to bulk buying however can lead to wasted inventory that spoils and high holding costs

55
Q

What is accounts recievable

A

All outstanding invoices that a company has or the money that clients owe the company

56
Q

why do we need to manage accounts receivable

A

Promise to pay
Collection policy
How long should the customer be given to pay bills?
How likely are customers to pay?

57
Q

what is the working capital cycle

A

the length of time a company takes to convert their aggregate net working capital to cash.
The interval between purchasing raw materials and generating revenue through selling manufactured goods.

Financial Maths (4 decks)

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