Midterm, Fin 1 Flashcards
Calculate profit margin.
Net income / sales
Calculate asset turnover ratio.
Sales / Total Assets
Calculate the Equity Multiplier.
Total Assets / Total Equity
OR
1 + Debt Equity Ratio
Calculate Inventory Turnover.
Costs of Goods Sold / Inventory
Calculate Days of Inventory
365 / Inventory Turnover
Calculate Current Ratio.
Current Assets / Current Liabilities
Calculate the Cash Coverage Ratio.
(EBIT + Depreciation) / Interest Expense.
Calculate the P/E Ratio
Price per share / Earnings per share
Calculate the Earnings per share
Net Income / Number of Shares outstanding
Calculate the Times Interest Earned Ratio.
EBIT / Interest Expense
Calculate the Effective Annual Rate.
[1+(Quote Rate/m)]^m-1
How do you calculate the Effective Annual Rate in Excel?
=EFFECT(nominal_rate, npery)
How do you calculate continuous Effective Annual Rate in Excel?
=EXP(number)-1
Number = APR
How do you calculate the PV of a loan?
=-PV(rate, nper, pmt, fv, type)
type can be zero
How do you calculate the price of a stock based on a dividend?
Dividend / Discount Rate
What are the 3 fundamental concerns of financial managers?
- Capital budgeting - cash flows
- Capital structure - debt and equity
- Working capital management
What do you decide when you make a capital budgeting decision?
Cash flows
What is the goal of a financial manager?
Maximize the current value per share of the existing stock
What are the roles of a corporation?
Board of Directors, owners = shareholders
Who are the stakeholders of a corporation?
someone other than a stockholder or a creditor who potentially has a claim on the cash flows of a firm
What is the agency problem?
Conflict of interest between the principal and the agent
What is double taxation?
Being taxed as a corporation and then taxed as an individual.
What are current assets?
Cash and accounts receivable, what has a life of less than one year
Why do we use ratios?
To compare different companies of different sizes.
To compare the same company at different times.
What is the DuPont Identity?
Profit Margin X Total Asset Turnover X Equity Multiplier
- operating efficiency (as measured by profit margin)
- asset use efficiency (as measured by total asset turnover)
- Financial leverage (as measured by the equity multiplier)
What is the time value of money?
A dollar in hand today is worth more than a dollar promised at some time in the future.
What does it mean to have more cash flows earlier in a project?
Higher PV, higher FV, worth more to you
What is not required to value a coupon bond?
Risk-free rate
In a fully diversified portfolio of securities, the only type of risk priced by the market is?
Systemic Risk
The risk of cash flows generated by an asset can be measured by what?
Standard deviation and beta
How do you calculate the PV of perpetuities?
PV = C/R = D/R
How do you calculate the Payment based on the PV?
=PMT(rate, nper, pv, fv)
FV can equal zero
How do you calculate the Average Price Today when you have the Average Past Price?
Average Past Price * (1+rate)^time
How do you calculate the average tax rate?
Find the taxes due for each rate.
Add them together
Divide by taxable income
What is the marginal tax rate?
The rate it would have to pay if it had another taxable dollar of income.
How do you calculate cash flow from assets?
CF from creditors/bondholders + CF from stockholders/owners
Calculate the Equity Multiplier
total assets / total equity
Calculate Number of Periods
=NPER(rate,pmt,-pv,fv)
How do you calculate PV for multiple different cash flows?
Calculate PV for each and add the result
How do we find the price of a bond today?
=PRICE(settlement, maturity, rate, YLD, redemption, frequency, basis)
How do you calculate current stock price?
Po=(D1+P1)/(1+R)
Zero Growth = D/R
How do you calculate the stock price if the growth rate is less than the discount rate?
Po = [Do*(1+g)]/(R-g)
Calculate NPV
=NPV(rate, value1:valuen) + Investment
Calculate Geometric Average Return
=[(1+R1)X(1+R2)…X(1+Rt)]^(1/t)-1
Holding Period Return^(1/t)-1
t = number of years not number of times
Calculate the Holding Return
=Ending Return - Beginning Return / Beginning Return
What do you have to do to YTM if payments are semiannual?
Divide YTM by the number payments in a year (2 for semi-annual)
Calculate Stock Growing in Perpetuity
Year 17/R-G
How do you find the PV of a perpetuity?
PV = C/R
How do you find the rate if you have the PV and the Payment?
C/PV
What don’t you need to calculate the value of a bond?
risk-free rate
How do you calculate total holding period return?
find the return for each line, add one, multiple together, subtract 1
How do you calculate the geometric average holding period return?
Take the total holding period return, add one, to the (1/n) power, subtract one
Which is the preferred method for capital budgeting?
NPV
When is NPV better than IRR?
Mutually exclusive projects
Changing cash flows
What formula do you use if you have dividend just paid?
Po = Do*(1+g)/(r-g)
When your given a stock that you’re asked to calculate in year 10, where do you go to PV?
D/R, PV of year 9
When you have a dividend growing at a certain percent for a few years and then growing in perpetuity, what do you do?
1) Calculate Dividends
2) Price in Year 3
3) PV Year 3= Price today
4) NPV of all div
5) SUM = Price of stock
How do you calculate OCF?
OCF = EBIT + Depreciation - taxes
What are the steps to OCF?
1) Recreate the income statement
2) Find EBIT using Revenues, Costs, Depreciation
3) Subtract taxes
4) Add depreciation
How do you calculate FCF or cash flow from assets?
FCF = OCF-CAPEX-change in NWC
