Finance Exam 1

You agree to pay back 1100 in 4 weeks for a 1000 payday loan. Your APR is....

FIRST FIND R 1100 = 1000(1+r) r= .1 THEN APR .1 * (52/4) 130%

A borrower is able to repay 25,000 in 5 years. the lender wants 12 percent interest rate. How much would the lender be willing to lend? This is pure discount

PV = 25,000 / 1.12^5 14186 Pure discount loan

What is the difference in the future value of $100 at 7% interest for 5 years if the interest is compounded semiannual rather than annually?

Use future value interest factor... .80

What are two ways to calculate a balloon payment?

find the present value of payments remaining after the loan term and amortize the loan over the loan life to find the ending balance

annuity is...

fixed

which type of amortization is most commonly used in the real world for mortgages and car loans?

fixed payment

the EBITDA is similar to...

the PE ratio

Suppose you paid a $1,200 loan off by paying $400 in principal each year plus 10% annual interest. How much is the interest payment in the second year of the loan?

$80 Year 1: Balance 1200, Total Payment 520, Interest Payment 120, Principal 400. 1200 - 400 = 800 Year 2: beginning 800 x.1 = 80 interest

A credit card charges 18 percent APR per year. What is the EAR

EAR = (1+QR/m)^m -1 .18/12 = .015 .015+1 = 1.015 1.015^12 = 1.1956 1.1956-1 19.56%

Pros and cons of liquidity

Pro = less likely to experience financial distress con - liquid assets typically earn a lower return

what is the simplest loan form?

a purse discount loan

ordinary annuity

a series of constant or level cash flows that occur at the end of each period for some fixed number of periods

What does the present value calculate?

a single future cash flow

what is peer group analysis?

compare to similar companies or within industries

The EAR takes into account the ___ of interest that occurs within a year

compounding

when the market to book value is greater than one, the company has...

created value for shareholders

present value is.... (definition wise)

earlier money on a timeline

what type of amortization is used most for mortgages and car loans

fixed payments (like the one I have)

if sales increases while there is no change in AR, the receivables turnover will...

increase

what is true about a growing annuity?

it grows in a finite period, and at a constant rate

future value is... (definition wise)

later money on a time line

most investment involve...

multiple cash flows

payments in a ___ amortization loan are not based on the life of the loan

partial

what type of amortization is common in real estate?

partial amortization

what is an interest only loan?

repayment plan that calls for the borrower to pay interest each period and to repay the entire principal at some point in the future

what is a pure discount loan/

the simplest form. Borrower receives money today and repays a single lump sum at some time in te future

what is important to note about PRESENT and FUTURE values?

the timing of cash flow

Total capitalization equals total equity plus....

total long-term debt

The first cash flow at the end of week 1 is $100, the second cash flow at the end of month 2 is $100, and the third cash flow at the end of year 3 is $100. This cash flow pattern is a ____ cash flow

uneven, the cash flows are not occurring at regular intervals

What is time trend analysis?

used to see how the firms performance is changing through time (internal and external)

When is net working capital positive?

when cash that will be received over the next 12 months exceeds the cash that will be paid out. positive is healthy

Do non cash items affect net income? Do they affect cash flow?

yes/no

what is the present value of 100 in 10 years at a continuously compounded rate of 10 percent?

100/e^(.1X 10) = 36.79

BC Corp has 1,800 shares outstanding and earned $2700 last year on assets of 2 million and equity of 1.5 million. What is the PE ratio if the stock is currently selling at $18 per share?

18/ (2700/1800) = 12 times

What is the future value of a 100 compounded continuously at a state annual rate of 10 percent for ten years?

271.83

what is an interest rate?

an exchange between earlier money and later money: such as discount rate cost of capital opportunity cost of capital required return

what is difficult about benchmarking?

diversified firms

Ralph has $1000 in an account that pays 10% per year. Ralph wants to give this money to his favorite charity by making three donations at the end of the next 3 years. how much will Ralph give to the charity each year?

he HAS 1000 so this is PRESENT VALUE OF ANNUITY. Not future, he HAS this amount. 402.11

A ___ PE Ratio may indicate that investors believe a company has better prospects for future growth in earnings

higher

given the same APR, more frequent compounding results in >>>

higher EARs

what is a proprietary asset?

intellectual property that cannot be disclosed

which ratios use some information that is not contained in financial statements?

market value ratios

what does it mean in a partial amortization if the lending calls for 5 year loan with 15 year amortization?

the borrower makes a payment every month of a fixed amount based on a 15 year amortization. Then after 60 months (5x12) the borrower makes a single, larger payment called a balloon- the monthly payments do not pay off the balloon

APR...

the interest rate per period multiplied by the number of periods in the year

EAR

the interest stated as though it were compounded once per year

Suppose your firm earns 4 million in taxable income. - what is the firms tax liability? -what is the average tax rate? - what is the marginal tax rate? - if you want to increase firms taxable income by 1 million, what rate do you use?

1,360,000 34% 34% marginal -- 34%

Find the present value of $100 per year for 30 years if the discount rate is 5%

1,537.25

What is the future value of an annuity due of 100 per year for 10 years at 10 percent?

1,753.12 find the FV then multiply by 1.1

a one year 10 percent pure discount loan makes the borrower pay ____ in one year for every one dollar borrowed

1.10

what is the debt equity ratio for a company with 3.5 million in total assets and 1.4 million in equity

1.5

what is the present vvalue of an annuity that makes payments of 100 per year for 10 years if the first payment is made immediately and the discount rate is 10 percent per year?

100 ((1-1/1.1^10)/.1) (1.1) = 675.90 This is when you would use an annuity due!

A three year, 10 percent, interest only loan of 1000.... what would the borrower pay with an interest only?

1000x.1 = 100 in interest at the end of the first and second years and at the end of the third year 1100

A 5 year 10000 loan with 15 year amortization period paid monthly at 10 percent compounded monthly will have monthly payments of....

107.46 PRESENT VALUE OF ANNUITY (1/1 + .1/12 ^ 12*15) / .1/12) / 10000

a 5 year $10,000 loan with 15 year amortization period paid monthly at 10 percent compounded monthly will have monthly payments of

107.46... 1000 / (1- (1/(.1/12)^12x15)/(.1/12))

Assume $100 earns a stated 10 percent rate compounded quarterly. What will the value of the 100 be after one year?

110.38

If the interest rate is 10 percent per week, what is the EAR?

14104%, (1+QR/m)^52 -1 1 +(.1/1)^52 -1

if C = $100, g = 10% r = 15% and t = 2 years, what is the PV of growing annuity?

170.13

Which three of the following are most apt to create problems when comparing financial statements for multiple firms? 1. differing levels of cash 2. seasonality 3. differing accounting methods 4. differing fiscal years

2, 3, and 4. Cash levels do not create a problem.

you borrow $100 and agree to pay back your payday loan in 2 weeks for 10% interest over that 2 wee period. what is your APR?

260.71%.... APR = .1 x (365/14)

the quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes an average of ___ days to sell. 1. 2 2. 287 3. 46 4. 182

287 -- when inventory takes a long time to sell, it does not meet the definition of liquidity

You will receive a bonus of $5,000 in one years time, and would like to take a loan against it now. How much can you borrow if you plan to use the entire amount to pay bac the loan and your interest rate is 3%?

4,854.37... Future value

The difference between the present value of an ordinary annuity with payments of 100 per year at 10% compounded annually foe 10 years and an annuity due with payments of 100 per year at 10% compounded annually for 10 years is...

61.45 FIND THE PRESENT VALUE ANNUITY FIRST THEN MULTIPLY BY 1.1 and subtract the difference

What is the present value of an annuity that makes payments of $100 per year for 10 years if the first payment is made immediately and the discount rate is 10 percent per year?

675... Present value of annuity = 614.5 x 1.1

Your bank quotes 9% APR on your car loan. What is the EAR?

9.38

An APR of 9% with continuous compounding gives an EAR of...

9.42% EAR = 1+APR/365^365 -1

increasing its non cash liquid assets will enable a firm to do which of them following? - increase its ability to avoid financial distress - reduce its investment in receivables and inventory - increase its ability to meet short term obligations - increase its rate of return

A/C

What is the future value of an annuity due of $100 per year for 10 years at 10 percent

ANNUITY DUE: future value of annuity factor times (1+r) 1,753.12

You are planning to buy a CD for 1352. You will receive 1500 in 2 years. What is the interest rate?

FV = PV (1+r)^t 1500 = 1352 (1+r)^2 1.109 = (1+r)^2 (/^1/2) 1.109^1/2 = 1.0533 1.0533 = 1+r r = 5.33%

You agree to repay a 1200 in 2 weeks for a 1000 payday loan. what is your EAR assuming there are 52 weeks in a year?

First; FIND THE PERCENT FV= PV(1+r) 1200 = 1000(1+r) 1.2 = 1+r r= .2 THEN FIND EAR EAR = (1+QR)^52/2 -1 1+.2 ^ 52/2 -1 11347.55%

profitability measures such as return on assets and return on equity are __ rates of return

accounting

what is an annuity

an interest bearing account that pays you a fixed amount each period or that you pay each period

Payday loans allow you to...

borrow now and repay later

what two ways can a borrower pay in an amortized loan?

borrower pay interest each period plus a fixed amount or have the borrower pay a single fixed payment every period.

who externally evaluates financial statements?

creditors, suppliers, customers, stockholders

what amortizes a loan?

fixed payments that result in a 0 loan balance, and interest plus a fixed amount

what makes it harder to compare companies?

globalization

If the interest rate is greater than 0, the value of an annuity due is always _____ an ordinary annuity

greater than

what is the timing for present and future values?

it is assumed that the cash flows occur at the end of each period

Compared to a comparable fixed payment loan, the total interest on a fixed principal loan is.......

less

Some financial ratios measure a firms ___ which shows the ability to meet short term obligations without undue stress, while others measure a firms financial ___ which demonstrates the proportion of assets financed by long-term obligations

liquidity, leverage

a single cash flow is a ...

lump sum

Why do the loan balances on partial amortization loans decline so slowly?

payments are mostly interest

One of the most important uses of financial statement information within the firm is...

performance evaluation

Why do firms internally evaluate financial statements?

performance evaluation -- comparison between divisions. planning for the future

what is the simplest loan form and why?

pure discount loan -- the borrower receives money today and repays a single lump sum at some point in the future. (PV = x/1+r^t

what 3 types of loans are there

pure discount, interest only, and amortized loan

what is benchmarking?

ratios are not helpful by themselves, they need to be compared to something

What does the future value calculate?

the lump sum of a present amount

Income statement = GAAP, when do you show revenue?

when it accrues and match the expenses required to generate the revenue