FIL 240

Key principles of finance

1. cash is king: cash flow are the most important indicator of a business' success 2. timing of cash flows is important: money has time value (prefer today over getting tomorrow) 3. there is a trade-off between risk and return: investors are risk averse 4. market prices generally reflect public information:

compounding semi

2

Anthony borrowed $50,000 today that he must repay in 15 annual end-of-year installments of $5,000. What annual interest rate is Anthony paying on his loan?

5.556%

How much would you be willing to pay (rounded to the nearest dollar) for a 20-year ordinary annuity if the payments are $4,500 per year and you want to earn a rate of return equal to 5.5% per year?

$53,777

You have contracted to buy a house for $250,000, paying $30,000 down and taking out a fully amortizing loan for the balance, at a 5.7% annual rate for 30 years. What will your monthly payment be (to the nearest dollar)?

$1277

Today is your 21st birthday and your bank account balance is $25,000. Your account is earning 6.5% interest compounded daily. How much will be in the account on your 50th birthday?

$164,631

Your daughter is born today and you want her to be a millionaire by the time she is 35 years old. open an investment account that promises to pay 11.5% per year. How much money must you deposit today so your daughter will have $1,000,000 by her 35th birthday?

$22,150

Andre's wonderful parents established a college savings plan for him when he was born. They deposited $50 into the account on the last day of each month. The account has earned 10.9% compounded monthly, tax-free. How much can they withdraw on his 18th birthday to spend on his education?

$33,307

How much money must be put into a bank account yielding 6.42% (compounded annually) in order to have $1,671 at the end of 11 years (round to the nearest $1)?

$843

What is the present value of $11,463 to be received 7 years from today? Assume a discount rate of 3.5% compounded annually and round to the nearest $1.

$9010

compounding monthly

12

You have a savings account that pays 3.9% interest compounded quarterly. What is the effective rate of interest? Round to the nearest 0.01% (e.g., if your answer is 4.832%, record it as 4.83).

3.96

You borrow $9671 to buy a car. This is a 29-month loan with an annual rate of 5.44%. What is your required monthly payment? Round to the nearest $0.01 (e.g., if your answer is $385.4789, record it as 385.48).

356.64

compounding daily

365

compounding quarterly

4

At what rate must $550 be compounded annually for it to grow to $1045.66 in 12 years?

5.5%

What is the present value of an annuity of $824 to be received at the end of each of the next 9 years if the discount rate is 3.18%? Round to the nearest dollar.

6362

Bob has $8436 in student loans to repay, starting a year from now. The loan interest rate is 4.5%. If he repays $1283 annually at the end of each year, how long will it be before the loan to paid off? Round to the nearest year.

8

You deposit $6.2 thousand at the end of every six months for the next 6 years into an IRA account that earns 4.8% annually (compounded semiannually). How much will you have on the account after making the last deposit? Express the answer in $ thousands, round to the nearest $0.1 thousand. E.g., if your answer is $42,576, record it as 42.6.

85.1

You pay $877 thousand to buy a 16-year annuity with annual payments to be received at the end of each year. What is the annual payment if the discount rate is 5.74%? Express your answer in $ thousands, round to the nearest $0.1 thousand. E.g., if your answer is $50,583, record it as 50.6.

85.2

You charged $1,000 on your credit card for Christmas presents. Your credit card company charges you 26% annual interest, compounded monthly. If you make the minimum payments of $25 per month, how long will it take (to the nearest month) to pay off your balance?

94 months

what is another word for current ratio

ACID

another word for current ratios

ACID test (most liquid current assets/ current liabilities)

the principle of risk return trade-off means that

a rational investor will only take a higher risk if he expects a higher return

in finance we assume that investors are generally

averse to risk

investment decisions

dealing with how to use capital

financing decisions

dealing with raising capital to run a business

The two major types of decisions finance deals with are ________ decisions.

financing & investment

how to know if a company is liquid

inventory turnover = COGS/inventory -when ratio is high that means goods are being sold quicker

the primary goal of publicly owned corporation is to

maximize shareholder wealth, maximize the value of the films equity

Car prices and cellphone prices are always __ value

present

why is return on equity (ROE) misleading

shareholders' equity often gets understated in relation to its value -ex: company with no assets and a trademark

Assume that you won the Lotta Dough Lotto jackpot for $20 million. Further assume that you were offered a choice to receive the $20 million today, receive it in equal installments of $1 million per year for 20 years. According to one of the principles of finance, which would you take?

the $20 million today because it would be worth more than if you would receive it in equal installments of $1 million per year for 20 years

what is liquiditiy

the ease of converting an asset into cash at a fair market value

Joe, a risk-averse investor, is trying to choose between investment A and investment B. If investment A is riskier than investment B and Joe selects investment A anyway, then

the expected return for investment A will be higher than the expected return for investment B

Assume that an investor is offered a choice of a risk-free government bond or a high-risk corporate stock. Assume that the expected return is the same for both. According to one of the key principles of finance, which investment would be chosen?

the government bond

why ratios are important

you can't just look at numbers and compare those because a larger company could have the same numbers or less but that doesn't mean they're financially lower its because of their higher financial standing than that smaller company.