financial management exam 1

stock split

# of outstanding doubles, price halfs

rule of 72

# of years it takes for a certain amount to double in value is 72 / rate of interest

First City Bank pays 7 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest compounded annually. If you made an $8,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 10 years?

$15,737.21 - 13,600 = $2,137.21`

If you deposit $4,000 at the end of each of the next 20 years into an account paying 9.5 percent interest, how much money will you have in the account in 20 years?

$216,488.93 n = 20 i = 9.5 PV = 0 PMT = -4,000 FV = solve

If you put up $25,000 today in exchange for a 7.9 percent, 12-year annuity, what will the annual cash flow be?

$3300.12 n = 12 i = 7.9 PV = -25,000 PMT = solve FV = 0

quick ratio

(Current Assets - Inventory) / Current Liabilities -short term solvency

risk free rate of return

-3 month T-bill -prime rate -LIBOR (london inter bank offer rate)

3 traditional areas of finance

-Financial Institutions: banks, exchanges, SEC -Investments: instruments->asset pricing (study of risk) -Corporate Finance: fin mgmt.->capital budgeting+structure

what are some common principal-agent relationships?

-NFL -owners: stockholders; control: management

how can the agency problem for firms be reduced?

-executive compensation -board of directors -threat of a takeover

Discounted Cash Flow Analysis (DCF)

-make an exact dollar value adjustment for time and risk so that we can compare the current "worth" of cash flows arriving at different times and/or having different amounts of risk associated with them -discounting - finding today's worth FV n time + -compounding - finding future value PV i risk

amortization tables

-the payment is constant and is found using the standard annuity formula -the beginning balance for period n is the PV of an annuity with an interest rate of i' and n' -(n-1) payments -the interest payment is i' * beg. balance -the reduction of principal is payment-interest payment

typical issues facing a financial manager

1) What projects should we invest in? (capital budgeting) 2) How do we value the "capital"? (capital structure) 3) Daily finance decisions: pricing, inventory, employment (working capital management)

FV WITH UNEVEN CASH STREAM Suppose you sign a contract that will pay $125,000 the first 2 years and $150,000 for the third year. If your discount rate is 10%, what is the future value of your contract at the end of three years?

1) find PV of CF stream (npv) 2) find FV of NPV on calculator: n=3 i = 10 PV=329,639 PMT=0 FV= solve (438,750)

You are to make monthly deposits of $400 into a retirement account that pays 10.5 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 30 years?

1,006,560.40 n = 360 (12*30) i = 0.875 (10.5/12) PV = 0 PMT = 400 FV = solve

ANNUITY DUE Lucien signs a one-year lease at a homeless park. The lease calls for 12 equal payments of $500 at the first of each month. If Lucien can earn a return of 12% compounded monthly on Lucian's investments, what is the present value of Lucian's lease agreement?

1. 2nd PMT and 2nd SET to begin N = 12 (months) I = 12/12 = 1 PV = solve (5,683.80) PMT = -500 FV = 0

3 types of stock market transactions:

1. IPO 2. Primary market transactions (SEO) 3. secondary market (stock exchanges)

4 basic ways to measure the value of an asset

1. book value 2. market value 3. replacement value 4. economic value

What is the present value of $1,625 per year, at a discount rate of 7 percent, if the first payment is received 6 years from now and the last payment is received 20 years from now?

1. click CF - C01 = 0 - F01 = 5 - C02 = 1625 - F02 = 15 2. click NPV - i = 7 - NPV = solve (10,552.45)

A 10-year annuity pays $2,500 per month, and payments are made at the end of each month. If the interest rate is 9 percent compounded monthly for the first four years, and 7 percent compounded monthly thereafter, what is the present value of the annuity?

1. compute present value of first 4 years payments -CF -C01 = 2500 -F01 = 48 -NPV -i = 0.75 (9/12) NPV = solve (100,461.95) 2. compute present value of last 6 years of payments -CF -C01 = 2500 -F01 = 72 -NPV - i = 0.58333 (7/12) -NPV = solve (146,636.11) 3. but hol up youre not done thats only the present value of the 6 years of payments but that doesnt start for a min n = 48 i = 0.75 PV = solve (102,442.06) PMT = 0 FV = 146,636.11 4. add these together to get total present value 202,904.01

who issues bonds? (4)

1. corporate bonds 2. treasury bonds (sovereign debt) 3. municipal bonds (state) tax free 4. foreign and eurobonds

Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $4 million. The machinery can be sold to the Romulans today for $6.2 million. Klingon's current balance sheet shows net fixed assets of $2.8 million, current liabilities of $710,000, and net working capital of $ 130,000. If all the current assets were liquidated today, the company would receive $825,000 cash. What is the book value of Klingon's assets today? What is the market value?

1. find NWC = current assets - current liab. current assets = $130,000 + $710,000 = $840,000 2. find book value by adding current assets and fixed assets Book value = $3,640,000 Market value = $7,025,000

Given an interest rate of 6.35 percent per year, what is the value at year t = 7 of a perpetual stream of $3,100 payments that begin at year t = 20?

1. find PV of perpetuity - 3100/0.0635 = 48,818.90 2. find pv at 7 years (# above is the value at year 19 right before payments start) n = 12 i = 6.35 PV = solve (23,320.51) PMT = 0 FV = 48,818.90

You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 2.1 percent per year, compounded monthly for the first six months, increasing thereafter to 17 percent compounded monthly. Assuming you transfer the $10,000 balance from your existing credit card and make no subsequent payments, how much interest will you owe at the end of the first year?

1. find balance after first 6 months n = 6 i = 0.175 (2.1/12) PV = 10,000 PMT = 0 FV = solve (10,105.46) 2. find balance in the next 6 months with new interest rate n = 6 i = 1.41667 (17/12) PV = 10,105.46 PMT = 0 FV = solve (10,995.43)

A 5-year annuity of 10 $7,800 semiannual payments will begin 9 years from now, with the first payment coming 9.5 years from now. If the discount rate is 9 percent compounded semiannually, what is the value of this annuity five years from now? What is the value three years from now? What is the current value of the annuity?

1. first you gotta find the present value of the cash flows right before they start -click CF -C01 = 7800 -F01 = 10 (5yrs*2semiannual pmts) -click NPV -i = 4.5 (9/2 pmts a year) -NPV solve (61,719.20) 2. the value of this annuity 5 years from now you will find by putting in calculator like this: n = 8 i = 4.5 PV = solve (43,400.02) PMT = 0 FV = 61,719.20 3. 3 years from now is same deal as last one n = 12 i = 4.5 PV = solve (36,393.58) PMT = 0 FV = 61,719.20 4. the current value is similar too n = 18 i = 4.5 PV = solve (27,946.48) PMT = 0 FV = 61,719.20

4 key characteristics described in the indenture

1. par value 2. coupon rate 3. maturity date 4. provisions -put gives investors right to sell back to company -call gives company right to buy it back from investor -convertible bonds can convert to stock

why don't companies just go to banks to borrow money

1. public market less risky - lower int rate 2. easier to raise capital - lot more investors risk sharing - main benefit of capital market

3 basic forms of business organization

1. sole proprietorship 2. partnership 3. corporation -rougly 80% of all businesses in US are sole proprietorships -rougly 80% of all business is conducted by corporations

PERPUITY ANNUITY Suppose you have a perpetuity that pays $100 per year, and your discount rate is 5%. What is the present value?

100/.05 = $2,000

PV WITH UNEVEN CASH STREAM Suppose you sign a contract that will pay $125,000 the first 2 years and $150,000 for the third year. If your discount rate is 10%, what is the present value of your contract?

1st year PV = 125,000/(1+.10) = 113,636 2nd year PV = 125,000/(1+.10)^2 = 103,305.79 3rd year PV = 150,000/(1+.10)^3 = 112,697.22 Total 329,639.37 on calculator: 1. click CF button 2. enter 125,000 for C01 and C02 and 150,000 for C03 3. click NPV button 4. input discount rate (interest rate) 5. scroll to NPV and click compute

If the appropriate discount rate for the following cash flows is 8.4 percent, what is the present value of the cash flows? year 1 = 1200 year 2 = 1100 year 3 = 800 year 4 = 600

3105.74 calc: 1. CF enter cash flows then click NPV and set interest rate to 8.4 and compute for NPV

One of your customers is delinquent on his accounts payable balance. You've mutually agreed to a repayment schedule of $500 per month. You will charge 0.9 percent per month interest on the overdue balance. If the current balance is $14,720, how long will it take for the account to be paid off?

34.36 months n = solve i = 0.9 PV = 14,720 PMT = -500 FV = 0

You have arranged for a loan on your new car that will require the first payment today. The loan is for $34,000, and the monthly payments are $645. If the loan will be paid off over the next 60 months, what is the APR of the loan?

5.40% 1. 2nd PMT 2nd enter set to begin n = 60 i = solve (.45) PV = 34,000 PMT = -650 FV = 0

First Simple Bank pays 8 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to match First Simple Bank over an investment horizon of 10 years?

6.05% 1. set simple interest equation and compound interest equation equal to each other (.08)(10) = (1+r)^10-1 r = 1.8^1/10-1 r = 6.05%

You want to buy a new sports car from Muscle Motors for $43,000. The contract is in the form of a 60-month annuity due at a 6.25 percent APR. What will your monthly payment be?

831.98 because it's an annuity due you gotta do some extra shit 1. click 2nd PMT then 2nd enter to set the payment to beg. then input numbers as usual 2. n = 60 i = 0.520833 (6.25/12) PV = 43,000 PMT = solve FV = 0 3. this will give you the right payment amount but make sure to set the PMT to end after doing this so you don't fck up every single question after this

A) Curly's Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $35,000 per year forever. If the required return on this investment is 6 percent, how much will you pay for the policy? B) Curly's told you the policy costs $600,000. At what interest rate would this be a fair deal?

A) $583,333.33 valuing perpetuities PV = PMT/i 35,000/.06 B) 5.83% 600,000 = 35,000/r solve

takeover

An action whereby a person or group succeeds in ousting a firm's management and taking control of the company -getting enough shares

retained earnings

An amount earned by a corporation and not yet distributed to stockholders.

The Taylors bought a resort home 10 years ago for $78,000. The purchase was made for investment purposes, and was being depreciated straight line over 20 years. A builder estimate that a comparable home today would cost $95,000 to build. The rental income has averaged $12,000 annually, and a realtor estimates that in today's market, the home's value as an investment property is $101,000. The realtor said that a buyer submitted an offer for $97,000 Book value= Economic value= Replacement value= Market value=

Book value= 39,000 Economic value= 101,000 Replacement value= 95,000 Market value= 97,000

SDJ, Inc., has net working capital of $1,410, current liabilities of $5,810, and inventory of $1,315. What is the current ratio? What is the quick ratio?

Current ratio = Current assets / Current liabilities Current ratio = $7,220 / $5,810 Current ratio = 1.24 Quick ratio = (Current assets - Inventory) / Current liabilities Quick ratio = ($7,220 - 1,315) / $5,810 Quick ratio = 1.02

Given the following information for Sookie's Cookies Co., calculate the depreciation expense: sales = $51,000; costs = $39,800; addition to retained earnings = $2,300; dividends paid = $925; interest expense = $1,580; tax rate = 40 percent.

Depreciation = $4,245

TIE (times interest earned)

EBIT / interest charges -interest coverage ratio -long term solvency

Efficient vs. Effective

Effective means to achieve organizations goals Efficient is be cost effective and wise

compounding formula

FV = PV (1+i)^n

simple interest formula

I=PRT (Interest = Principal x Rate x Time)

net cash flow

NI - non cash revenue + non cash expenses -usually differs from accounting profit because some revenues/expenses weren't paid in cash during the year

ROE (return on equity)

NI / total equity

Lifeline, Inc., has sales of $585,000, costs of $273,000, depreciation expense of $71,000, interest expense of $38,000, and a tax rate of 35 percent. What is the net income for this firm?

NI = $131,950

EPS equation

NI/Shares outstanding

First National Bank charges 10.1 percent compounded monthly on its business loans. First United Bank charges 10.3 percent compounded semiannually. As a potential borrower, which bank would you go to for a new loan?

National bc better EAR national's: 10.58% united's: 10.57% on calc: 1. click 2nd and 2 2. enter nominal as 10.1 3. scroll to c/y (compounding periods) enter 12 for 12 months 4. scroll to NPV and click compute

ROA (return on assets) formula

Net Income/Total Assets also total asset turnover * net profit margin

. Here and Gone, Inc., has sales of $18 million, total assets of $13 million, and total debt of $3.8 million. If the profit margin is 8 percent, what is net income? What is ROA? What is ROE?

Net income = $1,440,000 ROA = Net income / Total assets ROA = $1,440,000 / $13,000,000 ROA = 11.08% ROE = Net income / (Total assets - Total debt) ROE = $1,440,000 / ($13,000,000 - 3,800,000) ROE = 15.65%

3 advantages of and 3 disadvantages of a sole proprietorship

PROS: -easy + inexpensive to form -few regulations -avoid corporate income tax CONS: -difficult to raise large amounts of capital -unlimited personal liability for personal debts -limited life

2 advantages and 4 disadvantages of a partnership

PROS: -easy to form -avoid corporate income tax CONS: -unlimited liability -limited life -difficult to transfer ownership -difficult raising large amounts of money

3 advantages and 2 disadvantages to a corporation

PROS: -most you can lose is what you invested (limited liab.) -easier to raise capital -transfer of ownership is easy -(unlimited life) CONS: -complex to set up -double taxed

discounting formula

PV = FV / (1+i)^n

how do we solve for an annuity due?

PV of Ann Due = PV of Ord. Ann * (1+i)

common stock

VARIABLE INCOME SECURITY -rights of common stockholders: VOTING

zero coupon bond

a bond that makes no coupon payments and is thus initially priced at a deep discount

Ordinary Annuities

a cash flow stream in which an equal flow (payment) occurs at the end of every period for n periods

sunk cost

a cost that has already been committed and cannot be recovered

corporation

a legal entity created by a state, it is separate and distinct from its owners and managers

amortized loans

a loan repaid in equal payments over its life where the payments include interest and principal

income statement

a statement summarizing the firm's revenues and expenses over an accounting period, generally a quarter or a year

Suppose you plan on retiring 40 years from now. After retiring, you believe you will live 20 more years and will require 100,000 per year. Let's assume for now that all of your investing will be in a mutual fund that returns 9% annually. You also have no initial value in the account. a) What is the annual investment required to meet retirement needs? b) suppose you can initially have $25,000 to open the account. adjust any formulas to recalculate the annual investment

a) 1. find PV of those future cash flows n = 20 i = 9 PV = solve (912,854.57) PMT = 100,000 FV= 0 2. take that PV and put it as FV to find payments n= 40 i= 9 PV= 0 PMT= solve (2701.69) Fv= 912,854.57 b) 1. change PV to -25,000 PMT = 377

ellie just took out a 100,000 thirty year mortgage from a bank with a 6.6% interest rate compounded monthly a) what will be ellie's monthly payment? b) in the first year, how much interest does ellie pay? c) in the first year, what fraction of the total payment goes toward principal? d) suppose you decide to re-finance after 5 years, what will your remaining balance be at that point

a) n = 360 i = 0.55 (6.6/12) PV = 100,000 PMT = solve (638.66) FV = 0 b) 2nd PV P1 = 1 P2 = 12 scroll to int = 6,567.22 c) in amort table find principal = 1,096.69 1,096.69 / (638.66 x 12) d) in amort table set p1 and p2 to 60 bal = 93,717.94

AMORTIZED LOAN To purchase your first house, supposed you borrow $120,000. The terms of your mortgage with the bank are as follows: 30 years of monthly payments with 8.4% APR compounded monthly. a) What is your monthly payment? b) how much of the loan remains after 5 payments

a) n = 360 (30*12) i = .7 (8.4/12) PV = 120,000 PMT = solve (914.21) FV = 0 b) 1. with inputs above click 2nd PV 2. P1 = 5 3. P2 = 5 4. scroll to find balance (119,623.74) number might not be perfect i fcked something when i did it in class but thats the right way to do it ong

Suppose you are going to receive $12,000 per year for five years. The appropriate interest rate is 9 percent. a. What is the present value of the payments if they are in the form of an ordinary annuity? What is the present value if the payments are an annuity due? b. Suppose you plan to invest the payments for five years. What is the future value if the payments are an ordinary annuity? What if the payments are an annuity due?

a. 1. to find ordinary annuity put it in as normal n = 5 i = 9 PV = solve (46,675.82) PMT = 12,000 FV = 0 2. to find annuity due PV you gotta set pmt to begin (yk how to do it bich nig) PV = 50,876.64 b. 1. now that you have present values of the cash flows you can set them as your PV and enter everything else to get FV n = 5 i = 9 PV = (PV for ord and annuity next time you do it) PMT = 0 FV = solve (71,816.53 ord) (78,280.01 due)

why is there a difference between accounting income and cash flow?

accounting: when revenue earned; expenses incurred

examples of non cash activities

accounts payable, depreciation, accounts receivable

proxy fights / activist investors

activist investors trying to get enough votes to get new directors

what does a bond create

an agreement or indenture between the bond holder and the bond issuer. the indenture details the nature in which the principal must be repaid

annuity due

an annuity for which the cash flows occur at the beginning of the period

Sole Proprietorship

an unincorporated business owned by one individual

APR

annual percentage rate -nominal rate followed by the compound frequency

financial statements

balance sheet income statement statement of cash flows statement of retained earnings

stock repurchase

buy back outstanding shares

why might the value of a business be maximized as a corporation instead of the other forms?

can be publicly traded able to raise capital easier

dividends

company distributes some earnings to shareholders

debt

created whenever you borrow money

net working capital

current assets - current liabilities

current ratio

current assets / current liabilities -short term solvency

market to book ratio

current market value of a firm's stock / book value of a firm's stock MV / BV -market value (market cap) forward looking -book value (A-L) backward looking -market ratio, most widely used ratio: growth opp. and how mgmt has done

secured debt

debt guaranteed by collateral -usually called mortgage bonds, -issues not secured by specific assets are called debentures

Liquidity

firm's ability to meet near-term debt payments. some ratios used are: -TIE (times interest earned) -current ratio -quick ratio

general vs limited partnership

general: whoevers engaged in mgmt of operations and bears liab. limited: can be involved in mgmt but limited liab. for debts; only what they put in

perpetuity annuity

goes on indefinitely PV of Perpetuity = PMT/i

replacement value

how much it costs to replace

i' and n'

idk why this is in our notes but i don't wanna get blindsided by some shit that looks like another language i' any sub-annual discount rate? (periodic rate) n' the # of sub annual time periods (total # of periods in investment horizon)

economic value

if asset used in investment purposes

how do we determine net cash flow from the income statement

if we assume that all non-cash charges, excluding depreciation add to zero, we can simply do: NCF = NI + depreciation

solve for EAR of APR given one and compounding frequency

in calculator: 1. 2nd 2 NOM (APR) EFF (EAR) C/Y (compounding frequency) 2. enter what you have and compute missing variable

calculating interest with inflation

ireal = (1+i nom) / (1+i inf) -1 i think the numerator is pretty much EAR

hot issue IPO

large appreciation in first few days of IPO's

PRESENT VALUE OF AN ORDINARY ANNUITY Hudson Levin signed a contract that pays $25 million per year for the next 10 years. What is the present value of this contract if the discount rate if 10%?

lightwork in calculator: n = 10 i = 10 PV = solve (153,614,177) PMT = 25,000,000 FV = 0

FUTURE VALUE OF AN ORDINARY ANNUITY Find the value of Hudson's contract after 10 years. 10% discount rate, 25,000,000 a year. PV solved previously but it is 153,614,177

n = 10 i = 10 PV = 153,614,177 PMT = 0 FV = solve (398,435,615)

In 2009, an 1893 Morgan silver dollar sold for $6,450. What was the rate of return on this investment?

n = 116 (2009-1893) i = solve (7.86) PV = 1 PMT = 0 FV = 6450

A local finance company quotes a 17 percent interest rate on one-year loans. So, if you borrow $20,000, the interest for the year will be $3,400. Because you must repay a total of $23,400 in one year, the finance company requires you to pay $23,400/12, or $1,950 per month over the next 12 months. Is this a 17 percent loan? What is the effective annual rate?

n = 12 i = solve PV = 20,000 PMT = -1950 FV = 0 - i comes out to 2.502, multiply this by 12 months to get APR of 30.03% -click 2nd 2 and enter 30.03 as NOM and C/Y as 12 -compute eff to get an EAR of 34.53%

Assume the total cost of a college education will be $320,000 when your child enters college in 18 years. You presently have $50,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child's college education?

n = 18 i = solve (10.86%) PV = -50,000 PMT = 0 FV = 320,000

Imprudential, Inc., has an unfunded pension liability of $750 million that must be paid in 25 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 8 percent, what is the present value of this liability?

n = 25 i = 8 PV = solve (109,513,42.87) PMT = 0 FV = -750,000,000

net profit margin formula

net income / sales

while maximizing shareholder wealth should be the goal of the employees of the firm, is this necessarily the case?

not always. an agency relationship arises whenever one or more individuals, called principals, hires another individual or organization, called an agent to perform some service and then delegates decision-making authority to that agency

stock dividend

pay shares as dividend

how do we value a bond?

price = PV of future cash flows

PE (price earnings ratio) formula

price per share / earnings per share

balance sheet

provides a snap-shot of the firm's status at a given point in time

board of director

represents interest of shareholders (CORP. GOVERNANCE) -monitor and advise -(inside)Executive directors: work for the company -(outside)Independent directors: do not have direct relationship w/ company; MORE -gray directors: not really inside/outside but more have a connection to someone

total assets turnover formula

sales / total assets

You are saving to buy a $175,000 house. There are two competing banks in your area, both offering certificates of deposit yielding 6 percent. How long will it take your initial $92,000 investment to reach the desired level at First Bank, which pays simple interest? How long at Second Bank, which compounds interest monthly?

simple interest formula: simple interest = principal x interest rate x time you need 83,000 worth of interest so 83,000=92,000(0.06)(n) =15.04 years for second bank n = solve (128.92 months) i = 0.5 (6/12) PV = 92,000 PMT = 0 FV = 175,000 10.74 years

You want to buy a new sports coupe for $73,800, and the finance office at the dealership has quoted you a 6.2 percent APR loan for 60 months to buy the car. What will your monthly payments be? What is the effective annual rate on this loan?

steps: 1. find annuity payment n = 60 i = 0.5166 (6.2/12) pv = 73,800 PMT = solve (1,433.63) FV = 0 2. 2nd 2 enter 6.2 for nom and 12 for c/y then click cpt on eff to get an EAR of 6.38%

EAR (effective annual rate)

the actual rate paid (or received) after accounting for compounding that occurs during the year (1+APR/m)^m-1 m=compound frequency

leverage

the concept of how much debt a firm issues for its projects -allows you to do things you wouldn't be able to

expected return vs. risk trade off

the concept that greater risk should be rewarded with a higher return risk vs. return

opportunity cost

the cost of the next best alternative

maximization of wealth

the creation of as much wealth as possible with the available resources do all firms maximize wealth? they try

diversification

the idea of removing risk from a portfolio of stocks or other investments exs. -stocks -bonds -real estate

financial management

the job of managing a firm's resources so it can meet its goals and objectives

what is risk

the likelihood that actual outcomes differ from the expected -volatility exs. investing instartups company going bankrupt stocks

capital structure

the mixture of debt and equity maintained by a firm how to finance decisions payout policy

time value of money

the opportunity cost of tying up funds in projects, stocks, or other assets

capital budgeting

the process of planning and managing a firm's long-term investments projects; what to take on

financial ratios

tools used to evaluate financial statements, the advantages are 1. comparable companies 2. assessing managerial performance

partnership

two or more persons associate to conduct a non-corporate business -general and limited

long term debt

usually referred to as bonds. bonds=FIXED INCOME SECURITY

book value

value bought at in book

market value

what you could sell it for