Review of Basic Financial Tools
Time Value of Money
Compounding (future values)
•
PV(FVIF
i,n
)
•
PMT(FVIFA
i,n
) for an annuity
Discounting (present values)
•
FV(PVIF
i,n
)
•
PMT(PVIF
i,n
) for an annuity
2
nd
ICONV for NOM/EAR problems
Bond Valuation
Coupon Payment – periodic interest payment, usually semiannual
Coupon Rate – total annual payment as a % of par value
Yield to Maturity – interest rate given the bond’s price
Example:
15 year bond, par $1000, 8% coupon rate, semiannual payments, selling for $925. What is YTM?
N=30
PV=925
FV=1000
PMT=40
CPT I/Y = 4.45
[x2]
= 8.91%
Securities Market Line (SML)
Shows the relationship between the required rate of return on a stock and its risk measured by beta
Stock Valuation
the present value of the stream of dividends the stock is expected to provide in the future
for constant growth:
Price = Dividend / (r – g)
•
Same formula for a perpetuity, but with g = 0
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View Full DocumentChapter 8 – Ratios and Analysis of Financial Statements
Liquidity ratios – how quickly can the firm pay off its current liabilities
•
Current Ratio = current assets / current liabilities
•
Quick (Acid Test) Ratio = (current assets – inventory) / current liabilities
o
Remove inventory because it is typically the least liquid
Asset Management Ratios – how effectively does the firm manage its assets
•
Inventory turnover = sales / inventory
o
How quickly are we turning over inventory?
•
DSO – Days Sales Outstanding = receivables / average sales per day [annual sales / 365]
o
What is the average collection period?
•
Fixed assets turnover = sales / net fixed assets [fixed assets – accumulated depreciation]
o
•
Total assets turnover = sales / total assets
Debt Management Ratios – to what extent does the firm use leverage
•
Debt ratio = total liabilities / total assets
o
What % of funds is provided by current liabilities and LT debt?
•
TIE – Times Interest Earned = EBIT / interest expense
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 Spring '08
 VARMA
 Finance, Time Value Of Money, Annuity, Compounding, Future Value, Valuation, Generally Accepted Accounting Principles, total assets, Price per share

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