FINC312 Midterm - Review of Basic Financial Tools Time...

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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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Chapter 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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FINC312 Midterm - Review of Basic Financial Tools Time...

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