Theory of finance notes.docx

# Net worth book value of equity shareholders equity

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Net worth (book value of equity) = shareholders equity = book value of the assets – the book value of the liabilities = historical contributions of owners = original cash paid for share (capital stock) + reinvested earnings over time (retained earnings)

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Statement of earnings (income statement) Sales revenues - cost of goods sold - fixed costs Earnings before interest, taxes, depreciation and amortization -depreciation earnings before interest and taxes -interest Taxable income -tax Net income = dividends or retained earnings **interest is paid before taxes, dividends are paid after taxes Statement of cash flows Profits subtract depreciation (non cash expense) Profits ignore expenditures on new assets (expense gets capitalized over time as depreciation) Profits record income and expenses at the time of sale, not when cash changes hands Profits do not consider changes in new working capital (difference between current assets and current liabilities) Chapter 5 Perpetuity PV = C R 150,000 .05 = \$3,000,000 What is the PV of the perpetuity if the first payment is at time 0? \$3,000,000 + 150,000 = \$3,150,000 What is the present value today of the perpetuity if the first payment is not until time 4? - Find its value at time 3
PV 3 = \$3,000,000 PV 0 = PV 3 (1 + r) 3 3,000,000 (1.05) 3 = \$2,591,513 Annuity subtract: A-B A = perpetuity starting at time 1 B = perpetuity starting at time t +1 = t- period annuity PV of A = c R PV of B = (c) * (1+r) -t = c R r(1+r) t PV of annuity = Pv of A – Pv of B C - c R r(1+r) t = C (1 = 1 ) R r(1+r) t What is the present value of an annuity of \$150,000 per year for 3 years should the interest rate be 5% = \$408,487
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• Spring '11
• Bower
• Balance Sheet, Generally Accepted Accounting Principles

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