• “Average” performance is not necessarily good. Use the leader’s. • Seasonal factors can distort ratios. • Window dressing techniques can make statements and ratios look better. • Different accounting and operating practices can distort comparisons. • Sometimes it is difficult to tell if a ratio value is “good” or “bad.” • Often, different ratios give different signals, difficult to tell whether a company is in a strong or weak financial condition. Financial Calculator Display 8 decimal places : [2 nd ] [.] FORMAT  Clear all memory : [2 nd ] [FV] CLR TVM and [2 nd ] [CE/C] CLR WORK Toggle beginning/end mode : [2 nd ] [PMT] BGN then [2 nd ] [ENTER] SET For annuity due (first cash flow occur immediately) TVM : 1. set P/Y compounding frequency. 2. Set BGN/END mode 3. If EAR given, compute APR Debt increases, ROA decreases Interest Expense lowers net income, which lowers ROA Debt lowers equity, if equity is lowered more than net Y, ROE increase Substitution of equipment for labourers, decrease FA
4. Input I/Y. No need to divide by compounding frequency since P/Y is already set. Same goes if APR is given. Just input the given APR without dividing. 5. N = number of years x compounding frequency (input [no. of years] [2 nd ] [N] xP/Y ) 6. If computing N or I/Y, PMT and/or PV must be input as a negative number. If annuity VS fixed payment now, e.g. pay $100 for lifetime or $10 every year PV = 10 – 100 = 90. FV = 0, PMT = 10, I/Y = given. Compute N how long you need to live to profit Find Effective rate: [2 nd ]  ICONV input NOM nominal rate, C/Y compounding frequency (pressing [ENTER] [ ↓ ] after entering each) then [ ↓ ] to EFF effective rate and press [CPT] display effective rate PV of Ordinary Annuity: N=3, I/YR=10, PMT=100, FV=0, CPT PV=?? Time Value of Money Future Value = the amount of money an investment will grow to over some period of time at some given interest rate. Future Value – Compounding || Present Value – Discounting FV = PV(1+r) t r: interest rate ; t: time period Present Value = the current value of future CFs discounted at the appropriate discount rate PV = FV ( 1 + r ) n = FV × 1 ( 1 + i ) n For a given amount to be received in the future and for a given interest rate, the longer into the future that amount is to be received, the lower the present value of that amount For a given amount to be received at a given time period in the future, the higher the interest rate, the smaller the present value of that amount Interest/Discount rate/Required return Simple Interest FV = PV + ( PV ×i ×n ) where I and r = i/r and n and t = #periods Compound Interest FV = PV ( 1 + i ) n Effect of compounding is small for a small # periods; increases as # periods increases. i =( FV PV ) 1 / n − 1 t = ln ( FV PV ) ln ( 1 + r ) Annuity = series of cash flows; same CF takes place each period for a set #periods Ordinary Annuity first cash flow occurs one period from now Annuity Due first cash flow occurs immediately Perpetuity a set of equal payments that are paid forever Growing Perpetuity set of payments which grow at a constant rate each period and continue forever Annuity PV = PMT × [ 1 r ∗( 1 − 1 ( 1 + r ) t ) ]
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