Finc 211 OAES
NI = $3,000,000; EBIT = $6,000,000; T = 40%; Interest = ?
Need to set up an income statement and work from the bottom up.
EBT $5,000,000 EBT =
Taxes (40%) 2,000,000
Interest = EBIT EBT = $6,000,000 $5,000
FUTURE VALUE If you deposit $10,000 in a bank account that pays 10% interest annually, how much will be in
your account after 5 years?
Deposit= $10,000 Bank pays= 10% Period= 5 YEAR 5 $14641 x 10%= 1464.10 14641+1464.10 =
OAES Week 4
Q7-3. Q7-3 Short-term bond prices are more sensitive to interest rate
changes than are long-term bond prices.
This statement is partially true in that values are affected by changes
in interest rates. the statement is false however, in t
Risk and Rates of Return
The acceptance of risk is the key to generating a return for your investment. The
greater the risk, the greater the return if all else is equal.
Stand-alone risk is the risk an investor would face if he or she held only one asset.
Capital Budgeting Template
Complete only the yellow boxes; everything else is done by formula. I have added several rows below template for you to complete payback calculations.
Find the required Year 0 investment, the annual after-tax operaing cash flows
Calculates the net present value of an investment by using a discount rate and a series of
future payments (negative values) and income (positive values).
Rate is the rate of discount over the length of one period.
Financial Statements, Cash Flow, and Taxes
Accounting is a prerequisite for this course; therefore this chapter should be a
review of principles addressed in previous courses of instruction. Very little time will be
spent on addressing accounting principl
If you have an initial cash out flow of $1000 pays back $400 the first year, $300 the second year and $390 the third year, $500 the fourth year you have a rate of return of 10%. The
The final topic is the cost of money. We are all interested in this cost as generally
we all have some type of debt whether it is a car loan, mortgage, or credit card debt. The
higher the interest rate the more we pay for the borrowed funds
-5000 Cash flow Year 0
2000 Cash Flow Year 1
2000 Cash Flow Year 2
2000 Cash Flow Year 3
Note: no change in IRR to MIRR when finance rate and reinvest rate are the same as IRR.
Notice what happens when we chan
Pricing bonds is straightforward. Remember yield to maturity is the same
thing as determining the rate of interest earned on an investment if you
were to hold that investment until it matured. Detailed information can be
found in our text.
Stocks and Their Valuation
The value of a share of stock is based on the present value of the stream of
dividends the stock is expected to provide in the future. You may ask yourself how can a
stock have value if it doesnt pay dividends. Every stock is ex
WACC: 6.4% (Same as our project!)
WACC does not matter for the payback method. But we would use it in the
discounted payback method.
Year 0: -690,000
Year 1: 105,000
Year 2: 125,000
Year 3: 210,000
Year 4: 109,000
Yera 5: 255,000
The Cost of Capital
The cost of capital used in capital budgeting is a weighted average of the types of
capital the firm uses, typically debt, preferred stock, and common stock. I t should be
noted that a firm will only use those types of capital that can
Time Value of Money
Time Value of Money is the most important concept in finance. Therefore it is
critical that each student have a complete understanding of this principle.
Some of the basic concepts are as follows (Brigham and Houston, (2004):
Yield to Maturity Example.
6 year bond with semi-annual coupons
Face Value $1000
Coupon Rate 8%
Current market price: $911.37
What is the YTM?
PV = - 911.37
FV = 1000.00
12 (6 years times 2 payments per year)
PMT = 40 (coupon rate of 8% time
Using TVM FV_PV Factor Tables
If you need to calculate the present value or future value of a single sum or an annuity (stream
of payments), you can do this using the attached tables. The tables include:
1. Future Value of $1 single sum in the future when
Time Value of Money
To understand the financial significance of the time value of money in the business model,
you will need to understand present value, future value, and interest concepts. Our readings
this week address these concepts. Basically, the id
Amount of Debt
Amount of PS
Amount of CS
Input dollar amounts of each item in yellow
input the annual rate for that it
Example Excel for Variance and Standard Deviation.
One event happening over a selected period of time
Here is a green line representing the mean or average
of a common stocks closing price at the end of each
month for 15 months. We take all the closing prices
(15 in all), add them together, and then divide by 15.
As you can see th
General Obligation Bonds
High Yield Bonds (See Junk
Interest Payment Dates
Amortization of Discount Bond using Straight Line Method
Number payments per year
Interest paid per period
Bond Issued at
Present Value of Bond
SL amortization of Discount
5. A disadvantage of the corporate form of organization is that corporate stockholders are more exposed
to personal liabilities in the event of bankruptcy than are investors in a typical partnership.
7. Some partners in
The CEOs compensation amount should depend on the performance of the company. A
measurement in the stocks intrinsic value will give a more timely and accurate representation of
the performance of the building. The stock market can change daily
The emphasis of the various types of analysts is by no means uniform nor should it be. Management is
interested in all types of ratios for two reasons. First, the ratios point out weaknesses that should be
strengthened; second, management rec
I think it is vital to understand how risk is measured within stock investments. I
say this because at times to grow big you want to really understand what you are
investing and what the shape of the future will hold for your investments.