Finc 211 OAES
3-2
NI = $3,000,000; EBIT = $6,000,000; T = 40%; Interest = ?
Need to set up an income statement and work from the bottom up.
Interest
1,000,000
EBT $5,000,000 EBT =
Taxes (40%) 2,000,000
NI
$3,000,000
Interest = EBIT EBT = $6,000,000 $5,000
P5-1
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 =
$16,105.10
P5-2
PRESENT VALU
OAES Week 4
Q7-3. Q7-3 Short-term bond prices are more sensitive to interest rate
changes than are long-term bond prices.
False
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
NPV
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).
Syntax
NPV(rate,value1,value2, .)
Rate is the rate of discount over the length of one period.
Va
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
CF0
CF1
CF2
CF3
CF4
i/y
NPV
CF
-1000
400
300
390
500
PV
-1000.000
363.636
Interest Rates
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
9.70% IRR
9.70% MIRR
=MIRR(A1:A4,0.097,0.097)
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.
Bond Fundamenta
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!)
Cash Flows:
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
Year 0
Year 1
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):
1. Compou
Yield to Maturity Example.
Situation:
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
N=
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
WACC Formula
Amount of Debt
Amount of PS
Amount of CS
Total Capitalization
Debt%
16.67%
WACC
Rate
9.42%
$
$
$
$
1,000,000
2,000,000
3,000,000
6,000,000
Pref. Stock%
33.33%
8.65%
Input dollar amounts of each item in yellow
input the annual rate for that it
Example Excel for Variance and Standard Deviation.
Example 1:
Mean
Count
Example 2:
Possibility 1
Possibility 2
Possibility 3
Possibility 4
Possibility 5
Possibility 6
Possibility 7
One event happening over a selected period of time
Data
Mean
difference (
Standard Deviation
$34.8
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
Item
Bond
Call Date
Call Protection
Call Risk
Callable
Corporate Bond
Coupon
Current Yield
Discount Bond
General Obligation Bonds
High Yield Bonds (See Junk
Bonds)
Interest
Interest Payment Dates
Issuer
Junk Bonds
Maturity Date
Municipal Bonds
Non-Callabl
Amortization of Discount Bond using Straight Line Method
Factors
Issue Date
Par
Coupon
Years
Number payments per year
Periods
Maturity Date
Interest paid per period
Bond Issued at
Present Value of Bond
SL amortization of Discount
1/1/2009
$ 500,000.00
6%
Chapter 1
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.
a. True
b. False
ANSWER:
7. Some partners in
Chapter 1.5
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
Question 4-1
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.
Investopedia exp