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The return on equity of a typical rm may change over time because of changes in business
and economic conditions, but it is unlikely to cha
1. You can use to roughly estimate how many years a given sum of money must earn at
a given compound annual interest rate in order to double that initial amount .
the Rule of 72
2. In a typical loan amortization schedule, the dollar amount of interest pai
Shows impact of transactions not defined as investing or financing activities.
These cash flows are generally the cash effects of transactions that enter into the
determination of net income.
Thus, we see items that not all statement
1. The liquidation value of a firm is the amount of money that could be raised if the firm
were to cease operations and sell its assets
2. The book value of a firm is equal to the common stock equity account on its balance
3. The book value of a fir
Assume that the interest rate is greater than zero.
Which of the following cash-inflow streams should you prefer?
Year 1 ($400), Year 2 ($300), Year 3 ($200), Year 4 ($100)
You are considering investing in a zero-coupon bond that sells for $250. At maturi
Hybrid forms of business organization
-Limited liability partnerships (LLPs) combine the limited liability of a corporation
with the tax advantage of a partnership.
-Recent types that are equivalent to LLPs:
Limited liability companies (LLCs)
Forecasting Financial Statements
future financial statements based on conditions that
management expects to exist and actions it expects to take
Forecast income statement
o A summary
of the firms expected revenues and expenses over some
Chapter 4 Review
1. What's the value to you of a $1,000 face-value bond with an 8% coupon rate when
your required rate of return is 15 percent?
less than its face value
2. If the intrinsic value of a stock is greater than its market value, which of the fo
A firm is unprofitable when it fails to generate sufficient cash flows.
-Firms that are unprofitable over time will be forced into bankruptcy by their creditors.
-In bankruptcy, the company will either be reorganized, or the companys assets will be
Cash Flow Forecasting
A company with a strong internet presence that conducts much or all of its business
through the web site.
The name refers to the period followed by the abbreviation of the commercial domain
(.com) at the end of an email or we
Wages are assumed to vary with the amount of production but not perfectly.
Generally wages are more stable over time than purchases are.
When production dips slightly workers are usually not laid off.
Which production picks up, labor becomes more efficien