## 44 terms

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Capital budgeting

Capital Structure

Working capital management

What are the three functions of financial Manger ? (note : these reflect on the balance sheet)

### a conflict of interest between the corporate shareholders and the corporate mangers

What is agency problem ?

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Assets

Current assets + Net fixed assets = total assets

Liabilities and shareholder's Equity

Current liabilities + long-term liabilities + Share holder's equity - Total liabilities and shareholder's equity

Formula for Balance sheet

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is your tax bill divided by your taxable income, In other words, the percentage of your taxes the goes to pay taxes.

Formula:

Total taxes/ Total taxable income = Average taxes

What is average taxes?

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amount of tax payable on next dollar earned

or: the rate of extra tax you will pay if you earned 1 more dollar.

What is marginal taxes?

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Net Working Capital (which is also known as "Working Capital" or the initials "NWC") is a measurement of the operating liquidity available for a company to use in developing and growing its business.

CA -CL =NWC

Note: page 21

What is net working capital ?

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Liquidity

Turnover

Long-term solvency/ leverage ratio

Profitability ratio

Market value ratio

What are the 5 groups of ratio?

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A standardized finical statement presenting all items in percentage terms.

Balance sheet items are shown as %in total assets

Income statement items are shown as % in sales

Common-size statements

### A standardized financial statement presenting all items relative to certain base year amount.

Common -base year statement

### Reports every item as a % of the same item in another year.

Combined common-size and common - base year statements

### There will be examples

Know how to calculate PV&FV of simple cash flows for Ch.5 . Be able to solve 1 out of 4 variables. PMT is not included in Ch.5

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CLR TVM

40000 FV

5 N

8 I/Y

CPT PV = -27,223.33

You need $40,000 in 5 years, you can invest your money at 8%, how much do you need to invest today?

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CLR TVM

-100 PV

4000 FV

50 N

CPT I/Y = 7.66%

•You invest $100. In 50 years your investment is worth $4,000. What annual return will you have earned?

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Step 1:

CF CLR WORK (2nd CE/C)

CF 0 = 0 ENTER

C01 = 50 ENTER

F01 = 1 ENTER

C02 = 60 ENTER

F02 = 1 ENTER

C03 = 70 ENTER

F03 = 1 ENTER

NPV

I = 10 ENTER

NPV = CPT

NPV = $147.633

Step 2:

CLR TVM

147.633 PV

3 N

10 I/Y

CPT FV

FV = -$196.5

Ch. 6 : Consider the following cash flow:

Year 1 2 3

CF 50 60 70

What is FV at the end of year 3 at 10%?

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CLR TVM

3 N

5 I/Y

200 PMT

CPT PV = -544.65

Chh.6 At the end of each of the next 3 years you will receive $200. If the appropriate rate is 5%, how much is this investment worth today?

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Simple interest is interest not reinvested, interest period is only earned each period only in the original principle

Compounding interest is the process of accumulating interest on an investment over time to earn more interest and is reinvested. Called interest on interest in process.

What is the difference between simple interest and compound interest?

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Annuity Due:

BGN (2nd PMT), SET (2nd ENTER), QUIT (2nd CPT)

CLR TVM

50000 PV

5 N

5 I/Y

CPT PMT = -10,998.80

(remember to set the calculator back to the END mode, when done)

Ch.6 You just deposited $50,000. How much can you withdraw at the most at the beginning of each of the next 5 years if the interest rate is 5%?

### When a corporation or government wishes to borrow money from the public on long-term basis, it usually does so by issuing or selling debt securities.

What is bonds ?

### An interest -only loan, meaning that the borrower, will Pay the Interest every period, but none of the principle will be repaid until the end of The Loan.

A bond is normally....

### Direct, Indirect

Be aware that Interest rate risk has a _______ relationship with coupon rate but _________ relationship with with time to maturity.

### ou may Have to adjust the YTM & the coupon payments, if necessary.

Bonds can make semi annual or annual coupon payments but keep in mind ____________________________.

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5 variables

I/Y= YTM

N= Time To Maturity

PMT- coupon rate (% x (Face value =$1000))

FV= 1000

PV = price

PMT and FV are positive and PV is negative sign .

How many variables are in the bond valuation formula?

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1000 FV

60 PMT

5 I/Y

40 N

CPT PV = -1,171.59

What is the price of a bond with 20 years left to maturity. The YTM (quoted as an APR) is 10%, the face value is $1,000, and the semi-annual coupons are $60.

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1000 FV 80/2 = 40 PMT 5x2 = 10 N PV = -800

CPT I/Y = 6.8245 x 2 = 13.65%

Ch. 7 A bond Makes semi- annual payments, has 5 YTM, an 8% coupon rate (APR), a $ 1000 face value. If the price is $ 800, what is the YTM ( quoted as APR) ?

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A share of common stock in a company with a constant dividend is much like a share of preferred stock .

Formula :

P= D/ r

what is zero growth rate ?

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Formula :

P= D/ r

$10/.20= $50 Per share

Example of a Zero/ no growth rate : Paradise protocopying co. has a policy for paying $10 per share dividend every. If this policy is to be continued indefinably, what is the value of a share of stock if the required rate of return is 20%?

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A model that determines the current price of a stock as it dividend next period divided by the discount rate less the dividend growth rate .

If the constant growth rate exceeds the discount rate , then the stock price is indefinitely large.

Constant growth rate (dividend growth rate)

Only the definition of growth model

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We need to find the required return of the stock. Using the constant growth model, we can solve the equation for R. Doing so, we find:

R = (D1 / P0) + g = ($2.10 / $48.00) + .05 = .0938 or 9.38%

Ch 8 example of constant growth rate: The next dividend payment by Hot Wings, Inc., will be $2.10 per share. The dividends are anticipated to maintain a 5 percent growth rate forever. If the stock currently sells for $48 per share, the required return is ____________ percent. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))

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The main reason we consider this case is to allow super normal growth rates over some finite length in time .

The growth rate cannot exceed the required rate return indefinitely , but it certainly could do so for some number of years.

Non constant growth rate

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Step 1: calculate the price at time 2

P2 = D3 /(R-g) =D2 x (1+g)/(R-g) = 2 x (1.05)/(0.08- 0.05) = 2.1/.03 = $70

Step 2: Enter the CFs into you CF register and calculate the NPV:

CF, CLR WORK (2nd CE/C)

CF 0 = 0 ENTER

C01 = $1 ENTER F01 = 1 ENTER

C02 = $2+$70 = $72 ENTER F02 = 1 ENTER

NPV I = 8 ENTER (this is the R)

NPV = CPT NPV = $62.65

Ch. 8 example of a Non Constant growth rate (dividend growth rate): A stock pays a dividend of $1 in 1 year, $2 in 2 years and then grows at 5% after that. What is the value of the stock today if the required rate of return is 8%?

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P4 = D4(1 + g) / (R - g) = $2.00(1.05) / (.12 - .05) = $30.00

P0 = $11.00 / 1.12 + $8.00 / 1.122 + $5.00 / 1.123 + $2.00 / 1.124 + $30.00 / 1.124 = $40.09

Or you can use your CF function:

CF

CLR WORK

CF0 = 0

C01 = 11 enter ↓

F01 = 1

C02 = 8 enter ↓

F02 = 1

C03 = 5 enter ↓

F03 = 1

C04 = 32 enter↓

F04 = 1 NPV

I=12 enter ↓

NPV CPT

Ch 8 example of non constant growth rate :

Far Side Corporation is expected to pay the following dividends over the next four years: $11, $8, $5, and $2. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 12 percent, the current share price is $___________ . (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))