FIN 310 Exam 1 Review (Equations to Memorize)

FCF (Free Cash Flows)

EBIT - Taxes + Depreciation - CapEx - ∆NWC

Operating Cash Flow - CapEx - ∆NWC

constant annuity calculation

PV = PMT/R * (1 - 1/(1+r)^T)

DuPont breakdown of ROE

profit margin x asset turnover x equity multiplier

Market Capitalization

share price x # shares outstanding

Bond Price

B = (C/m)/(y/m) * (1 - 1/(1+ y/m)^mT)) + Face/(1+y/m)^mT

annuity due

PV = PMT/r (1 - 1/(1+r)^T) (1+r)

Operating cash flow is defined as:

A. a firm's net profit over a specified period of time.

B. the cash that a firm generates from its normal business activities using its existing assets.

C. the change in the net working capital over a stated period of time.

D. the cash that is generated and added to retained earnings

B. the cash that a firm generates from its normal business activities using its existing assets

Which of the following statements is TRUE?

A. The coupon rate on a previously issued bond represents the rate of return required by today’s participants in the market place.

B. When a bond’s yield to maturity is less than its coupon rate, the bond is selling at a discount.

C. The market prices of bonds with higher coupons are more sensitive to changes in market interest rates.

D. The market prices of bonds with longer maturities are more sensitive to changes in market interest rates

D. The market prices of bonds with longer maturities are more sensitive to changes in market interest rates

Which of the following statements is FALSE?

A. The current ratio provides a measure of the short-term solvency of the firm.

B. Price-earnings ratio reflects the book value per share per dollar of accounting earnings for a firm.

C. Total asset turnover measures how much in sales is generated by each dollar of firm assets.

D. Times interest earned, also known as the interest coverage ratio, provides a relative measure of how well a firm’s operating earnings can cover current interest obligations.

D. Times interest earned, also known as the interest coverage ratio, provides a relative measure of how well a firm’s operating earnings can cover current interest obligations

Which of the following statements is FALSE?

A. The effect of compounding is great over short time periods, but then it begins to decline as the horizon grows.

B. Moving cash flows to the left on a time line is called discounting, and values are additive at any one point in time.

C. Future value refers to the amount of money an investment will grow to over some period of time at some given interest rate.

D. To estimate the present value of future cash flows, the discount rate should be adjusted for both the timing or maturity of that cash flow and the inherent risk of that cash flow.

A. The effect of compounding is great over short time periods, but then it begins to decline as the horizon grows.

Which of the following is NOT an advantage to the corporate form of organization?

A. Ability to raise large sums of equity capital

B. Ease of ownership transfer

C. Profits taxed at the corporate level

D. Limited liability for all owners

C. Profits taxed at the corporate level

Which of the following statements is FALSE?

A. The average tax rate is the total tax expense divided by the total taxable income.

B. The marginal tax rate is the tax rate that applies to the next dollar of taxable income that a firm earns.

C. The average tax rate is always less than or equal to, and often considerably less than, the marginal tax rate.

D. Managers should use the average tax rate when making decisions regarding new investments and financing choices

D. Managers should use the average tax rate when making decisions regarding new investments and financing choices

Managers should act in shareholders’ interests because shareholders have ___________priority in receiving their claims.

A. Top

B. Somewhere in the middle

C. Bottom

D. Equal (to those of all other stakeholders)

C. Bottom

Firms that compile financial statements according to GAAP:

A. record income and expenses at the time they affect the firm’s cash flows

B. have no discretion of recording either revenue or expense items

C. must record all expenses when incurred

D. can still manipulate their earnings to some degree

D. can still manipulate their earnings to some degree

Given an interest rate of zero percent, the future value of a lump sum invested today will always:

A. Remain constant, regardless of the investment time period.

B. Decrease if the investment time period is shortened.

C. Decrease if the investment time period is lengthened.

D. Be infinite in value.

A. Remain constant, regardless of the investment time period.

Which of the following statements is FALSE?

A. The future value of a single cash flow grows across a longer time period

B. The present value of a single cash flow falls with a higher interest rate

C. The present value of an annuity grows if the annuity lasts longer

D. The future value of an annuity falls with a higher interest rate

D. The future value of an annuity falls with a higher interest rate

What is a bond?

A loan made by an investor to a borrower; A fixed income investment; Will be paid back with interest on top (hopefully)

Who uses bonds?

Corporations, Countries, Municipalities, States

Why do people use bonds?

Raising money to finance projects and operations

Bond Price