FINC310: Exam 2 - CH 4 & 5

Time Line

An important tool used in time value analysis; it is a graphical representation used to show the timing of cash flows.

Future Value (FV)

The amount to which a cash flow or series of cash flows will grow over a given period of time when compounded at a given interest rate.

Present Value (PV)

The value today of a future cash flow or series of cash flows.

Compounding

The arithmetic process of determining the final value of a cash flow or series of cash flows when compound interest is applied. Going to future value from present value.

Compound Interest

Occurs when interest is earned on prior periods’ interest.

Simple Interest

Occurs when interest is not earned on interest.

Opportunity Cost

The rate of return you could earn on an alternative investment of similar risk.

Discounting

The process of finding the present value of a cash flow or a series of cash flows; discounting is the reverse of compounding.

Annuity

A series of equal payments at fixed intervals for a specified number of periods.

Ordinary (or deferred) Annuity

An annuity whose payments occur at the end of each period.

Annuity Due

An annuity whose payments occur at the beginning of each period.

Perpetuity

A stream of equal payments at fixed intervals expected to continue forever.

Uneven/Nonconstant Cash Flows

A series of cash flows where the amount varies from one period to the next.

Payment (PMT)

This term designates equal cash flows coming at regular intervals.

Cash Flow

This term designates a cash flow that’s not part of an annuity.

Nominal Interest Rate

The contracted interest rate.

Effective Annual Rate

The annual rate of interest actually being earned, as opposed to the quoted rate.

Amortized Loan

A loan that is repaid in equal payments over its life.

Amortization Schedule

A table showing precisely how a loan will be repaid. It gives the required payment on each payment date and a breakdown of the payment, showing how much is interest and how much is repayment of principal.

Current Ratio

Current Assets / Current Liabilities

Quick Ratio

(Current Assets - Inventories) / Current Liabilities

Inventory Turnover

COGS / Inventories

Days Sales Outstanding

Receivables / (Annual Sales / 365)

Fixed Asset Turnover

Sales / Net Fixed Assets

Total Asset Turnover

Sales / Total Assets

Debt-to-Capital Ratio

Total Debt / Total Invested Capital

Times-Interest-Earned Ratio

EBIT / Interest

Operating Margin

EBIT / Sales

Profit Margin

Net Income / Sales

Basic Earning Power

EBIT / Total Assets

Return on Assets (ROA)

Net Income / Total Assets

Return on Equity (ROE)

Net Income / Total Common Equity

Equity Multiplier

ROE / ROA or Total Assets / Total Common Equity

Price to Earnings (P/E)

Price / Earnings

Market to Book (M/B)

Market Price per Share / Book Value per Share

Dupont ROE

(Net Income/ Sales) x (Sales / Total Assets) x (Total Assets / Total Common Equity)

Profit Margin x Asset Turnover x Equity Multiplier