Principles of Finance

Networking Capital Current assets- current liabilities (positive in a healthy company)
Book value Balance sheet value of assets, liabilities, and stockholders equity
Market Value True value price at which A,L, & SE can be sold at
Marginal Taxes % of tax paid on next dollar
Average taxes Total tax bill/ Taxable income
Future Value equation PV(1+r)^t
Present value FV/(1+r)^t
R equation (FV/PV)^1/t-1
T equation ln(Fv/Pv)/ln(1+r)
Annuity Finite series of equal payments. First payment occurs at end of period=Ordinary Annuity Payment occurs at beginning of the month= Annuity due
Perpetuity Infinite series of equal payments
Perpetual formula Pv=PMT/r
Cash Inflow +
Outflow
Yield to maturity Market required rate of return implied by the current bond price
Municipal security Debt of state & local govt usually exempt from state tax
Treasurer Security Federal govt debt Pure discount bonds Original market of 1 year or less
Treasury Notes Coupon debt Original maturity between 1-10 years
Treasury bond Coupon debt Maturity more than 10 years
Zero coupon bonds Makes no periodic interest Coupon rate = 0%Entire YTM comes from difference between purchase price or par value Cannot sell for more than par value
Other bond types Income bond PV bond
1. The Coupon rates of a bond equals: a percentage of its face value
2.How much should you pay for a $1,000 bond with 10% coupon, annual payments, and five years to maturity if the interest rate is 12%? $927.90
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4.Which of the following is correct for a bond priced at $1,100 that has ten years remaining until maturity, and a 10% coupon, with semiannual payments? Each payment of interest equals $50.
5.U.S. Treasury bond yields do not contain a: Default premium
6.Capital losses will automatically be the case for bond investors who buy: Premium bonds
7.What is the amount of the annual coupon payment for a bond that has six years until maturity, sells for $1,050, and has a yield to maturity of 9.37%? $105.00
8.Which of the following is correct concerning real interest rates? Real interest rates, if positive, indicate increased purchasing power.
9.How much should you be prepared to pay for a 10-year bond with a 6% coupon and a yield to maturity to maturity of 7.5%? $897.04
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12.What is the value of the expected dividend per share for a stock that has a required return of 16%, a price of $45, and a constant growth rate of 12%? $1.80
13.What should be the current price of a share of stock if a $5 dividend was just paid, the stock has a required return of 20%, and a constant dividend growth rate of 6%? $37.86
14.What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%? $43.75
15.Lee pays one percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:-annual percentage rate.-compounded rate.-effective annual rate.-perpetual rate.-simple rate. Annual percentage rate
16.Jenny needs to borrow $16,000 for 3 years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny? 8 percent simple interest
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18.By definition, a bank that pays simple interest on a savings account will pay interest: only on the principal amount originally invested.
19.Which one of the following can be classified as an annuity but not as a perpetuity? Equal annual payments for life
20.Which one of the following has the highest effective annual rate? 6 percent compounded monthly
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23.What is the correct formula for computing the present value of $600 to be received in 6 years? The discount rate is 7 percent. PV = $600/(1 + 0.07)6
25.Which one of the following is the annuity present value formula?C {{1 [1 / (1 + r)t]} / r}C {1 [1 / (1 + r)t]} rC {1 [r / (1 + r)t]} / rC {{1 [1 / (1 r)t]} r}C {1 [r / (1 r)t]} / r C {{1 [1 / (1 + r)t]} / r}

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