QUIZ2

Review of
Accounting
Chapter 4
Learning Objectives:
Use of the balance sheet,
the income statement, and

the statement of cash flows
by managers.
Calculation of depreciation.
How depreciation affects
cash flow.
How taxes affect a firms
value.
Calculation of marginal and
The Firms Financial

Statements
Annual report includes:
Income Statement
Balance Sheet
Statement of Cash Flows
Accompanying Notes
Income Statement
ACME CORPORATION
The Firms Financial

Statements
Annual report
includes:
Balance Sheet
The Firms Financial Statements

Balance Sheet
Assets =
Current Assets:
Cash
Inventory
A/R
Fixed Assets:
Land
Liabilities +
Owners Equity
Current Liabilities:
A/P
Accruals
S-T Debt
Long Term Liabilities:

Bonds
Plant
Equipment
Less: Ac. Dep.
L-T Bank Debt

Mortgages
Preferred Stock
Owners Equity:
Common Stock
Capital in Excess
of Par
Retained Earnings
Balance Sheet
ACME CORPORATION
Balance Sheet
ACME CORPORATION
December 31
Balance Sheet
ACME CORPORATION
Assets = Liabilities + Owners Equity

Income Statement:
Revenues - Expenses = Net Income
Sales
Investment Income
Gains
Interest Received
Dividends Received
COGS
Salaries
Depreciation Exp.
Taxes
Other Expenses
Interest Paid

Income Statement:
Revenues - Expenses = Net Income
Dividends
Retained
Earnings
The Firms Financial

Statements
Annual report includes:
Statement of Cash Flow
The Firms Financial

Statements
Statement of Cash
Flows
Cash Inflow - Cash Outflow = Change in Cash
From Operations:
Cash Sales +
Payments to Suppliers Depreciation Exp. + Salaries Collection of A/R + Increase A/R Decrease inventory +
Decrease Payables Decrease Accruals -
The Firms Financial

Statements
Statement of Cash
Flows
Cash Inflow - Cash Outflow = Change in Cash
From Investing:
Sale of Fixed Assets + Purchase of fixed assets -
Purchase of other firms -
14
Statement of
Flows
Cash Cash
Inflow - Cash
Outflow = Change in Cash
From Financing:
Sale of stock +
Buy back stock Issue of LT debt +
Repay LT debt or notes payable +
Pay dividends Pay interest 15
Market vs. Book Value

Market Value & Book Value can be very
different.
Book Value is recorded initially

at cost.
Changes in book value
(depreciation) follow specified
accounting rules.
16
Factors that determine the

disparity between market and
book:
Time since acquisition
More time, more difference
Inflation: Higher inflation, more
difference
Tangible versus intangible assets
Intangible assets, more difference

Liabilities
As with assets, the market value of
liabilities may diverge from the
book value, but the relationship is
less complex.
The main factor that determines the

difference between market and book
values for liabilities of a healthy firm is:
the time until a liability must be paid off
At maturity, the market value will

equal the
book value.
Market vs. Book Value of

Equity
Total Market Value of Equity is the
market
price per share times the number
of shares outstanding.
Book Value of equity reflects the
changes in other asset and liability
accounts since it is the account that can
change to enforce the balance sheet
identity.
Stockholders Equity = Assets - Liabilities
DEPRECIATION
Accounting depreciation is the
allocation of an assets initial
cost over time.
Allowable depreciation
expense is determined by
established accounting rules.
CALCULATION OF
DEPRECIATION
Depreciable basis
Total amount to be depreciated over the

accounting life of the asset.
Equal to cost of the asset plus any setup and
delivery costs incurred.
Straight line depreciation
Basis divided by accounting life with equal

amounts of depreciation allocated to each
time period (except for half-year convention).
MACRS (Modified Accelerated Cost

Recovery System)
Specified percent charged each year.
Federal Income Taxation

Marginal and Average Tax
Rates
Marginal = Tax Rate on the next dollar of income.
Average = Taxes paid divided by taxable income.
Progressive Tax System
Average tax rate increases with the level of

taxable income.
Marginal tax rate is greater than the average tax
rate. (The current corp. tax rate schedule is not
strictly progressive.)
THE TAX SYSTEM EXPLAINED IN COFFEE

Suppose that every day, ten men go out for COFFEE AND
CONVERSATION
and the bill for all ten comes to $100...
If they paid their bill the way we pay our taxes, it would go something like
this...
The first four men (the poorest) would pay nothing.

The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
The ten men drank COFFEE every day and seemed quite happy with the arrangement, until
one day, the owner threw them a curve ball. "Since you are all such good customers," he
said, "I'm going to reduce the cost of your daily coffee bill by $20". Unlimited coffee for the
ten men would now cost just $80.
The group still wanted to pay their bill the way we pay our taxes. So the first four men
were unaffected. They would still drink for free. But what about the other six men? How
could they divide the $20 windfall so that everyone would get his fair share?
They realized that $20 divided by six is $3.33. But if they subtracted that from
everybody's share, then the fifth man and the sixth man would each end up being paid to
drink THEIR COFFEE.

So, the owner suggested that it would be fair to reduce each man's bill
by a higher percentage the poorer he was, to follow the principle of the
tax system they had been using, and he proceeded to work out the
amounts he suggested that each should now pay.
At a bill of $80, in order to follow the principle of the tax system they had
been using, and he proceeded to work out the amounts he suggested that
each should now pay.
Now, the first four men along with the fifth would pay nothing.
The sixth now paid $2 instead of $3 (33% saving).
The seventh now paid $5 instead of $7 (28% saving).
The eighth now paid $9 instead of $12 (25% saving).
The ninth now paid $14 instead of $18 (22% saving).
The tenth now paid $49 instead of $59 (16% saving).

Each of the six was better off than before. And the first four continued to
drink for free. But, once outside the bar, the men began to compare their
savings. "I only got a dollar out of the $20 saving," declared the sixth
man. He pointed to the tenth man AND SAID, "but he got $10! "Yeah,
that's right," exclaimed the fifth man. "I only saved a dollar too. It's unfair
that he got ten times more benefit than me! "That's true!" shouted the
seventh man. "Why should he get $10 back, when I got only $2? The
wealthy get all the breaks! "Wait a minute," yelled the first four men in
unison, "we didn't get anything at all. This new tax system exploits the
poor! The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for COFFEE AND
CONVERSATION so the nine sat down and had their COFFEE without
him. But when it came time to pay the bill, they discovered something
VERY important. They didn't have enough money between all of them for
even half of the bill!
THE TAX SYSTEM EXPLAINED IN

COFFEE
And that, my dear students is exactly how our tax
system works. The people who already pay the
highest taxes will naturally get the most benefit
from a tax reduction. Tax them too much, attack
them for being wealthy, and they just may not show
up anymore. In fact, they might start drinking coffee
overseas, where the atmosphere is somewhat
friendlier. For those who understand this, no
explanation is needed. For those who do not
understand, no explanation is possible because
you never will get it.
Income
% of Total Income Tax Paid
Top 1%
40%
Top 10%
71%
Top 50%
97%
From 2009 IRS Data
Accounts Receivable Tax

Building Permit Tax
CDL License Tax
Cigarette Tax
Corporate Income Tax
Dog License Tax
Federal Income Tax
Federal Unemployment Tax (FUTA)
Fishing License Tax
Food License Tax
Fuel Permit Tax
Gasoline Tax
Hunting License Tax

Inheritance Tax
Inventory Tax
IRS Interest Charges (tax on top of tax)
IRS Penalties (tax on top of tax)
Liquor Tax
Luxury Tax
Marriage License Tax
Medicare Tax
Property Tax
Real Estate Tax
Service charge taxes
Social Security Tax

Road Usage Tax (Truckers)
Sales Taxes
Recreational Vehicle Tax
School Tax
State Income Tax
State Unemployment Tax (SUTA)
Telephone Federal Excise Tax
Telephone Federal Universal Service Fee Tax
Telephone Federal, State and Local Surcharge Tax
Telephone Minimum Usage Surcharge Tax
Telephone Recurring and Non-recurring Charges Tax
Telephone State and Local Tax
Telephone Usage Charge Tax
Utility Tax
Vehicle License Registration Tax
Vehicle Sales Tax
Watercraft Registration Tax
Well Permit Tax
Workers Compensation Tax
Not one of these taxes existed 100

years ago...
and our nation was the most
prosperous in the world.
We had absolutely no national debt...
We had the largest middle class in the
world... And there was only one wageearner per family
What happened?
Can you spell
'politicians!'
Differential Tax Treatment

of Interest and Dividends
Interest paid on corporate debt is a tax
deductible expense.
Dividends paid to common and preferred
stockholders is not tax deductible.
Dividends received by a corporation
from another corporation have at
least a 70% exclusion from taxable
income.
32
Differential Tax Treatment

of Interest and Dividends
Corp B owns 100
shares of Common
Stock in Corp A
Dividend
Income
Corp A
Corp B
Corp A pays a
$2/share dividend
to shareholders.
$200
30% or $60 is Taxable
70% or $140 is Tax Free
Corp. B pays marginal tax rate of 25%

$60 x .25 = $15
Federal Taxes on dividend income

33
Who Pays all the Bills? The

Taxpayer thats Who (Just
Dont
Us)
Income
Top 1%
Top 10%
Top 50%
% of Total Income Tax Paid

40%
71%
97%
From 2008 IRS Data
forget
Who
pays
the
bills.
Homework Questions and Problems

1. Explain the difference between debt and equity. Why must the two equal total
assets?
2. Ajax Inc. had profits of $200,000 for the year. Their retained earnings account grew
from $800,000 at the beginning of the year to $950,000 by year end. How much did
the firm pay out in dividends?
3. Calculate earnings per share for the following:
Net income
$500,000
Interest expense:
$ 50,000
Common Dividends paid
$100,000
Common shares outstanding
100,000
4. Working capital includes both current and non-current assets. Do you agree or
disagree with this statement? Explain.
5. Explain why common stockholders are paid after preferred stockholders.
6. Are retained earnings and cash the same thing?
36
Analysis of Financial
Statements
Chapter 5
37
Learning Objectives
How financial ratio analysis
helps managers assess the
firms health.
Compute profitability, liquidity,
debt, asset activity, and market
value ratios.
Compare financial information
over time and among
companies.
38
Ratio Analysis
Financial managers use ratios to
interpret the raw numbers on
financial statements.
Relative measures allow comparison
over time and to other firms.
Ratios are used by financial
managers, other business
managers, creditors, and investors.
39
Ratio Analysis
Five Categories of Ratios
Profitability ratios
Liquidity ratios
Debt ratios
Asset activity ratios
Market value ratios
40
Ratio Analysis
Profitability Ratios
Measure the overall effectiveness

of the firms management.
41
Ratio Analysis
Gross Profit Margin =
Gross Profit
Sales
How effective is the firm at generating

revenue in excess of its cost of goods
sold?
42
Balance Sheet
Excalibur Corporation
Cash
$175
Accounts Receivable 430
Inventories
625
Current Assets
$1,230
Plant & Equipment $2,500
Less:Acc. Depr.
(1,200)
Net Fixed Assets
$1,300
Total Assets
$2,530
Income Statement
Sales
$1,450
Cost of Goods Sold
875
Gross Profit
$575
Operating Expenses
45
Depreciation
200
Net Operating Income
$330
Interest Expense
60
Income Before Taxes
$270
Taxes (40%)
108
Net Income
$162
Common Dividends Paid
100
Addition to Retained Earnings $62
Gross
Profit
Margin
Accounts Payable
$115
S-T Notes Payable
115
Current Liabilities
$230
Bonds
$600
Owners Equity
Common Stock
$300
Capital in Excess of Par 600
Retained Earnings
800
Total Owners Equity $1,700
Total Liabilities and
Owners Equity
$2,530
Gross Profit
Sales
Gross Profit Margin =
$575
$1,450
= 39.7%
43
Ratio Analysis
Operating Profit Margin =
Operating Income
Sales
How effective is the firm in keeping costs

of production low?
44
Balance Sheet
Cash
$175 Accounts Payable
$115
Accounts Receivable 430 S-T Notes Payable
115
Inventories625 Current Liabilities
$230
Current Assets
$1,230 Long-term Debt
$600
Plant & Equipment $2,500 Owners Equity
Less:Acc. Depr.
(1,200) Common Stock
$300
Net Fixed Assets
$1,300 Capital in Excess of Par 600
Total Assets
$2,530 Retained Earnings
800
Income Statement
Owners Equity
$2,530
Sales
$1,450
Cost of Goods Sold
875
Gross Profit
$575
Operating Expenses
45
Depreciation
200
Operating
Operating Income
$330
Operating Income
Profit
=
Interest Expense
60
Sales
Income Before Taxes
$270
Margin
Taxes (40%)
108
Net Income
$162
$330
Oper. Profit Margin =
= 22.8%
100
$1,450
45
Ratio Analysis
Note: Net Income equals Earnings Available to CS
when there is no preferred stock.
Net Income
Net Profit Margin =
Sales
How much net profit is being generated

from each dollar of sales?
46
Balance Sheet
Assets
Liabilities
Cash
$115
115
Inventories625 Current Liabilities
$230
Current Assets
$600
Less:Acc. Depr.
$300
Net Fixed Assets
Total Assets
800
Income Statement
Owners Equity
$2,530
Sales
$1,450
Cost of Goods Sold
875
Gross Profit
$575
Operating Expenses
45
Depreciation
200
Net
Operating Income
$330
Net Income
Profit
=
Interest Expense
60
Sales
Margin
Income Before Taxes
$270
Taxes (40%)
108
$162
Net Income
$162
Net
Profit
Margin
=
= 11.2%
100
$1,450
47
Ratio Analysis
Return on Assets =
Net Income
Total Assets
How effectively is the firm generating net

income from its assets ?
48
Balance Sheet
Assets
Liabilities
Cash
$115
115
Inventories
625 Current Liabilities
$230
Current Assets
$1,230 Long-term debt
$600
Less:Acc. Depr.
$300
Net Fixed Assets
Total Assets
800
Income Statement
Owners Equity
$2,530
Sales
$1,450
Cost of Goods Sold
875
Gross Profit
$575
Operating Expenses
45
Net Income
Return on
Depreciation
200
=
Operating Income
$330
Total Assets
Assets
Interest Expense
60
Income Before Taxes
$270
Taxes (40)
108
$162 = 6.4%
Net Income%
$162
ROA = $2,530
100
49
Ratio Analysis
Net Income
Return on Equity =
Common Equity
How well is the firm generating return to
its equity providers?
50
Balance Sheet
Assets
Liabilities
Cash
$115
115
Inventories
$230
Current Assets
$600
Less:Acc. Depr.
$300
Net Fixed Assets
Total Assets
800
Income Statement
Owners Equity
$2,530
Sales
$1,450
Cost of Goods Sold
Gross Profit
Operating Expenses
Depreciation
Operating Income
Interest Expense
Income Before Taxes
Taxes (40%)
Net Income
Addition to Retained Earnings
875
$575
45
200
$330
60
$270
108
$162
100
$62
Return on Equity =
ROE =
$162
$1,700
Net Income
Common Equity
= 9.53%
51
Ratio Analysis
Liquidity Ratios
Measure the ability of the firm to
meet its short-term financial obligations.
Current Assets
Current Ratio =
Current Liabilities
Are there sufficient current assets to pay off
current liabilities? What is the cushion of
safety?
52
Balance Sheet
Assets
Liabilities
Cash
$115
115
Inventories
$230
Current Assets
$600
Less:Acc. Depr.
$300
Net Fixed Assets
Total Assets
800
Owners Equity
$2,530
Current Ratio =
Current Assets
Current Liabilities
Current Ratio = $1,230 = 5.35x

$230
53
Ratio Analysis
Liquidity Ratios
Measure the ability of the firm to meet
its short-term financial obligations.
Acid-Test Ratio =
Current Assets - Inventory

Current Liabilities
What happens to the firms ability to repay current

liabilities after what is usually the least liquid of the
current assets is subtracted?
54
Balance Sheet
Assets
Liabilities
Cash
$115
115
Inventories
$230
Current Assets
$600
Less:Acc. Depr.
$300
Net Fixed Assets
Total Assets
800
Owners Equity
$2,530
Acid-Test Ratio =
Current Assets - Inventory

Current Liabilities
Acid-Test Ratio =
$1,230 -$625
= 2.63x
$230
55
Ratio Analysis
Debt Ratios
Measure the relative size of
the firms debt load and the
firms ability to pay off the
debt.
56
Ratio Analysis
Debt Ratios
Debt Ratio =
Total Debt
Total Assets
What proportion of the firms assets is

financed with debt?
57
Balance Sheet
Assets
Liabilities
Cash
$115
115
Inventories
$230
Current Assets
$600
Less:Acc. Depr.
$300
Net Fixed Assets
Total Assets
800
Income Statement
Owners Equity
$2,530
Sales
$1,450
Cost of Goods Sold
Gross Profit
Operating Expenses
Depreciation
Operating Income
Interest Expense
Income Before Taxes
Taxes (40%)
Net Income
875
$575
45
200
$330
60
$270
108
$162
100
$62
Debt Ratio =
Total Debt
Total Assets
Debt Ratio = $230 + $600 = 33%

$2,530
58
Ratio Analysis
Debt Ratios
Total Debt
Debt to
=
Common Equity
Equity Ratio
What is the proportion of debt relative to
equity financing for the firm?
59
Balance Sheet
Assets
Liabilities
Cash
$115
115
Inventories
$230
Current Assets
$600
Less:Acc. Depr.
$300
Net Fixed Assets
Total Assets
800
Income Statement
Owners Equity
$2,530
Sales
$1,450
Cost of Goods Sold
Gross Profit
Operating Expenses
Depreciation
Operating Income
Interest Expense
Income Before Taxes
Taxes (40%)
Net Income
875
$575
45
200
$330
60
$270
108
$162
100
$62
Debt to
Equity Ratio
Total Debt
Common Equity
D/E = $230 + $600 = 48.8%

$1,700
60
Ratio Analysis
Debt Ratios
Times Interest Earned Ratio =
Operating Income
Interest Expense
What is the firms ability to repay interest

payments from its operating income?
61
Balance Sheet
Assets
Liabilities
Cash
$115
115
Inventories
$230
Current Assets
$600
Less:Acc. Depr.
$300
Net Fixed Assets
Total Assets
800
Income Statement
Sales
$1,450
Owners Equity
$2,530
Cost of Goods Sold
875
Gross Profit
$575
Operating Expenses
45
Depreciation
200
Times
Operating Income
Operating Income
$330
Interest
=
Interest Expense
60
Interest Expense
Earned
Ratio
Income Before Taxes
$270
Taxes (40%)
108
$330
Net Income
$162
TIE Ratio =
= 5.50x
100
$60
62
Ratio Analysis
Asset Activity Ratios
Help assess how effectively the

firm is using assets to generate
sales.
63
Ratio Analysis
Average Collection Period =
Accounts Receivable
Avg. Daily Credit Sales
How long does it take for the firm on

average to collect its credit sales from
customers?
64
Balance Sheet
Assets
Liabilities
Cash
$115
115
Inventories
$230
Current Assets
$1,230 Bonds
$600
Less:Acc. Depr.
$300
Net Fixed Assets
Total Assets
800
Income Statement
Owners Equity
$2,530
Sales
$1,450
Additional Info:
We assume all
sales are credit
sales.
Cost of Goods Sold

Gross Profit
Operating Expenses
Depreciation
Operating Income
Interest Expense
Income Before Taxes
Taxes (40%)
Net Income
875
$575
45
200
$330
60
$270
108
$162
100
$62
Average
Accounts Receivable
Collection =
Avg. Daily Credit Sales
Period
ACP =
$430
$1,450/365
= 108.24 days
Days in a
year
65
Ratio Analysis
Inventory Turnover Ratio =
Sales
Inventory
Is inventory efficiently translating into

sales for the firm?
66
Balance Sheet
Assets
Liabilities
Cash
$115
115
Inventories
$230
Current Assets
$600
Less:Acc. Depr.
$300
Net Fixed Assets
Total Assets
800
Income Statement
Owners Equity
$2,530
Sales
$1,450
Cost of Goods Sold
Gross Profit
Operating Expenses
Depreciation
Operating Income
Interest Expense
Income Before Taxes
Taxes (40%)
Net Income
875
$575
45
200
$330
60
$270
108
$162
100
$62
Inventory
Turnover =
Ratio
Inventory Turnover =
Sales
Inventory
$1450 = 2.3x
$625
67
Ratio Analysis
Sales
Fixed Asset Turnover Ratio = Net Fixed Assets
How effective is the firm in using its fixed
assets to help generate sales?
68
Balance Sheet
Assets
Liabilities
Cash
$115
115
Inventories
$230
Current Assets
$600
Less:Acc. Depr.
$300
Net Fixed Assets
Total Assets
800
Income Statement
Owners Equity
$2,530
Sales
$1,450
Cost of Goods Sold
Gross Profit
Operating Expenses
Depreciation
Operating Income
Interest Expense
Income Before Taxes
Taxes (40%)
Net Income
875
$575
45
200
$330
60
$270
108
$162
100
$62
Fixed Asset
Turnover
Ratio
Sales
= Net Fixed Assets
Fixed Asset Turnover =
$1,450
= 1.12x
$1,300
69
Ratio Analysis
Total Asset Turnover Ratio =
Sales
Total Assets
How effective is the firm in using its

overall assets to generate sales?
70
Balance Sheet
Assets
Liabilities
Cash
$115
115
Inventories
$230
Current Assets
$600
Less:Acc. Depr.
$300
Net Fixed Assets
Total Assets
800
Income Statement
Owners Equity
$2,530
Sales
$1,450
Cost of Goods Sold
875
Gross Profit
$575
Operating Expenses
45
Total Asset
Depreciation
200
Sales
Turnover = Total Assets
Operating Income
$330
Interest Expense
60
Ratio
Income Before Taxes
$270
Taxes (40%)
108
$1,450
Total
Asset
Turnover
=
= 0.57x
Net Income
$162
$2,530
100
71
Ratio Analysis
Market Value Ratios
Price to Earnings Ratio =
Market Price per Share

Earnings per Share
How much are investors willing to pay per

dollar of earnings of the firm?
(Indicator of investors attitudes toward future
prospects of the firm and of the firms risk.)
72
Balance Sheet
Assets
Liabilities
Cash
$115
115
Inventories
$230
Current Assets
$600
Less:Acc. Depr.
$300
Net Fixed Assets
Total Assets
800
Income Statement
Owners Equity
$2,530
Sales
$1,450
Additional Info:
100 shares
$20.00 per
share
Cost of Goods Sold

Gross Profit
Operating Expenses
Depreciation
Operating Income
Interest Expense
Income Before Taxes
Taxes (40%)
Net Income
875
$575
45
200
$330
60
$270
108
$162
100
$62
P/E
= Market Price/Share
Ratio
EPS
P/E ratio =
$20.00
= 12.35x
$162/100
73
Ratio Analysis
Market Value Ratios
Market to Book Ratio =
Market Price per Share

Book Value per Share
How much are investors willing to pay

per dollar of book value?
74
Balance Sheet
Assets
Liabilities
Cash
$115
115
Inventories
$230
Current Assets
$600
Less:Acc. Depr.
$300
Net Fixed Assets
Total Assets
800
Income Statement
Owners Equity
$2,530
Sales
$1,450
Cost of Goods Sold
875
Gross Profit
$575
Operating Expenses
45
Market
Depreciation
200
Price/Share
to
=
Operating Income
$330
Common Equity/ # shares
Interest Expense
60
Book
Income Before Taxes
$270
Taxes (40%)
108
$20.00
Net Income
$162
M/B
=
= 1.18x
100
$1,700/100
Additional Info:
100 shares
$20.00 per
share
75
EBITDA
EBITDA stands for Earnings Before
Interest, Taxes, Depreciation, and
Amortization.
It is often of great interest to financial
analysts although FASB does not
require that this number be reported.
It measures the amount of cash thrown
off from the operations of the company.
76
Ratio
Industry Excalibur
Profitability
Gross Profit Margin
Operating Profit Margin
Net Profit Margin
Return on Assets
Return on Equity
38%
20%
12%
9.0%
13.4%
39.7%
22.8%
11.2%
6.4%
9.5%
Excalibur is good at keeping

operating costs down, but not as
good at total costs. ROA and ROE
are low mainly due to productivity
problems.
77
Summary of Excalibur Corporation Ratios

Ratio
Liquidity
Current Ratio
Acid-Test Ratio
Industry
5.00x
3.00x
Excalibur
5.35x
2.63x
Looking at the current ratio it appears

that Excalibur is more liquid than the
industry.... however when looking at
Acid Test (a better measure) they are
not as liquid indicating that inventory
levels are probably too high.
78
Ratio
Industry Excalibur
Debt
Debt Ratio
35%
Times Interest Earned 7.00x
Debt to Equity
49%
33%
5.50x
48%
While the debt ratio is close to the industry

average, Excalibur is not able to cover
interest payments as easily as the industry.
This indicates Excalibur may have too much
debt relative to what they can realistically
afford.
79
Ratio
Industry Excalibur
Asset Activity
Avg. Collection Period
Inventory Turnover
Fixed Asset Turnover
Total Asset Turnover
90 days
3.00x
1.00x
0.75x
108 days
2.32x
1.12x
.57x
Collection policies need examining, as Excalibur is

slower than average at collecting receivables.
Inventories are being sold more slowly than the
industry average, again indicating inventories that
are too high. Excalibur is very efficient at converting
Fixed Assets to Sales (fixed assets are productive).
However, overall assets are not productive
indicating Current Assets (e.g. inventories) are not
as productive as for the industry.
80
Ratio
Market Value
Price Earnings
Market to Book
Industry Excalibur
18.0
2.5
12.35
1.18
Excaliburs Investors are not willing to

pay as much per dollar of earnings or
per dollar of book value as they are for
shares in other firms in the industry.
This signals that they consider the firms
prospects to be worse than the average.
However, the firm is still selling for more
than its accounting book value.
81
Relationships Among Ratios:

The Du Pont System
Ratio Analysis generally involves an
examination of related ratios.
Comparison of these relationships
over time helps to identify the
companys strengths and
weaknesses.
82

The Du Pont System
The Du Pont Equation
Return
=
on
Assets
Net Inc.
Assets
Net
Profit x
Margin
= Net Inc.
Sales
Total
Asset
Turnover
Sales
Assets
83

The Du Pont System
The Modified Du Pont Equation

Return
=
on
Equity
Net Inc.
Equity
Net
Profit x
Margin
Net Inc.
Sales
Total
x
Asset
Turnover
Sales
x
Assets
Equity
Multiplier
Assets
Equity
84
Homework Questions & Problems:

Use the following information to answer the questions.
Elton Corporation
Income Statement
for the year ending 12/31/XX
(in thousands of dollars)
Net sales
$ 2,700
Operating Costs
(2,350)
Depreciation
( 150)
Interest Expense
( 70)
EBT
130
Income Tax (40%)
(
52)
Net Income
$
78
Dividends to Common Stock = $ 58
85

Elton Corporation
Balance Sheet
12/31/XX
(in thousands of dollars)
Cash
$ 150
Accounts Payable
$100
Accounts Receivable
250
Notes Payable
250
Inventory
600
Other Current Liabilities
Total Current Assets
$1,000
Total Current Liabilities
Total Fixed Assets

1,500
Long Term Debt
1,100
Common Stock
800
Retained Earnings
200
Total Assets
$2,500
Total Liab. & Equity
$2,500
Number of shares outstanding = 10,000 shares

Price per Share = $100
50
$400
86

1. Calculate each of the following ratios. Be sure to give the complete equation as well as the
solution:
a. Current ratio
b. Quick ratio
c. Total Debt/Total Asset Ratio
d. Inventory Turnover Ratio
e. ROE
f. TIE
g. EPS
h. Net Profit Margin
i. Market to Book Ratio
j. Total Assets Turnover Ratio
2. Show the Modified DuPont Equation for the company.
87
3. Given these industry ratios:

Net Profit Margin
4.3%
Debt/Asset
40%
Total Asset Turnover
1.1
ROA
4.73%
Use the DuPont equation to compare the performance of Elton Corp to the industry
average. What can you say about their(a) profitability, (b) expense control, (c) asset
management, and (d) debt management.
4. A firm expects to have net income of $85,000. If preferred dividends paid are 42,000,
common stock dividends paid are $20,000, and shares of common stock outstanding
are 10,000, what is the EPS?
88
5. Fill in the missing data based on the information provided for years 2009 and 2010.
ABC CORPORATION
Balance Sheet Changes and Classification
Of Key Accounts between 2009 and 2010
Account
Long-term debt
Accounts receivable
Common stock
Cash
$640
Retained earnings
Accruals
Inventory
Accounts payable
Net fixed assets
2009
$960
$640
$200
2010 Change
$800
$500
$300
Source/Use
$500
$960
$800
$50
$200
$840
$600
$1,150
$1,800
$1,000
$2,000
89
Forecasting for
Financial Planning
Chapter 6
90
Learning Objectives:
The importance of forecasting to
business success.
The financial forecasting
process.
Preparation of pro forma
financial statements.
The importance of analyzing
forecasts.
91
Why is forecasting
important?
Mistakes are costly:
If you produce too much of a product,
or a product that no one wants to
buy, you still must pay for materials,
labor, and storage.
If you produce too little of a product,
you will lose sales and possibly
market share.
92
Forecasting Approaches
Financial managers concentrate on
three general approaches to financial
forecasting:
Experience
Probability
Correlation
93
Experience
Managers who have been in the
business for a long time have
developed a sense for the patterns
in sales, expenses, consumer
demand factors, etc.
Example: Editors who work for book
publishers regularly read submitted
manuscripts and make judgments
about whether their company should
buy the rights to publish the books.
94
Probability
Past history often tells us a lot
about what will happen in the
future.
Managers can use this
information to estimate the
future.
Example: In the past, a 7-11
manager has found that she will
lose 1% of candy inventory to
shoplifters. She can use this
information to estimate future
95
Correlation
Correlation is a measure of the relative
movement of two variables relative to
each other.
Example: If interest rates go up, a real
estate agent knows that home sales will
tend to fall (because the higher cost of
financing makes it harder for buyers to
qualify for mortgages).
Example: Sales of umbrellas are higher in
rainy seasons.
96
The Sales Forecasting

Process
Marketing
(sales estimate)
Top Management
(policy, strategy)
Finance
Department
Production
(capacity, schedules)
Accounting
(financial statements,
depreciation, taxes)
SALES
FORECAST
97
Forecast future sales

based on past sales
growth
Sales
Plot of Past Sales
00 01
02 03 04
05 06 07 08
09
Time
98

based on past sales
growth
Sales
Trend Line
00 01
02 03 04
05 06 07 08
09
Time
99

based on past sales
growth
Sales Estimates for
next 2 years
Sales
Growth Rate
00 01
02 03 04
05 06 07 08
09
Time
100
Forecast future sales based on

past sales growth
Also include the effects of any events
which are expected to impact future sales
(new products or economic conditions)
Sales
New Product
Introduced
00 01
02 03 04
05 06 07 08
09
Time
101
Forecast future sales based on past sales

growth
Also include the effects of any events which
are expected to impact future sales (new
products or economic conditions)
Sales
New Product
Introduced
00 01
02 03 04
05 06 07 08
09
Time
102
Sales Growth Imposes Costs on the

Firm
Will require additional resources
Current Assets: Inventory, A/R, Cash
Fixed Assets: Plant and Equipment
2009
2010
103
Pro Forma Financial

Statements
Pro forma financial statements are
forecasts of the firms future financial
statements based on a certain set of
assumptions about sales trends and
the relationships between sales and
various financial variables, and
between other financial statement
variables relative to each other.
104
Producing Pro Formas

Example Data for Marginal Product Inc.
Sales will increase from $5million to $8 million.
Production is at full capacity (24 hrs. per day).
Dividend payout will be 70% of NI.
Spontaneous balance sheet accounts.
increase in a constant proportion to sales.
105

Step 1:
Determining Sales Growth
$8 - $5
= 60%
$5
Income Statement
Marginal Product Inc.
figures in 000s
figures in 000s
Current
Current Projected
Projected
Sales $5,000
COGS 4,133
EBIT
867
867
Int
200
EBT
667
Tax (.40) 267
NI
400
$8,000
Note: The projected sales

will be determined after input
from many different units or
departments of the firm.
106

Step 2:
Income Statement
figures in 000s
figures in 000s
Current Projected
Sales $5,000
$8,000
$5,000
COGS 4,133
6,613
EBIT
867
1,387
Int
200
200
200
EBT
667
1,187
Tax (.40) 267
475
NI
400
712
400
712
Calculate projected Net

Income. New COGS =
Old COGS x 1.6 = 6,613
Note: There is no increase yet
in the interest charges since
Marginal Products managers
have not yet decided how they
will finance the growth.
107

Step 3:
Forecast increase in
assets (% of sales)
Balance Sheet
figures in 000,000s
Assets
Current Projected
Liabilities
Current
Current Assets
$2.5
Accounts Payable $1.0
Net Fixed Assets
3.0
Accrued Expenses 0.5
Total
$5.5
Notes Payable
0.0
Current Liabilities
$1.5
Long Term Debt
$2.0
Common Stock
0.5
Retained Earnings 1.5
Common Equity
$2.0
Total Claims
$5.5
Projected
108

Step 3:
Forecast increase in assets (% of sales). If
sales increase by 60%, so too will any asset
that remains a constant percent of sales.
Balance Sheet
figures in 000,000s
Assets
Current Projected
Liabilities
Current
Projected
Current Assets
$2.5
$4.0
Net Fixed Assets
3.0
Total
$5.5
Notes Payable
0.0
Current Liabilities
$1.5
Long Term Debt
$2.0
Common Stock
0.5
$2.5(1+.60) = $4.0
Common Equity
$2.0
Total Claims
$5.5
109

Step 3:
assets (% of sales)
Balance Sheet
figures in 000,000s
Assets
Current Projected
Liabilities
Current
Projected
Current Assets
$2.5
$4.0
Net Fixed Assets
3.0
4.8
Total
$5.5
$8.8
Notes Payable
0.0
Current Liabilities
$1.5
Long Term Debt
$2.0
+$3.30
Common Stock
0.5
Common Equity
$2.0
$3.0(1+.60) = $4.8
Total Claims
$5.5
110

Step 4:
spontaneous liabilities.
Balance Sheet
figures in 000,000s
Assets
Current Projected
Liabilities
Current
Projected
Current
$2.5
$4.0
$1.6
Current Assets
Assets
$2.5
$4.0
Net
3.0
4.8
Net Fixed
Fixed Assets
Assets
3.0
0.5
Total
$5.5
$8.8
Notes Payable
0.0
Total
$5.5
$8.8
0.0
Current
$1.5
Current Liabilities
Liabilities
$1.0(1+.60)
=
$1.60
Long Term Debt
$2.0
Common Stock
0.5
0.5
1.5
Common Equity
$2.0
Total
$5.5
Total Claims
111

Step 4:
spontaneous liabilities.
Balance Sheet
figures in 000,000s
Assets
Current Projected
Liabilities
Current
Projected
Current Assets
$2.5
$4.0
$1.6
Net Fixed Assets
3.0
4.8
.8
Total
$5.5
$8.8
Notes Payable
0.0
Current Liabilities
$1.5
$0.5(1+.60) = $0.80
Long Term Debt
$2.0
Common Stock
0.5
Common Equity
$2.0
Total Claims
$5.5
112

Step 5:
retained earnings.
Balance Sheet
figures in 000,000s
Assets
Current
Projectedearnings
Liabilities
Current
Projected
New retained
Current Assets
$2.5
$4.0
$1.6
=Old
retained
earnings
Net Fixed Assets
3.0
4.8
.8
+ additions
earnings
Total
$5.5
$8.8to ret.Notes
Payable
0.0
Liabilitiespayout)]
$1.5
=1.5 +Current
[NI x (1-div.
Term Debt
$2.0
=1.5 + [.712 x (1-.7)]Long
= 1.7
Common Stock
0.5
1.7
Common Equity
$2.0
Total Claims
$5.5
113

Step 6:
Hold other accounts constant
to see how much additional
funds will be needed.
Balance Sheet
figures in 000,000s
Assets
Current Projected
Liabilities
Current
Projected
Current Assets
$2.5
$4.0
$1.6
Net Fixed Assets
3.0
4.8
.8
Total
$5.5
$8.8
Notes Payable
0.0
0.0
Current Liabilities
$1.5
2.4
Long Term Debt
$2.0
2.0
Common Stock
0.5
.5
1.7
Common Equity
$2.0
2.2
Total Claims
$5.5
$6.6
114

Step 7:
Additional funds needed
(AFN) = projected assets
minus projected claims
Balance Sheet
figures in 000,000s
Assets
Current Projected
Liabilities
Current
Projected
Current Assets
$2.5
$4.0
$1.6
Net Fixed Assets
3.0
4.8
.8
Total
$5.5
$8.8
Notes Payable
0.0
0.0
Current Liabilities
$1.5
2.4
Long Term Debt
$2.0
2.0
AFN
Common Stock
0.5
.5
= $8.8 - 6.6
1.7
= $2.2 mill.
Common Equity
$2.0
2.2
Total Claims
$5.5
$6.6
115

Step 7:
Additional funds needed
(AFN) = projected assets
minus projected claims
Balance Sheet
Raise $2.2 million Using:
figures in 000,000s
Assets
Current Projected
Liabilities
Current
Projected
Notes
Payable,
and/or
LT
Current Assets
$2.5
$4.0
$1.6
Debt,Expenses
and/or Common
Stock
Net Fixed Assets
3.0
4.8
Accrued
0.5
.8
Total
$5.5
$8.8
Notes Payable
0.0
0.0
Current Liabilities
$1.5
2.4
AFN
Long Term Debt
$2.0
2.0
= $8.8 - 6.6
Common Stock
0.5
.5
1.7
= $2.2 mill.
Common Equity
$2.0
2.2
Total Claims
$5.5
$6.6
116

Summary
Determine sales growth.
Calculate projected net income.
Project assets needed to support the
new sales level.
Project increases in spontaneous
asset and liability accounts.
Project addition to retained earnings.
Determine the difference between
projected assets and projected
liabilities & equity.
117
Financing feedback
If outside financing is required, the new
debt or equity may affect your original
projections of the amount of the addition
to retained earnings (due to increased
interest or dividends on the income
statement).
In this case, the pro forma should be
recast with the new information to make
final projections of AFN.
118
Homework Questions
1. Briefly discuss the three general
approaches to forecasting.
2. Why is forecasting important?
3. Distinguish between the cash budget
and the capital budget.
119
4.
Given the following data on the Sands Corporation, project the balance sheet for the coming year using
the percentage of sales technique:
Current Sales: $650,000
Next years sales: $925,000
After-tax profits: 6% of Sales
Dividend payout ratio: 40%
Current retained earnings: $200,000
Accounts receivable as a percent of sales: 10%
Cash as a percent of sales: 5%
Inventory as a percent of sales: 32%
Net fixed assets as a percent of sales: 38%
Accounts payable as a percent of sales: 6%
Accruals as a percent of sales: 12%
Next years common stock: $200,000
ASSETS
Cash
Accounts receivable
Inventory
Net fixed assets
(d)
Total
(e)
Sands Corporation
Balance Sheet
December 31, 2005
LIABILITIES AND EQUITIES
(a)
Accounts payable
(b)
Notes payable
(c)
Accruals
Common stock
(i )
Retained earnings
(j )
Total
(k)
(f )
(g)
(h)
120
Risk and Return
Chapter 7
121
Learning Objectives
Define risk, risk aversion, and riskreturn tradeoff.
Measure risk.
Identify different types of risk.
Explain methods of risk reduction.
Describe how firms compensate for
risk.
Discuss the CAPM.
122
Expected Return
Expected return is the mean of the
probability distribution of possible
returns.
Future returns are not known with
certainty. The standard deviation
is a measure of this uncertainty.
123
Expected Return
Expected return is the mean of the
probability distribution of possible
returns.
Future returns are not known with
certainty
To calculate expected return,
compute thewhere
weighted average of
possible returns
= Expected return
V i x Pi)
Vi
Pi
= Possible value of return

during period i
= Probability of V
124
occurring during
period i
Expected Return
Calculation
Example:
You are evaluating Zumwalt Corporations
common stock. You estimate the following
returns given different states of the economy
State of Economy Probability Return
Economic Downturn
Zero Growth
Moderate Growth
High Growth
.10
.20
.40
.30
5%
5%
10%
20%
Expected rate of return on

the stock is 10.5%
125
=
=
=
=
k=
0.5%
1.0%
4.0%
6.0%
10.5%
Risk and Rates of

Return
Risk is the potential for unexpected
events to occur.
If two financial alternatives are
similar except for their degree of
risk, most people will choose the
less risky alternative because they
are risk averse i.e. they dont like
risk.
Risk averse investors will require
higher expected rates of return as
compensation for taking on higher
126
levels of risk.
Measurement of Investment
Risk
Example:
You evaluate two investments: Zumwalt
Corporations common stock and a one year
Gov't Bond paying a guaranteed 2%.
There is risk in owning Zumwalt
stock, no risk in owning the T-bills
Probability
of Return
Probability
of Return
T-Bill
Zumwalt Corp
100%
40%
30%
20%
10%
2%
Return
5% 5% 10% 20% Return

127
Measurement of Investment Risk

Standard Deviation (measures the
dispersion of returns. It is the square root of
the variance.
SQRT( P(V - )2)
= variance
Example:
22 = .005725 = 0.5725%
Compute the standard deviation on
Zumwalt
= SQRT ofcommon
0.005725
stock. the mean () was previously computed
as 7.566%
10.5%
= .07566 =
State of Economy Probability Return
Economic Downturn
.10
(- 5% Zero Growth
.20
( 5% Moderate Growth
.40
( 10% High Growth
.30
( 20% -
10.5%)2
10.5%)2
10.5%)2
10.5%)2
128
= .24025%
= .0605%
= .001%
= .27075%
Risk and Rates of

Return
Risk of a company's stock can be separated
into two parts:
Firm Specific Risk - Risk due to factors within the firm
Market
related
Risk
due to overall
price will
most likely
fall -ifRisk
a major
Stock
market conditions
government
contract is discontinued unexpectedly.
Stock
Stock price is likely to rise if overall stock

market is doing well.
Diversification: If investors hold stock in many companies,

the firm specific risk will be cancelled out.
Even if investors hold many stocks, cannot eliminate the
market related risk
129
Risk and Rates of

Return
Risk and Diversification
If an investor holds enough stocks in
portfolio (about 15-20) company
specific (diversifiable) risk is virtually
eliminated
Variability
of Returns
Market Related
Risk
# of stocks in Portfolio
130
Risk and Rates of

Return
portfolio (about 20) company specific
(diversifiable) risk is virtually
eliminated
Variability
of Returns
Firm Specific Risk
131
Risk and Rates of Return

portfolio (about 20) company specific
(diversifiable) risk is virtually
eliminated
Variability
of Returns
Total Risk
132

Market risk is the risk of the overall
market, so to measure we need to
compare individual stock returns to the
overall market returns.
A proxy for the market is usually used: An
index of stocks such as the S&P 500
Market risk measures how individual stock
returns are affected by this market
Regress individual stock returns on the
returns of the market index
133

Regress individual stock returns on
Market index
PepsiCo
Return
15%
10%
5%
-15%
-10%
-5%
S&P
Return
5%
10%
15%
-5%
-10%
-15%
134

Regress individual stock returns on Market index. Plot
ordered pairs every 6 months for ten years starting in
January 1999.
PepsiCo
Return
15%
10%
5%
-15%
-10%
-5%
Jan 1999
PepsiCo-0.37%
S&P
-1.99%
S&P
Return
5%
10%
15%
-5%
-10%
-15%
135

Market index
PepsiCo
Return
15%
10%
5%
-15%
-10%
Plot
Remaining
Points
-5%
S&P
Return
5%
10%
15%
-5%
-10%
-15%
136

Market index returns
PepsiCo
Return
15%
10%
Best Fit
Regression
Line
-15%
-10%
5%
-5%
S&P
Return
5%
10%
15%
-5%
-10%
-15%
137

Regress individual stock returns on Market
index returns
PepsiCo
Return
15%
10%
-5%
-15%
-10%
rise 5.5%
=
Slope =
= 1.1
run 5%
-5%
5%
S&P
Return
5%
10%
15%
-5%
-10%
-15%
138
Risk and Rates of

Return
Market Risk is measured by Beta
Beta is the slope of the regression
(characteristic) line.
139

Market Risk is measured by Beta
Beta is the slope of the regression
(characteristic) line
PepsiCo
Return
15%
10%
5%
-15% -10%
-5%
S&P
Return
5%
10%
15%
-5%
-10%
Slope = 1.1 = Beta (

-15%
140

Interpreting Beta
Beta = 1
Market Beta = 1
Company with a beta of 1 has average risk
Beta < 1
Low Risk Company
Return on stock will be less affected by the market
than average
Beta > 1
High Market Risk Company
Stock return will be more affected by the market
than average
141
The Capital Asset Pricing Model

Investors adjust their required
rates of return to compensate for
risk.
The CAPM measures required rate of
return for investments, given the
degree of market risk measured by
beta.
Security Market Line
kj = kRF + j ( kM kRF )
where:
Kj = required rate of return on the jth security
KRF = risk free rate of return
KM = required rate of return on the market
142
Bj = Beta for the jth security
CAPM Example
Suppose that the required return on
the market is 12% and the risk free
rate is 5%.
kj = kRF + j ( kM kRF )
143
CAPM Example
rate is 5%.
kj = 5% + j (12% 5% )
15%
10%
5%
Risk Free Rate

.50
1.0
Beta
1.5
144
CAPM Example
rate is 5%.
kj = 5% + j (12% 5% )
Risk &
Return on
market
15%
10%
5%
Risk Free Rate

.50
1.0
Beta
1.5
145
CAPM Example
rate is 5%.
15%
10%
SML
Market
Connect Points for

5%
Beta
.50
1.0
1.5
146
CAPM Example
Suppose that the required return on the
market is 12% and the risk free rate is
5%.
If beta = 1.2
k = 13.4
kj = 5% + j (12% 5% )
j
15%
13.4%
10%
Company kj
SML
Market
5%
Beta
.50
1.0 1.2
1.5
147
Homework
1. You hold a diversified portfolio of stocks and are
considering investing in the XYZ Company. The firms
prospects look good and you estimate the following
probability distribution of possible returns:
Probability
70%
20%
10%
Return
15%
9%
20%
The return on the market is 13.5% and the risk free rate
is 7%. You have calculated XYZs beta from past returns as
1.3 and you believe this will be the future beta.
a. What is the expected return for XYZ?
b. What is the required return for XYZ according to the
CAPM?
148
Homework
2. Assume your existing portfolio is valued at $9,000 and its beta is 1.0.
You plan to buy an additional $3,000 of a particular stock that has a
beta of 1.8 (without selling any other stock). What is the beta of the new
portfolio?
3. Distinguish between business risk and financial risk.
4. What is risk aversion? How does the assumption of risk aversion
affect the risk/return tradeoff?
5. Compare diversifiable and nondiversifiable risk. What are some
examples of each type of risk?
149
The Time Value

of Money
Chapter 8
Learning Objectives
The time value of money
and its importance to
business.
The future value and
present value of a single
amount.
The future value and
present value of an
annuity.
The Time Value of

Money
Money grows over time when it
earns interest.
Therefore, money that is to be
received at some time in the
future is worth less than the
same dollar amount to be
received today.
Similarly, a debt of a given
amount to be paid in the future
are less burdensome than that
1. Future Value of Single Sum
$
PV
CPT
FV
2. Future Value of an
Annuity
Toda
y
PMT
CPT
FV
3. Sinking
Fund
?
Toda
y
FV
?
i
?
CPT
PMT
155
4. Present Value
Single Payment
?
FV
CPT
PV
156
5. Present Value of the Annuit
?
PMT
$
i
$
N
CPT
PV
157
6. Amortized Loans
$
PV
?
i
?
N
CPT
158
PMT
Financial Calculator
Example: Solution
You invest - FV
$200 at 10%. How
much is it worth
after 5 years?
1) Calculator
Enter:
N = 5
I/YR = 10
PV
= -200
CPT FV = ?
2) Using Formula:
FV = $200 (1.10)5 = $322.10
322.10
Do all these homework problems on

your overhead homework sheets: use
your calculator and show the keys you
would press and circle your answer:
If you would have bought Berkshire Hathaway stock 20
years ago and spent $10,000 for your investment, how
much would you have today if the average annual
compounded rate of return was 18%?
How long it will take for $2,500 to become $8,865 if it is
deposited and earns 5% per year compounded annually?
(Calculate to the closest year).
If you deposit a lump sum of $1,200 today into a savings
account offering annual interest of 5% compounded
monthly, how much will you have in the account at the end
of three years?
If you deposit $100 in the bank today at an annual rate of
5.5% compounded annually, how long will it take to double
in value?
Annuities
An annuity is a series of equal
cash flows spaced evenly over
time.
For example, you pay your
landlord an annuity since your
rent is the same amount, paid on
the same day of the month for
the entire year.
Jan
Feb
$500
Mar
$500
$500
Dec
$500
$500
161
Future Value of an Annuity

0
$0
1
$100
2
$100
3
$100
You deposit $100 each year

(end of year) into a savings
account.
How much would this account
have in it at the end of 3 years
if interest were earned at a rate
162
Future Value of an
Annuity
Using the
Calculator:
Dont forget to clear
your calculator of the
previous problem!
N=3
I/Y = 2
PV = -$200
CPT FV = $212.24
$212.2
4

What is the future value of an ordinary annuity of

$1,000 each year for 10 years, assuming a 4%
compounding rate?
What is the future value of an annuity due of $1,000

each year for 10 years assuming a 4% compounding
rate?
Dan plans to fund his IRA with a contribution of $ 200
per month for the next 10 years. If Dan can earn 6%
per year on his contributions, how much will he have
at the end of the 10th year?
James plans to fund his IRA with a lump-sum today of
$10,000 and 20 annual deposits of $2,000 for the next
25 years. If he can earn 5% compounded annually,
Future Value of an Annuity Due
$100
$100
$100
FVA=?
You deposit $100 each year (beginning of year)

into a savings account.
How much would this account have in it at the
end of 3 years if interest were earned at a rate
of 8% annually?
165
Annuity Due:
Calculator
Solution
Example:
You receive
$100 per year for 3
years. How much is it
worth after 3 years if
you can earn 4%
N=3
annually?
I/Y = 4
PMT = -$100
CPT FV = $312.16

*NOW ASSUME ALL PAYMENTS ARE AT THE BEGINNING
What is the future value
of an
ordinary annuity of
OF THE
PERIOD*
$1,000 each year for 10 years, assuming a 4%
compounding rate?
What is the future value of an annuity due of $1,000
each year for 10 years assuming a 4% compounding
rate?
Dan plans to fund his IRA with a contribution of $ 200
per month for the next 10 years. If Dan can earn 6%
per year on his contributions, how much will he have
at the end of the 10th year?
James plans to fund his IRA with a lump-sum today of
$10,000 and 20 annual deposits of $2,000 for the next
25 years. If he can earn 5% compounded annually,
Financial Calculator Solution

PV of a Single Sum
You Expect to receive $100 in
EIGHT years. If can
invest at 3%, what is
it worth today?
Calculator
Enter:
N =8
I/YR = 3
FV = 100
CPT PV78.9
=?
4
78.9
4
168
Present Value of an Annuity

Calculator Solution
0
257.7
1
PV=?
$100
Enter:
N =3
I/YR = 8
PMT = 100
CPT PV = ? 257.7
1
$100
$100
-257.71
N I/ P PM F
Y V
V
169
Present Value of an Annuity

Due
How much would the following cash flows

be worth
earn 8% on
0to you today if
1 you could
2
3
your deposits?
$100
$100
$100
$100.
$92.60
00
$85.73
$278.33 BGN
N=3
PMT = -100
I/Y = 8
CPT PV = 278.33
278.3
3
170
Amortized Loans
A loan that is paid off in
equal amounts that
include principal as well
as interest.
Solving for loan
payments.
171
Amortized Loans
You borrow $5,000 from your parents to purchase a used car.
You agree to make payments at the end of each year for the
next 5 years. If the interest rate on this loan is 6%, how much
is your annual payment?
0
$5,000 $?
$?
ENTER:
N =5
I/Y = 6
PV = 5,000
CPT PMT =
- ?
1,186.
$?
$?
$?
1,186.9
8
N I/Y P PMT FV
V
172

1. Calculate the present value of annual payments of $3,000

per year for ten years at 8%:
a. Ordinary Annuity
b. Annuity Due
2. How much will you have at the end of the 6th year if you invest $5,000 annually for six years at 7% annual rate, if
you:
a. Start one year from today
b. Start today
3. A bank agrees to give you a loan of $12,000,000 and you have to pay $1,309,908 per year (end of year) for 26
years. What is your rate of interest? What would the payments be if this were a monthly payment loan?
4. You have found the perfect burial plot. Of course, you don't plan to need it for 60 years. The plot costs $12,000
today and burial plot prices are increasing at 4% per year. How much do you need to deposit at the beginning of
each of the next 60 years to pay for the plot if you can earn 11% on your deposit?

QUIZ2

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

QUIZ2

Hochgeladen von

Copyright:

Verfügbare Formate

Review of

Use of the balance sheet,

the income statement, and

The Firms Financial

The Firms Financial

The Firms Financial Statements

Long Term Liabilities:

L-T Bank Debt

The Firms Financial Statements

The Firms Financial Statements

The Firms Financial

The Firms Financial

The Firms Financial

Sale of Fixed Assets + Purchase of fixed assets -

Purchase of other firms -

Market vs. Book Value

Book Value is recorded initially

Market vs. Book Value

Factors that determine the

Market vs. Book Value

The main factor that determines the

At maturity, the market value will

Market vs. Book Value of

Total amount to be depreciated over the

Straight line depreciation

Basis divided by accounting life with equal

MACRS (Modified Accelerated Cost

Federal Income Taxation

Average = Taxes paid divided by taxable income.

Progressive Tax System

Average tax rate increases with the level of

THE TAX SYSTEM EXPLAINED IN COFFEE

The first four men (the poorest) would pay nothing.

THE TAX SYSTEM EXPLAINED IN COFFEE

THE TAX SYSTEM EXPLAINED IN COFFEE

THE TAX SYSTEM EXPLAINED IN

% of Total Income Tax Paid

Accounts Receivable Tax

Hunting License Tax

Social Security Tax

Not one of these taxes existed 100

Differential Tax Treatment

Differential Tax Treatment

30% or $60 is Taxable

70% or $140 is Tax Free

Corp. B pays marginal tax rate of 25%

Federal Taxes on dividend income

Who Pays all the Bills? The

% of Total Income Tax Paid

Homework Questions and Problems

Measure the overall effectiveness

How effective is the firm at generating

Gross Profit Margin =

How effective is the firm in keeping costs

How much net profit is being generated

How effectively is the firm generating net

Current Ratio = $1,230 = 5.35x

Current Assets - Inventory

What happens to the firms ability to repay current

Current Assets - Inventory

What proportion of the firms assets is

Debt Ratio = $230 + $600 = 33%

D/E = $230 + $600 = 48.8%

Times Interest Earned Ratio =