Corporate Finance Theory

Question 1

What is assets always equal to?

Answer 1

Liabilities + Shareholder’s Equity

Question 2

What is equity?

Answer 2

Is what shareholders would have to remain after the firm has discharged its obligations

Question 3

What is liquidity?

Answer 3

refers to the ease and rapidity with which assets can be converted into cash.

Question 4

Name current asses

Answer 4

Trade receivables and inventories

Question 5

Name non-current assets

Answer 5

Property, equipment, trademark or patent

Question 6

The formula for Income statement

Answer 6

Income= Revenue - Expenses

Question 7

The formula for EPS (Earnings per share)

Answer 7

Profit for the period attributed to equity holders/Total shares outstanding

Question 8

The formula for NWC (Net working capital)

Answer 8

Net working capital= Current assets -Current liabilities

Question 9

The formula for Cash flows from operating activities

Answer 9

CF(A)=CF(B)( Cash flows to firms creditors)+CF(S)( Cash fl flows to equity investors)

Question 10

Current Ratio

Answer 10

Current Assets/ Current Liabilities

Question 11

Which is the least liquid current asset

Answer 11

Inventory

Question 12

Quick/Acid-Test Ratio

Answer 12

current assets-inventory/current liabilities

Question 13

Cash ratio

Answer 13

Cash and cash equivalents/Current Liabilities

Question 14

Total debt ratio

Answer 14

Total assets-total equity/Total assets

Question 15

Interest coverage ratio

Answer 15

EBIT/Interest

Question 16

Cash coverage ratio

Answer 16

EBIT+Depreciation/ Interest

Question 17

What current ratio, quick ratio, and cash ratio measure?

Answer 17

Liquidity

Question 18

What total debt ratio, interest coverage ratio, and cash overage ratio measure?

Answer 18

Long term leverage

Question 19

Inventory turnover

Answer 19

Cost of goods sold / Inventory

Question 20

Receivables turnover

Answer 20

Sale/Trade receivables

Question 21

Total asset turnover

Answer 21

Sales/Trade receivables

Question 22

Profit margin

Answer 22

Net operation income/sales

Question 23

Return on assets(ROA)

Answer 23

Net income/Total assets

Question 24

Return on equity (ROE)

Answer 24

Net income/ Total equity

Question 25

What ROA, ROE, and profit margin measure?

Answer 25

Profitability, how efficiently the firm manages its operations

Question 26

Earnings per share (EPS)

Answer 26

Net income / Shares outstanding

Question 27

Price-earnings ratio

Answer 27

Price per share/EPS

Question 28

market-to-book ratio

Answer 28

Market value per share/Book value per share

Question 29

DuPont identity

Answer 29

Profit margin * Total asset turnover * Equity multiplier

Question 30

Present values of investments (one period case)

Answer 30

C/1+r

Question 31

NPV(One period case)

Answer 31

-Cost+PV

Question 32

FV (t=1...n)

Answer 32

C(1+r)^t

Question 33

Calculating an investment m times a year

Answer 33

C(1+r/m)^m

Question 34

EAR (effective annual return)

Answer 34

(1 +r/m)^m-1

Question 35

FV with compounding

Answer 35

C(1-r/m)^mT

Question 36

FV with continuous compounding

Answer 36

PV*e^rT

Question 37

Perpetuity PV

Answer 37

PV=c/r

Question 38

Growing perpetuity PV

Answer 38

PV=C/r-g

Question 39

Annuity PV

Answer 39

c/r[1-(1/1+r)^t]

Question 40

Annuity due PV

Answer 40

C* (1-(1+r)^-t)/r*(1+r)

Question 41

FV annuity

Answer 41

C[((1+r)^t-1)/r]

Question 42

Growing annuity PV

Answer 42

PV=C/r-g[1-(1+g/1+r)^t]

Question 43

What is a bond?

Answer 43

A certificate showing that a borrower owes a specific amount

Question 44

PV of a pure discount bond

Answer 44

FV/(1+R)^T

Question 45

PV of a level coupon bond

Answer 45

C*A(T,R)+F/(1+R)^T

Question 46

PV of a consol bond

Answer 46

C/R

Question 47

What do Dividends value?

Answer 47

Equity

Question 48

Value of Firms equity

Answer 48

Po=ΣDivt/(1+R)^t

Question 49

Value of Po for zero growth

Answer 49

Div1/R

Question 50

Value of Po for constant growth

Answer 50

Div1/r-g

Question 51

G estimation

Answer 51

Retention ratio*ROE

Question 52

Discount rate R

Answer 52

Div1/Po+g

Question 53

Payout ratio

Answer 53

1-Retention ratio

Question 54

What cash cow means?

Answer 54

The firm does not invest

Question 55

Value of equity when a firm is acting as a cash cow

Answer 55

EPS/R=Div/R

Question 56

Basic Investment rule

Answer 56

Accept if NPV>0, Reject if NPV<0

Question 57

Average accounting return (AAR)

Answer 57

AAR= Average net income/(Investments per yera/t+1)

Question 58

IRR rule with first cash flow negative, rest positive

Answer 58

Accept if IRR>R, reject IRR

Question 59

IRR rule with first cash flow positive, rest negative

Answer 59

Accept if IRRR

Question 60

PI (Profitability index)

Answer 60

PV of cash flows subsequent to initial investment/Initial investment

Question 61

PI rule

Answer 61

Accept if PI>1, reject if PI<1