Value Flashcards
(18 cards)
Why is scrubbing the data important in ratio analysis?
To adjust for differences in fiscal year-ends and accounting practices
Companies using different depreciation methods or reporting calendars can distort ratio comparisons.
What challenge does seasonality pose in ratio analysis?
It makes comparing ratios difficult if firms report in different seasons
Comparing a ski resort’s winter report to a beach resort’s can mislead conclusions.
How is the asset turnover ratio calculated?
Sales ÷ Total Assets
Example: $20,000 ÷ $8,000 = 2.5, indicating $2.50 of revenue generated for every $1 of assets.
What does Return on Equity (ROE) measure?
The earnings generated for each dollar of shareholder equity
Example: ROE = Net Income ÷ Shareholders’ Equity; a 20% ROE means $0.20 earned per $1 invested.
What are examples of equity on a balance sheet?
- Common stock
- Preferred stock
- Retained earnings
- Additional paid-in capital
- Less treasury stock
Total equity = Common stock + Retained earnings – Treasury stock.
What is an example of an external risk in financial analysis?
Changes in competitive forces due to an economic downturn
A recession reduces consumer demand and increases market pressure.
What is the future value of $100 invested at 10% annually for 3 years?
$100 × (1.10)^3 = $133.10
Compounding grows the investment over time.
What is the present value of $15,000 due in 6 years at a 12% discount rate?
PV = $15,000 ÷ (1.12)^6 ≈ $7,598.36
That’s the amount you’d need to invest today to have $15,000 in 6 years.
What is the future value of a 40-year annuity with $10,000 payments at 15%?
FV ≈ $17,791,000
Long-term compounding at high rates leads to massive growth.
If you need $2,000,000 in today’s dollars in 40 years with 3% inflation, how much will you actually need?
FV = $2M × (1.03)^40 ≈ $6,524,000
Future cost of living will require more nominal dollars.
What is the NPV of a $10,000 investment with 10% cost of capital and future cash flows?
NPV depends on specific cash flows
Use: NPV = ∑[CF / (1 + r)^t] – Initial Investment.
What is the IRR of a project with cash flows: –2,000, +1,000, +500, +1,500?
IRR ≈ 24.89%
Use Excel or calculator to solve: =IRR({-2000,1000,500,1500}).
How much annual return is needed to reach $2,000,000 in 30 years saving $400/month?
APR ≈ 7.52%
Use Excel: =RATE(360, -400, 0, 2000000) × 12.
What is the monthly mortgage payment on a $400,000 loan at 6% APR for 30 years?
PMT ≈ $2,398.20
Use loan formula or =PMT(0.005, 360, -400000).
How much should Maria have now to withdraw $2,000/month for 4 years starting today at 5%?
PV ≈ $88,294.80
Use annuity due formula or =PV(0.05/12, 48, -2000, 0, 1).
How much will someone accumulate by saving $500/month from age 25 to 65 at 12%?
FV ≈ $52,988,200
40 years × 12 months = 480 payments; compounding creates exponential growth.
What does the formula for future value of an annuity due include that ordinary annuity does not?
It multiplies by (1 + r) because payments occur at the beginning of the period
FV_annuity_due = FV_ordinary × (1 + r).
What’s the difference between NPV and IRR?
NPV gives dollar value of net gain/loss; IRR gives rate of return
NPV shows value created; IRR shows project’s expected rate.
