FIN 335 STUDY EXAMS ANSWERS AND QUESTIONS
SET A+
✔✔sustainable growth rate - ✔✔- tells us how much the firm can grow by using
internally generated funds and issuing debt to maintain a constant debt ratio
= ROE x b/ 1- ROE x b
✔✔determinants of growth - ✔✔- profit margin: operating efficiency
- total asset turnover: asset use efficiency
- financial leverage: choice of optimal debt ratio
- dividend policy - choice of how much to pay to shareholders versus reinvesting in the
firm
✔✔why evaluate financial statements? - ✔✔Internal uses
- Performance evaluation - compensation and comparison between divisions
- Planning for the future - guide in estimating future cash flows
External uses
- Creditors
- Suppliers
- Customers
- Stockholders
✔✔time trend analysis - ✔✔- used to see how the firm's performance is changing
through time
- internal and external uses
✔✔peer group analysis - ✔✔- compare to similar companies or within industries
- SIC and NAICS codes
✔✔cash flow to creditors - ✔✔interest - net new long term debt
(long term debt is NEGATIVE, two minus = a positive)
✔✔cash flow to shareholders - ✔✔dividends - net new equity
, ✔✔FV with multiple cash flows - ✔✔figure out fv of all cash flows and add them
together, same thing with present value
✔✔finding npv - ✔✔press npv, enter interest rate, enter, down, press CPT
✔✔annuity - ✔✔- finite series of equal payments that occur at regular intervals
- ordinary annuity is paid at the end of the period
- annuity due is paid at the beginning of the period
✔✔PV annuity formula - ✔✔PV = PMT [ 1-1/(1+r)^t/r]
✔✔FV annuity formula - ✔✔FV=PMT[(1+r)^t -1/r]
- enter variables; PMT is negative; CPT FV
- for annuity due: 2nd BGN 2nd set and then enter variables and CPT FV
✔✔perpetuity - ✔✔- infinite series of equal payments
- PV= c/r
✔✔finding the payment - ✔✔fill in all your variables and CPT PMT
✔✔Effective Annual Rate (EAR) - ✔✔the actual rate paid (or received) after accounting
for compounding that occurs during the year
- use EAR to compare 2 investments with different compounding periods
EAR = [1+ APR/m]^m - 1
m = # of compounding periods per year
✔✔Annual Percentage Rate - ✔✔- annual rate quoted by law
- APR = period rate x # of periods per year
- period rate = APR/ # of periods per year
✔✔Pure Discount Loan - ✔✔- the principal amount is repaid at some further date,
without any periodic interest payments
- enter variables and compute PV
- answer is negative b/c the CF direction is negative
✔✔Interest only loan - ✔✔only pay the interest over the term of the loan then repay
principal in a lump sum at maturity
- year 1-4: interest payment
- year 5: interest payment + principal amount
✔✔Amortized loan with fixed payment - ✔✔each payment covers the interest expense
plus reduces principal
- principal amount = C[1-1/(1+r)^t] x r
(PV annuity formula to find annual PMT)
SET A+
✔✔sustainable growth rate - ✔✔- tells us how much the firm can grow by using
internally generated funds and issuing debt to maintain a constant debt ratio
= ROE x b/ 1- ROE x b
✔✔determinants of growth - ✔✔- profit margin: operating efficiency
- total asset turnover: asset use efficiency
- financial leverage: choice of optimal debt ratio
- dividend policy - choice of how much to pay to shareholders versus reinvesting in the
firm
✔✔why evaluate financial statements? - ✔✔Internal uses
- Performance evaluation - compensation and comparison between divisions
- Planning for the future - guide in estimating future cash flows
External uses
- Creditors
- Suppliers
- Customers
- Stockholders
✔✔time trend analysis - ✔✔- used to see how the firm's performance is changing
through time
- internal and external uses
✔✔peer group analysis - ✔✔- compare to similar companies or within industries
- SIC and NAICS codes
✔✔cash flow to creditors - ✔✔interest - net new long term debt
(long term debt is NEGATIVE, two minus = a positive)
✔✔cash flow to shareholders - ✔✔dividends - net new equity
, ✔✔FV with multiple cash flows - ✔✔figure out fv of all cash flows and add them
together, same thing with present value
✔✔finding npv - ✔✔press npv, enter interest rate, enter, down, press CPT
✔✔annuity - ✔✔- finite series of equal payments that occur at regular intervals
- ordinary annuity is paid at the end of the period
- annuity due is paid at the beginning of the period
✔✔PV annuity formula - ✔✔PV = PMT [ 1-1/(1+r)^t/r]
✔✔FV annuity formula - ✔✔FV=PMT[(1+r)^t -1/r]
- enter variables; PMT is negative; CPT FV
- for annuity due: 2nd BGN 2nd set and then enter variables and CPT FV
✔✔perpetuity - ✔✔- infinite series of equal payments
- PV= c/r
✔✔finding the payment - ✔✔fill in all your variables and CPT PMT
✔✔Effective Annual Rate (EAR) - ✔✔the actual rate paid (or received) after accounting
for compounding that occurs during the year
- use EAR to compare 2 investments with different compounding periods
EAR = [1+ APR/m]^m - 1
m = # of compounding periods per year
✔✔Annual Percentage Rate - ✔✔- annual rate quoted by law
- APR = period rate x # of periods per year
- period rate = APR/ # of periods per year
✔✔Pure Discount Loan - ✔✔- the principal amount is repaid at some further date,
without any periodic interest payments
- enter variables and compute PV
- answer is negative b/c the CF direction is negative
✔✔Interest only loan - ✔✔only pay the interest over the term of the loan then repay
principal in a lump sum at maturity
- year 1-4: interest payment
- year 5: interest payment + principal amount
✔✔Amortized loan with fixed payment - ✔✔each payment covers the interest expense
plus reduces principal
- principal amount = C[1-1/(1+r)^t] x r
(PV annuity formula to find annual PMT)
