FIN 335 CORRECT TEST ANSWERS AND QUESTIONS
SET A+
✔✔Computing Receivables Ratios - ✔✔receivables turnover = sales/accounts
receivables
days sales in receivables = 365 / receivables turnover
✔✔computing asset turnover - ✔✔asset turnover = sales / total assets
- measure of asset use efficiency
- not unusual for AT = <1, especially if a firm has a large amount of fixed assets
✔✔computing profitability measures - ✔✔profit margin = net income / sales
return on assets = net income / total assets
return on equity = net income / total equity
✔✔computing market value measures - ✔✔market capitalization = outstanding shares *
market price per share
PE ratio = price per share / earnings per share
Market-to-book-ratio = market value per share / book value per share
✔✔Present Value equation - ✔✔PV = FV/ (1 + r)^t OR FV= PV(1+ r)^t
There are five parts to this equation- PV, FV, r, t and pmt (we've assumed zero pmt so
far)
- If we know any four, we can solve for the fifth
.• If you use a financial calculator, be sure to remember the sign convention (direction of
CF) or you will receive an error when solving for r or t
✔✔present value - ✔✔the current value of future cash flows discounted at the
appropriate discount rate
- value at t = 0 on a timeline
✔✔Future value - ✔✔- the amount an investment is worth after one or more periods -
"later" money on a timeline, value =tn
, ✔✔interest rate (r or k or R) - ✔✔the "exchange rate" between earlier money and later
money
discount rate -
cost of capital -
opportunity cost of capital -
required return -
- the price of money
✔✔CF - ✔✔CF = Net of cash inflows - Cash outflows
✔✔future values formula - ✔✔FV=PV(1+r)^t
FV= future value
PV = present value
r = period interest rate, expressed as a decimal
t = number of periods
- future value interest factor (1 + r)^t
( e^x button on calc)
✔✔effects of compounding - ✔✔- simple interest (interest is earned only on the original
principle)
- compound interest (interest is earned on principle and on interest received)
✔✔calculator rules - ✔✔FV= future value
PV = present value
ONE of these must be negative
PMT = payment
I/Y = period interest rate (r)
N = number of periods
these must ALL be the same relative time frame (days, weeks, months, years)
C/Y must equal 1 for the I/Y to be the period rate (C/Y = 1 : default on calculator)
interest is entered as a percent, not as a decimal (5% interest = "5")
- PMT = 0 for this chapter only
✔✔Clearing calc - ✔✔- clear the registers before each problem: press 2nd then CLR
TVM or reenter each field
✔✔Set number of decimal places to display - ✔✔- press 2nd key
- press format key above "."
- enter desired decimal places (for example,4)
- press enter to set the displayed choice
✔✔If your PV is negative... - ✔✔FV is positive
if you PV is positive, FV is negative
✔✔Be sure payment per period of P/Y is set to 1 - ✔✔- 2nd key
SET A+
✔✔Computing Receivables Ratios - ✔✔receivables turnover = sales/accounts
receivables
days sales in receivables = 365 / receivables turnover
✔✔computing asset turnover - ✔✔asset turnover = sales / total assets
- measure of asset use efficiency
- not unusual for AT = <1, especially if a firm has a large amount of fixed assets
✔✔computing profitability measures - ✔✔profit margin = net income / sales
return on assets = net income / total assets
return on equity = net income / total equity
✔✔computing market value measures - ✔✔market capitalization = outstanding shares *
market price per share
PE ratio = price per share / earnings per share
Market-to-book-ratio = market value per share / book value per share
✔✔Present Value equation - ✔✔PV = FV/ (1 + r)^t OR FV= PV(1+ r)^t
There are five parts to this equation- PV, FV, r, t and pmt (we've assumed zero pmt so
far)
- If we know any four, we can solve for the fifth
.• If you use a financial calculator, be sure to remember the sign convention (direction of
CF) or you will receive an error when solving for r or t
✔✔present value - ✔✔the current value of future cash flows discounted at the
appropriate discount rate
- value at t = 0 on a timeline
✔✔Future value - ✔✔- the amount an investment is worth after one or more periods -
"later" money on a timeline, value =tn
, ✔✔interest rate (r or k or R) - ✔✔the "exchange rate" between earlier money and later
money
discount rate -
cost of capital -
opportunity cost of capital -
required return -
- the price of money
✔✔CF - ✔✔CF = Net of cash inflows - Cash outflows
✔✔future values formula - ✔✔FV=PV(1+r)^t
FV= future value
PV = present value
r = period interest rate, expressed as a decimal
t = number of periods
- future value interest factor (1 + r)^t
( e^x button on calc)
✔✔effects of compounding - ✔✔- simple interest (interest is earned only on the original
principle)
- compound interest (interest is earned on principle and on interest received)
✔✔calculator rules - ✔✔FV= future value
PV = present value
ONE of these must be negative
PMT = payment
I/Y = period interest rate (r)
N = number of periods
these must ALL be the same relative time frame (days, weeks, months, years)
C/Y must equal 1 for the I/Y to be the period rate (C/Y = 1 : default on calculator)
interest is entered as a percent, not as a decimal (5% interest = "5")
- PMT = 0 for this chapter only
✔✔Clearing calc - ✔✔- clear the registers before each problem: press 2nd then CLR
TVM or reenter each field
✔✔Set number of decimal places to display - ✔✔- press 2nd key
- press format key above "."
- enter desired decimal places (for example,4)
- press enter to set the displayed choice
✔✔If your PV is negative... - ✔✔FV is positive
if you PV is positive, FV is negative
✔✔Be sure payment per period of P/Y is set to 1 - ✔✔- 2nd key
