Study Guide Exam 2
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This 3 page Study Guide was uploaded by Chris Holder on Monday February 29, 2016. The Study Guide belongs to FIN 315 at a university taught by Dr. Milanese in Spring 2016. Since its upload, it has received 69 views.
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Date Created: 02/29/16
Chris Holder FIN 315: Managerial Finance Exam 2 Review Cash flow is the meat and potatoes that keeps a firm alive Understand how cash flows work Chapter 4: Cash flows Positive values represent cash inflows Negative values represent cash outflows () Depreciation: a portion of the costs of fixed assets charged against annual revenues over time. Depreciation for tax purposes is determined by using the modified accelerated cost recovery system (MACRS) Depreciation formula = (full cost – salvage value)/useful Life Depreciation formula under (MACRS) = (full cost)/useful life Recovery period aka useful life, is the appropriate depreciable life of a particular asset as determined by MACRS. (n + 1) Developing the statement of cash flows Liquidity is increased by cash inflows and decreased by cash outflows. Categorization of Cash flows: Operating Activities: cash flows directly related to sales and production Investment Activities: cash flows related to purchase and sale of both fixed assets and equity investments in other firms. Financing Activities: cash flows related and that result from debt (loans from the bank) and equity transactions. Calculating Operating Cash Flows: the cash flow generated from normal operations: OCF=NOPAT+DEPRECIATION Free Cash Flow equations: Net Fixed Asset Investment NFAI=Change∈¿Assets+Depreciation Net Current Asset investment NCAI=Change∈current assets−Change∈ (accounts payable+accrua)s Free Cash Flow FCF=OCF−NFAI−NCAI Then evaluate according to the interest expense, if FCF > INTEREST, then the firm generated a sufficient amount of cash flow to satisfy investors. Chapter 5 Time value of money: Money today is worth more than a money in the future. FV PV= n Present Value: (1+i) Future Value: FV=PV ×(1+i) n Discounting: present value(the inverse of future value) Compounding: future value Annuities(2 types) nominal vs effective rate: 1. nominal rate: the stated annual rate of interest charged. Does not reflect the effects of compounding frequency. 2. effective rate: the annual rate of interest actually paid/earned. This rate reflects the effects of compounding frequency** ordinary annuity vs annuity due: Annuity Due v Ordinary Annuity Ordinary Annuity: the cash flow occurs at the end of each period. (INCALCULATOR_END) Annuity Due: the cash flow occurs at the beginning of each period. They have higher future value than ordinary annuities because each cash flow can earn interest for 1 year more than each of an ordinary annuity.*(INCALCULATOR_BEGIN) Finding the future value of an ordinary annuity Calculator Inputs Input Function -1000 PMT 5 N 7 I CPT FV Finding the present value of an an ordinary annuity Calculator Inputs Input Function 700 PMT 5 N 8 I CPT PV LONG METHOD OR FOR FINDING THE PRESENT VALUE FOR A PERIOD SUM OF PRESENT VALUES ∑ PV= FV (1+i)n *To Find The Present or Future value of an annuity due just change the mode from END to BEGIN mode Amortization of a loan (on financial calculator. = shift+AMORT+enter+(++)) Net Present Value The sum of all the present values for a mixed stream. Used (FV, I, n as the period, pmt=0) Internal Rate of Return Perpetuity is an annuity with an infinite life PV=CF ÷r *You must also learn how to use the financial calculator. Mixed Streams: unequal periodic cash flows Future value of a mixed stream: You need to use your calculator to calculate the future value of each individual cash flow Then sum the values to get the future value of the entire cash flow stream. Present value of a Mixed Stream: Use the future/present value of a Single lump sum equation for each period then add up all the values
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