 # Summary Fundamentals of Corporate Finance

ISBN-10 0273753460 ISBN-13 9780273753469
216 Flashcards & Notes
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Remember faster, study better. Scientifically proven. • ## 2.4 The Income Statement

• How do you calculate the Leverage Ratio? (also Interest coverage ratio (TIE))
Operating Income devided by Interest Expense

• ## 5.1 Interest Rate Quotes and Adjustments

• When you buy a car with borrowed money, of what is the interest the price?
The price to be able to convert money paid in the future to a car right now
• Why is it important to convert interest rates to the same time unit before comparison?
Because you cannot compare a daily interest rate with a yearly interest rate
• What is a different name for the effective anual rate?
The annual percentage yield
• What is the effective annual rate?
The effective interest paid in a year time unit
• How do you calculate the equivalent interet rate at a different period length? E.g. EAR of r to monthly, or 5 yearly?
(1+r)^n - 1
So for monthly n=1/12
For 5 yearly n=5
• What does the annual percentage rate do with compounding?
It doesn't take it into account
• What is the actual effective interest rate of a 6% APR compounded monthly?
6/12 = 0.5 monthly interest
1.005^12 - 1 = 6.17% after 12 month
• Can the APR be used as a discount rate?
No, you have to take compounding into account
• ## 5.2 Application: Discount Rates and Loans

• What is a amortizing loan?
A loan with equal payments that comprise interest and paying back part of the loan