Summary Fundamentals of Corporate Finance

A snapshot of the summary - Fundamentals of Corporate Finance Author: Jonathan B Berk Peter M DeMarzo Jarrad V T Harford ISBN: 9780273753469

• 2 Introduction to Financial Statement Analysis

• 2.4 The Income Statement

• How do you calculate the Leverage Ratio? (also Interest coverage ratio (TIE))

  Operating Income devided by Interest Expense

• 5 Interest Rates

• 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