Ch4- The Net Present Value (NPV) of an investment is the present value of the expected cash flows, less

the cost of the investment. NPV>0accept the project; NPV<0decline it. NPV=PV-Cost (1period case)-(s.4-9) FV=Co*(1+r)t(multiperiod case) if r changes over years; Co*(1+r1)(1+r2) Finding the #of periods: (ln) kullaniliyor!!! Compounding Periods:Compounding an investment m times a year for T years provides for future value of wealth: i: r/m; periods:m*t..formula ayni: Co*(1+r/m)t*m senede birkac kere odeme aliyorsa, bir sene birkac perioddan olusuyorsa Effective Annual Rates of Interest-EAR-:The Effective Annual Rate (EAR) of interest is the annual rate that would give us the same end-of-investment wealth after 3 years(sorum semiannualdi.so bu yontemle ayni getiriyi yillik kac r ile aliriz bulunuyor).Higher compounding frequency higher EAR. Continuous Compounding: The general formula for the future value of an investment compounded continuously over many periods can be written as: FV = C0erT, r:interest rate, T:number of years (s.4-27) Cash Flows: if the payments vary each year it is called Lumpy CFs and calculated by CF0 at calculator. (s.4-20) Perpetuity:A constant stream of cash flows that lasts forever; Growing perpetuity:A stream of cash flows that grows at a constant rate forever; Annuity: A stream of constant cash flows that lasts for a fixed number of periods; Growing annuity: A stream of cash flows that grows at a constant rate for a fixed number of periods Perpetuity: PV:C/r..C: constant payments every year Growing Perpetuity: C/r-g..r:I, g: each years growth rate Annuity: C/r *{1-[1/(1+r)t]} Growing Annuity: C/r -g*{{1-[1+g/(1+r)}t]} Loan Amortization: Pure Discount Loans are the simplest form of loan. The borrower receives money today and repays a single lump sum (principal and interest) at a future time. Ex: Treasury Bills.. Interest-Only Loans require an interest payment each period, with full principal due at maturity. Cash flow here is like cf of corporate bondsAmortized Loans require repayment of principal over time, in addition to required interest (bizim krediler boyle). S.4-39.. Amortized Loan with Fixed Principal Payment: s. 4-42; Amortized Loan with Fixed Payment; s. 4-43, Each payment covers the interest expense plus reduces principal Conceptually, a firm should be worth the PV of the firms cash flows CH-5--Why Use Net Present Value? Note that the NPV recognizes the magnitude, risk, and timing of cash flows, which was an important description of why stock price maximization should be the primary corporate goal. NPV Rule: Net Present Value (NPV) = Total PV of future CFs + Initial Investment (this is negative so -) Minimum Acceptance Criteria: Accept if NPV > 0, Ranking Criteria: Choose the highest NPV The Payback Period Method: How long does it take the project to pay back its initial investment? Payback Period = number of years to recover initial costs, Minimum Acceptance Criteria: Set by management, Ranking Criteria: Set by management;;; Disadvantages:Ignores the time value of money/Ignores cash flows after the payback period/Biased against long-term projects/Requires an arbitrary acceptance criteria/A project accepted based on the payback criteria may not have a positive NPV..Advantages:Easy to understand/Biased toward liquidity..(s.5-7) Cash flows prior to the cutoff are implicitly discounted at a rate of zero, and cash flows after the cutoff are discounted using an infinite discount rate. The Discounted Payback Period:How long does it take the project to pay back its initial investment, taking the time value of money into account? Decision rule: Accept the project if it pays back on a discounted basis within the specified time. Similar advantages and disadvantages as standard payback method, with the exception that cash flows prior to the cutoff are not discounted at zero. The Internal Rate of Return: IRR: the discount rate that sets NPV to zero/Minimum Acceptance Criteria:Accept if the IRR exceeds the required return/Ranking Criteria: Select alternative with the highest IRR. Disadv: IRR may not exist, or there may be multiple IRRs/Problems with mutually exclusive investments (PI ile ayni) Problems with IRR>>Multiple IRRs/Are We Borrowing or Lending/The Scale ProblemThe Timing Problem Mutually Exclusive Projects: only ONE of several potential projects can be chosen, RANK all alternatives, and select the best one. Independent Projects: accepting or rejecting one project does not affect the decision of the other projects. Must exceed a MINIMUM acceptance criteria.It is good to mention that the number of IRRs is equivalent to the number of sign changes in the cash flows. Multiple IRRs>>Modified IRR(s.5-17) The Timing Problem: The cross-over rate is the IRR of project A-B NPV versus IRR: NPV and IRR will generally give the same decision. Exceptions: Non-conventional cash flows cash flow signs change more than once/Mutually exclusive projects-Initial investments are substantially different+Timing of cash flows is substantially different The Profitability Index (PI): Total PV of Future CFs/Initial Inv.. Minimum Acceptance Criteria: Accept if PI > 1, Ranking Criteria: Select alternative with highest PI..Disdv: Problems with mutually exclusive investments (IRR ile ayni) Advantages:May be useful when available investment funds are limited/ Easy to understand and communicate/Correct decision when evaluating independent projects The Practice of Capital Budgeting: The most frequently used technique for large corporations is either IRR or NPV. Capital Budgeting: The process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark.

NPV: The difference between the present value of cash inflows and the present value of cash outflows. Summary Discounted Cash Flow:NPV:Difference between market value and cost/Accept the project if the NPV is positive/Has no serious problems/Preferred decision criterion..IRR:Discount rate that makes NPV = 0/Take the project if the IRR is greater than the required return/Same decision as NPV with conventional cash flows/IRR is unreliable with non-conventional cash flows or mutually exclusive projects, PI: Profitability Index/Benefit-cost ratio/Take investment if PI > 1/Cannot be used to rank mutually exclusive projects/May be used to rank projects in the presence of capital rationing Ch-8--Zero Coupon Bonds: Make no periodic interest payments (coupon rate = 0%) /The entire yield to maturity comes from the difference between the purchase price and the par value/Cannot sell for more than par value/Sometimes called zeroes, deep discount bonds, or original issue discount bonds (OIDs)/Treasury Bills and principal-only Treasury strips are good examples of zeroes Pure Discount Bonds (zero coupon bonds cesidi): PV:F(face value)/(1+r)t Time to maturity (T) = Maturity date - todays date Government and Corporate Bonds>> Treasury Securities:Federal government debt/T-bills pure discount bonds with original maturity less than one year/T-notes coupon debt with original maturity between one and ten years/T-bonds coupon debt with original maturity greater than ten years..MunicipalSecurities:Debt of state and local governments/Varying degrees of default risk, rated similar to corporate debt/Interest received is tax-exempt at the fed. level Corporate Bonds: Greater default risk relative to government bonds/The promised yield (YTM) may be higher than the expected return due to this added default risk Bond Ratings Investment Quality (s.8-27) Bond Markets: Primarily over-the-counter transactions with dealers connected electronically/Extremely large number of bond issues, but generally low daily volume in single issues/Makes getting up-to-date prices difficult, particularly on a small company or municipal issues/Treasury securities are an exception (s.8-29) Treasury Quotations:The difference between the bid and ask prices is called the bid-ask spread, and it is how the dealer makes money.(s.8-30) Clean versus Dirty Prices: Clean price: quoted price--Dirty price: price actually paid = quoted price plus accrued interest Inflation and Interest Rates: Real rate of interest change in purchasing power/Nominal rate of interest quoted rate of interest, change in purchasing power and inflation/The ex ante nominal rate of interest includes our desired real rate of return plus an adjustment for expected inflation. Real versus Nominal Rates: Fisher Effect:(1 + R) = (1 + r)(1 + h) (R:Nom, r:real, h: expected inflation rate).. Approximation: R =r+h Inflation-Linked Bonds: Most government bonds face inflation risk/TIPS (Treasury Inflation-Protected Securities), however, eliminate this risk by providing promised payments specified in real, rather than nominal, terms Factors Affecting Required Return: Default risk premium remember bond ratings/Taxability premium remember municipal versus taxable/Liquidity premium bonds that have more frequent trading will generally have lower required returns (remember bidask spreads)/Anything else that affects the risk of the cash flows to the bondholders will affect the required returns. (s.8/37) Ch-10--- Returns: Dollar Return = Dividend + Change in Market Value; %Return: $return/beginning MV-BV-=dvd+changein MV/BV=dvd yield+cap gains yield Holding Period Return:The holding period return is the return that an investor would get when holding an investment over a period of T years, when the return during year i is given as Ri: HPR: (1+R1)*(1+R2)*(1+RT)-1..if I doesnt change the formula is: (1+R)T Return Statistics Avrg Return: (R1+R2+R3+RT)/T; StdDevof the returns: s.10-10 GeometricAdv: (1+Rg)n=(1+R1)*(1+R2)*(1+Rn) Risk&Return go together!!! Ch-11>>> Covariance: Deviation compares return in each state to the expected return./ Weighted takes the product of the deviations multiplied by the probability of that state. =Sum of weighteds is Covariance..(s.11-10) Correlation: Cov(a,b)/SD(a)*SD(b)>>> -1<CC<1 Portfolios:The variance of the rate of return on the two risky assets portfolio is: (weight of S*SDs)2+( weight of B*SDb)2+2(weight of S*SDs)* ( weight of B*SDb)*CCbs.. (s.11-15). Note that variance (and standard deviation) is NOT a weighted average. The variance can also be calculated in the same way as it was for the individual securities. ****Historical returns divided by (n-1) vs Expected Returns divided by (n)**** Portfolios risk&return:Relationship depends on correlation coefficient The return on any security consists of two parts: 1-the expected returns 2-the unexpected or risky returns the return on a stock in the coming month is: R=R+U where R:expected return; U:unexpected return Announcement = Expected part + Surprise>>> there is a minimum level of risk that cannot be diversified away, and that is the systematic portion. Diversifiable Risk; Nonsystematic Risk; Firm Specific Risk; Unique Risk:CONTROLLABLE RISK Nondiversifiable risk; Systematic Risk; Market Risk:UNCONTROLLABLE Risk: Systematic and Unsystematic: A systematic risk is any risk that affects a large number of assets, each to a greater or lesser degree. An unsystematic risk is a risk that specifically affects a single asset or small group of assets.Unsystematic risk can be diversified away.systematic risk;ie uncertainty about general economic conditions, but; announcements specific to a single company are examples of unsystematic risk (s.11-26). Total risk = systematic risk + unsystematic risk; The SD of returns is a measure of total risk. For well-diversified portfolios, unsystematic risk is very small. so, the total risk for a diversified portfolio is essentially equivalent to the systematic risk. Riskless Borrowing and Lending: With a risk-free asset available and the efficient frontier (The section of the opportunity set above the min.variance portfolio is the efficient frontier) identified, we choose the capital allocation line with the steepest slope. Where the

investor chooses along the Capital Market Line depends on her risk tolerance. The big point is that all investors have the same CML (s.11-32). Best measure of the risk of a security in a large portfolio is the beta (b) of the security.it measures the responsiveness of a security to movements in the market portfolio (i.e., systematic risk) capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns. 'Capital Market Line - CML':A line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios depending on the risk-free rate of return and the level of risk (standard deviation) for a particular portfolio. Relationship between Risk and Expected Return (CAPM)- (s.11-36+37) BuildingBlocksOfAnalysis(13-6)-Financial analysis is used by many people within the organization. Managers find financial analysis helpful in planning and controlling operations. External users of financial statements are also interested in the results of comprehensive financial analysis. Shareholders, creditors, and customers all want to learn as much as possible about the financial health of a company. Measures of liquidity and efficiency are most important to short-term creditors(Ability to meet short-term obligations and to efficiently generate revenues).Measures of solvency help people assess the ability of the company to generate revenues in the longrun. These measures are especially important to long-term creditors(Ability to generate future revenues and meet long-term obligations). Measures of profitability are important to managers and outsiders as well. Everyone with an interest in the company is concerned about the long-term profitability of its operations (Ability to provide financial rewards sufficient to attract and retain financing). Market prospects are most important to owners of the companys common shares (Ability to generate positive market expectations). Horizontal analysis can be extremely helpful in learning more about a company. It is the process of properly preparing financial data in dollar and percentage formats. This information is usually shown side-by-side. Vertical analysis is the process of comparing a companys financial condition and results of operation in reference to a base amount. Tools of Analysis(13-7).HorizontalAnalysis (bizim yaptigimiz):Comparing a companys financial condition and performance across time. VerticalAnalysis:Comparing a companys financial condition and performance to a base amount. RatioAnalysis:Measurement of key relations between financial statement items. Horizontal analysis can be extremely helpful in learning more about a company. It is the process of properly preparing financial data in dollar and percentage formats. This information is usually shown side-by-side. Vertical analysis is the process of comparing a companys financial condition and results of operation in reference to a base amount. Over time, the business community has developed several key ratios that are considered important when evaluating the strengths and weaknesses of a company. Trend analysis which helps us analyze changes in financial information over a number of years. The change is usually stated in percentage terms.Trend analysis is used to reveal patterns in data covering successive periods. To calculate the trend percentage, we divide the current period amount by the base period amount and multiply by one hundred. All values will be expressed as a percentage increase or decrease from the base period. The base period is usually the oldest period shown. Now, lets move from horizontal analysis to vertical analysis. Common size financial statements are prepared for a single period. We express all items on the statement in terms of a one component of that statement. For the IS, we normally express all items as a percent of total revenues. For the BS, we generally express all items as a percent of total assets. we set total assets=100% TotalSales=Revenues in IS Liquidity and Efficiency ---Working capital=current assets minus current liabilities. It is a critical measure for all types of businesses. Positive working capital means the company will have enough assets converted into cash within the next year to pay its current obligations. Perhaps the most significant measure of a companys ability to pay current obligations is the current ratio.=CA/CL.As a short-term creditor, you would be vitally interested in a companys current ratio. If the ratio continues to lower over time, you may be less likely to be paid in full. The acid-test ratio is a more stringent measure than the current ratio. We calculate the ratio by dividing quick assets by current liabilities. Quick assets include cash, marketable securities, current accounts and notes receivable. This ratio is like the current ratio but excludes current assets such as inventories and prepaid expenses that may be difficult to quickly convert into cash. A/Rturnover:net credit sales, or sales on account(Revenue)/average A/R. this ratio helps us get a feel for the number of times per year a company can convert its accounts receivable into cash. For any company, the higher the turnover, the faster the cash collection on A/R. normalde credit sales olmali. Inv.turnover:COGS/average inv. The inventory turnover ratio measures the number of times inventory is sold and replaced during the year. Higher inventory turnover helps protect a company from obsolete inventory items. Days sales uncollected: ending AR/net sales*365. This ratio measures the liquidity of receivables. At ex. it is14.8days. If Norton offers a two-ten, net thirty cash discount, most customers would pay off the receivable balance close to the ten day discount period and reduce the days sales uncollected. ???? days sales in inventory: ending inv./COGS*365.@ ex. It is 31.9 days. Inventory is sold completely about once a month. This ratio measures the liquidity of inventory. Total asset turnover:net sales/average total assets. Asset turnover is a measure of how efficiently management is using the available assets to generate sales. SOLVENCY--EBIT({-net-}income before interest and taxes) is often referred to as net operating income. The debt ratio:TL/total assets. This ratio measures what portion of a companys assets are contributed by creditors. The equity ratio: TtalEq/TA.This ratio measures what portion of a companys assets are contributed by owners. The Debt to Equity ratio: measure the solvency ofacompany. lower the calculation, the more solvency the company has.

Long-term creditors are particularly interested in the ability of a company to meet periodic interest payments. Times interest earned: earnings before interest and taxes/interest expense for the period. This is the most common measure of the ability of a firms operations to provide protection to the long-term creditor. Profitability--Profit margin (net income/net sales) tells us how effective the company is at producing bottom line net income. This ratio describes a companys ability to earn a net income from sales. Gross margin ({net sales - cost of goods sold}/net sales) is an extremely important measure in business. It indicates how much of each sales dollar is left to cover operating expenses, taxes and profit. This ratio measures the amount remaining from $1 in sales that is left to cover operating expenses and a profit after considering cost of sales. Return on Total Assets: net income/average total assets. This ratio is generally considered the best overall measure of a companys profitability. Return on TA measures how well assets have been employed by the management of Norton. Return on common stockholders equity:net income available to common shareholders({net income- preferred dividends}/average common stockholders equity.This measure indicates how well the company employed the owners investments to earn income. Book value per share:common stockholders equity/the number of common shares outstanding. Remember, we are including only common stockholders equity in the numerator. If your company has preferred shares outstanding, the total dollar amount will be removed to determine the stockholders equity relating to the common shareholders. This ratio measures liquidation at reported amounts. Earnings per share:{net income-preferred stock dividends/the average number of common shares outstanding. The numerator of the equation is sometimes referred to as income available to common shareholders. Earnings per share is one of the most widely quoted financial ratios calculated. It is a measure of the companys ability to produce income for each common share outstanding. As an investor, we will want to track this ratio carefully. This measure indicates how much income was earned for each share of common stock outstanding. Market Prospects---shareholders r interested-- the price-earnings ratio, or P E ratio:closing market price of thecommon stock/earnings per share.This measure is often used by investors as a general guideline in gauging stock values.Generally, the higher the price-earnings ratio, the more opportunity a company has for growth. Dividend yield ratio:the annual dividend per share/closing market price per share of the companys common stock. This ratio identifies the return, in terms of cash dividends, on the current market price of the stock. CH-2-Balance Sheet Analysis: When analyzing a balance sheet, the Finance Manager should be aware of three concerns:Liquidity,Debt versus equity,Value versus cost. Liquidity: Refers to the ease and quickness with which assets can be converted to cashwithout a significant loss in value; Debt versus Equity: Creditors generally receive the first claim on the firms cash flow. Value vs Cost: Under Generally Accepted Accounting Principles (GAAP), audited financial statements of firms in the U.S. carry assets at cost.Market value is the price at which the assets, liabilities, and equity could actually be bought or sold, which is a completely different concept from historical cost. The Income Statement: The accounting definition of income is: Revenue Expenses Income; The operations section of IS reports the firms revenues and expenses from principal operations. The non-operating section includes all financing costs, such as interest expense. Usually a separate section reports the amount of taxes levied on income. Net income is the bottom line.There are three things to keep in mind when analyzing an income statement: 1-Generally Accepted Accounting Principles (GAAP)- matching principle of GAAP dictates that revenues be matched with expenses. Thus, income is reported when it is earned, even though no cash flow may have occurred. /2-Non-Cash Items-- Depreciation is the most apparent. No firm ever writes a check for depreciation. Thus, net income is not cash. /3-Time and Costs: accounting costs usually fit into a classification that distinguishes product costs from period costs. Taxes: Marginal vs. average tax rates.Marginal % paid on the next $ earned; Averagetax bill/taxable income Net Working Capital Current Assets Current Liabilities-- NWC usually grows with the firm Financial Cash Flow (just an application of the standard BS): CF(A) CF(B) + CF(S)..// In finance, the most important item that can be extracted from financial statements is the actual cash flow of the firm. The Statement of Cash Flows: Cash flow from operating activities/Cash flow from investing activities/Cash flow from financing activities accounting cash flow and actual cash flow as calculated earlier(BS ile ilgili-above) are different values. GrossProfit:TotalSales(revenues)-COGS Gross Margin:GrProf/Total Sales