In: Finance
Please explain the following terms:
Ratio analysis (all ratios)
The DuPont identity
Pro forma statements
(Ignore percent of sales and EFN)
Internal growth rate vs sustainable growth rate
FV, PV, NPV
Multiperiod case
FV and compounding
PV and discounting
Implied interest rate
A)
Ratio analysis is stated as the process of evaluating and comparing the financial date by determining the meaningful financial statements percentages rather than comparing the line items for every financial statement
Current ratio. This ratio makes comparison between the current assets to current liabilities, to determine if the firm has sufficient cash for paying its immediate liabilities.
B)
The DuPoint identity is defined as the expression which states that the return of equity of the business are stated as the product of total asset turnover, equity multiplier and profit margin
C)
The Proforma statements show the impact of the changes on the financial position of the firm which is displayed as the income statement, statement of cash flow and balance sheet statements. The example stated as when the management creates the proforma statements for gauging the effects of the capable joint venture or merger.
D)
The internal growth rate is stated as the formula for determining the maximum growth rate which a company can attain without going for external financing.
Sustainable growth is stated as the annual percentage of the rise in the sales which is consistent with a definite financial policy.
E)
The future value is stated as the value of the current asset at a particular date in some future time period which is relied on the assumed rate of growth.
The present value is stated as the current value of the future sum of the money which is given at a particular rate of return.
The net present value is stated as the difference between the present value of cash inflows and present value of cash outflows over the given period of time.
F)
Multi-period is defined on the assumption that the intrinsic value of the stocks is equivalent to the sum of all the future cash flows which are discounted back to their present values.
G)
Future value = P x (1 + r/n)nxm
Where,
P is the present value or the principal amount
R is the annual interest rate
N is stated as the number of years invested.
m is stated as the number of compounding periods per year
FV is stated as the future value, stating the amount of the principal which grows to after the y years
H)
The present value is stated as the current value of the future sum of the money which is given at the particular rate of return. The discounting is stated as the process which determines the present value of the stream of the payments which are to be obtained in future.
I)
Implied interest is defined as the difference between the forward or futures rate and the spot rate on the transaction. When the future or forward rate is higher than the spot rate, it means that the rate of interest will rise in future.