Fabozzi Frank, Peterson Pamela. Financial Management and Analysis Workbook
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50 QUESTIONS AND PROBLEMS
2. Construct a statement of cash flows given the following
information:
Common stock dividends are 40% of earnings available to
common shareholders.
Earnings before taxes are $45,000.
Preferred stock dividends are $20,000.
Taxes are 30% of earnings.
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Financial Statements 51
3. Construct a statement of cash flows given the following
information:
$15,000 in new long-term debt is issued.
$45,000 of common stock is repurchased.
Common stock dividends are $10,000.
Current liabilities are decreased by $30,000.
Depreciation is $60,000.
Net income is $54,000.
Plant and equipment purchased during the period is
$58,000.
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CHAPTER
7
53
Mathematics of Finance
FILL IN THE BLANKS
Refer to Chapter 7, pages 147–187 in Financial Manage-
ment and Analysis.
1. The ______________ of money is used to equate
______________ flows at ______________ points in time.
One dollar received in the ______________ is not as
______________ as a dollar received ______________
becasue it could be ______________ today and earn
______________. The process of calculating what one dol-
lar today will be worth in the future is called
______________ while the reverse is ______________.
2. The amount that you are willing to ______________ today is
the loan’s ______________ value. The amount that you
______________ to be ______________ at the end of the loan
period is the loan’s ______________ value. Therefore, the
______________ period’s value is comprised of two parts:
Future Value = ______________ value + ______________.
The ______________ is compensation for the
______________ of funds for a specific period. It consists of
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54 QUESTIONS AND PROBLEMS
compensation for the ______________ of ______________
the money is borrowed and compensation for the
______________ that the amount ______________ will not be
______________ exactly as set forth in the loan agreement.
3. The ______________ valuation equation, FV = ______________,
is used to translate ______________ values into ______________
values and to translate ______________ values into
______________ values. It also can be algebraically
manipulated to solve for the ______________ rate and the
number of ______________ periods. This basic relation-
ship includes ______________ compounding—that is,
______________ earnings on ______________ already earned.
4. We can use ______________ mathematics to value many dif-
ferent ______________ of ______________ flows, including
______________, ______________ due, and ______________
annuities. Applying the tools to these different patterns of
cash flows requires us to take care in specifying the
______________ of the various cash flows. ______________
containing ______________ factors, ______________ factors,
______________ value ______________ factors, and
______________ value ______________ factors can be used to
reduce the computations involved in financial math.
5. When faced with a(n) ______________ of ______________
flows, we must value each ______________ flow individu-
ally, and then ______________ these individual values to
arrive at the ______________ value of the ______________
value of the series. The work can be cut a bit shorter if these
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Mathematics of Finance 55
cash flows are ______________ and occur at ______________
intervals of time.
6. Valuing a(n) ______________ cash flow stream is just like
valuing a(n) ______________ annuity. The ______________
annuity cash flow analysis assumes that cash flows occur
at the ______________ of each period. However, it is fairly
common to receive ______________ cash flows at the
______________ of the period; this is called a(n)
______________.
7. A(n) ______________ annuity has a stream of cash flows of
______________ amounts at regular periods starting at some
time ______________ the end of the first ______________.
With a(n) ______________ annuity, the ______________
value of the ______________ annuity is determined and then
______________ to a(n) ______________ period.
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56 QUESTIONS AND PROBLEMS
SHORT ANSWER QUESTIONS
Refer to Chapter 7, pages 147–187 in Financial Manage-
ment and Analysis.
1. Why is a dollar today worth less than a dollar some time
in the future?
2. How are interest rates with different compounding periods
compared? Is there a method of comparison that is pre-
ferred?
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Mathematics of Finance 57
PROBLEMS
Refer to Chapter 7, pages 147–187 in Financial Manage-
ment and Analysis.
1. Using a 7.5% compounded interest rate per period, calcu-
late the future value of a $500 investment:
a. One period into the future
b. Five periods into the future
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58 QUESTIONS AND PROBLEMS
c. Ten periods into the future
4. Using a 7.5% compounded interest rate per period, calcu-
late the present value of a $500 investment to be received:
a. One period into the future
b. Five periods into the future
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Mathematics of Finance 59
c. Ten periods into the future
4. If Natalie deposits $1,000 in her savings account and
earns 4.5% interest per year:
a. How much would she have after three years if she left
the money in the account to earn compound interest?
b. How much interest has she earned?
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