Expense costs incurred in producing revenues Dividends amounts paid from profits of a corporation to shareholders as a return on their investment in the stock of the entity Commodity A good that is available in large quantities from different producers and is independent of the producer. Indistinguishable. Sold at fixed price Consolidated Added up over entire institution Net worth how are you doing Equity Ownership Liquidity degree to which an investment is converted into cash (+Canada savings bond –house) Securities An investment instrument that is paper backed, tends to be liquid Balance Sheet Financial Position at end of fiscal (reporting) period, no change info, no flow (salaries) Assets liability + equity Current assets can be converted to cash or its equivalent in less than one year Fixed (capital) assets relatively permanent and would take usually longer than a year to convert into cash Other assets investments made in other companies and intangible assets, licenses, patents Book value purchase price – accumulated depreciation Liabilities contracts/debt Income Statement How much money was made by a company during the fiscal year (involves time period) Leverage The use of various financial instruments or borrowed capital to increase the potential return of an investment. Extra money after paying loan Prospectus very detailed doc full disclosure with company info Primary stock market 2 parties: individual share buyers and company selling. Raise capital stock here Litigation lawyer´s fees Retained earnings all money made up to this point. Accumulated “not eaten it” Amortization length of time to pay a loan off (constnt rate and sched.) Shareholders equity represents the amount that is available to the owners after all other debts have been paid Simple interest: interest earned only on the principal amount during each interest period Compound interest: interest earned calculated on the basis of the total amount at the end of the previous period Economic Equivalence A sum of money in one-time period may have the same value to a different sum in another time period. Capital stock: total par value of company’s stock issued. Treasury stock: company can buy part of its stock and hold it as treasury s. Paid-in capital (Capital surplus): excess amount received over the par value. Cost of sales: expense of doing business (production, labour, material cost). Gross margin = Net revenue – Cost of sales. Income from operations (Operating income) = Gross margin – Operating expense. Income before taxes (Taxable income) = Operating income + Investment income. Bond contract pays interest at intervals total at end Par value stated face value on the individual bond which the borrower has to pay at the end Issue price: price at which investors buy the bonds when they r first issued. Market value: the price one has to pay to purchase a bond. Coupon rate The interest paid on the par value of a bond. Maturity date: date when par value is repaid. Yield to maturity actual interest earned from a bond over the holding period current yield annual interest earned, as a percentage of the current market price. Capitalized cost amount of money that must be invested today to yield a certain return A at the end of each and every period forever, assuming an interest rate of i. Bank of Canada prime rate: rate at which banks lend money to each other to ensure that they maintain enough cash Bank prime rate: rate at which banks lend money to their most preferred customers Rate of return interest rate earned on unpaid balance of an amortized loan, break-even interest rate i* that equates the present worth of a project's cash outflows to the present worth of its cash inflows Internal rate of return IRR interest rate charged on the unrecovered project balance of the investment such that, when the project terminates, the unrecovered project balance will be zero. Capital Cost amount of the net investment, includes all costs related to the investment, usually onetime costs Operating costs cost related to operating such as labour and raw mat Capital Recovery Costs annual payment that will repay the cost of a fixed asset over the useful life of the asset and will provide an economic rate of return on the investment Salvage value amount of money for which the equipment could be sold after its service to the project has been rendered. How a company goes public: 1.) Initial Public Offering (1st time shares) 2.) Fill Prospectus 3.) Secondary Stock Market Rule of 72: Estimate req. years to double investment (72/IR). Types of Mortgages: 1.) Conventional: doesn’t exceed 80% of purchase price/appraised value (whichever lower) 2.) High- Ratio: exceeds 80% 3.) Collateral: Provides backup protection. MORTGAGES ARE PAID MONTHLY AND COMP SEMI ANNUALY, K=12, C=1/6. Balance Remaining Mortgage: Bn= A(P/A, i, N-n) Principle Payment in Period n: PPn=A(P/F, i, N-n+1) Interest Paid During Period n: In= A(P/A, i, N-n+1) x i. Subprime mortgages given to individuals with poor credit histories, reason for 2008 financial crisis. 2 types: 1.) Adjustable Rate(ARM) very low initially then increases, 2.) NINJA, ppl got arm expecting to refinance after initial term. Mortgage bank securities sold to investors in tranches (slices). CDO is a repackag ing of MBS tranches that weren’t sold and were given high credit ratings, Credit Default Swap is insurance on mortgage that compensates buyer of the CDO if the loan defaults (betting on the mortgage). Chapter 5: Independent Projs: (NPW)= sum over n of A(P/F,i,n). AEW= NPW(A/P,i ,N). Capitalized Eqv.(CE): Capitalized cost of a project money invested today at i to yield A at end of each period forever, CE(i)=A(P/A,i,N->infinity)=A/i. Capital Recovery Cost: Annual payment that will repay cost of fixed asset, CR=P(A/P,i,N)-S(A/F, i, N).

Chapter 7: Cost Concepts Cost behaviour describes how a cost item will react or respond to changes in the level of business activity. Direct cost: cost that can be directly traced to producing specific G&S Direct RM: any materials used in final product (EG: wood in furniture, steel in bridge construction) Direct labour: labour costs that go into the production of a product (EG: labour costs of welders, carpenters) Manufacturing overhead: all manufacturing costs except direct RM & direct labour (EG: indirect labour, maintenance, property taxes) Overhead: costs not included/related to direct labour/materials/admin costs Marketing costs: all costs necessary to secure customer orders and get the finished product or service to customer. (EG: advertising, shipping) Admin fns: (EG: exec compensation, gen acting) Matching principle: costs incurred in generating a certain amt of rev shd be recognised as expenses in the same period tt the rev is recognised Period costs: costs charged to expenses in the period in which they are incurred (does not Δ wrt sales vol) (EG: all gen n admin expenses, insurance expenses)Product costs: costs involved in the purchase or manufacture of goods (Δs wrt sales vol) (EG:manufac costs) Fixed costs: costs that remain constant regardless of any Δ in the company’s activity Variable costs: cost that Δs in proportion to a Δ in a company’s activities Mixed costs: constant for a set level of activity, then become variable after the level is exceeded Opp cost: potential benefits given up when you choose an alternative Sunk cost: cost that has already been incurred and cannot be reversed Marginal cost/revenue: cost/revenue of/from producing 1 additional unit of production Cost Effectiveness: Sum of all costs/measured health affects (QALYS)

Chapter 13: Economic Analysis in the Public Sector Cost-effectiveness analysis: used to compare the financial costs (direct cost, indirect cost, intangibles) of therapies whose outcomes can be measured purely in terms of health effects(years of life

gained,) Cost-effectiveness ratio: (all costs) : (all measured health effects). CEA for Interventions: Mutually Exclusive: Incremental Cost-Effectiveness ratio: Cost of B- Cost of A/ Effects of B- Effects of A. Cost-utility analysis: compare financial costs of therapies. Therapies’ outcomes are measures in terms of survival and quality of life. Cost-benefit analysis: weighing total expected cost vs total expected benefits of 1/more actions to choose best/most profitable option. Users’ benefits(B): = benefits – disbenefits. (B) divided into primary (directly attributable to project) & secondary (indirectly attributable). Sponsor’s costs: =capital cost + O&M costs – rev. Social discount rate: MARR for public sector. 1. Project w/o pvt counterparts –rate shd reflect prevailing govt borrowing rate. 2. Project w/ pvt counterparts – rate sh represent opp cost of capital in alr investment in pvt sector GAME THEORY 1. Maximin: choose worst possible outcome for each alternative. Choose alt with max val of this min. 2. Maximax: choose best possible outcome for each alternative. Choose alt with max val of this max. 3. Laplace: calculate expected val of each axn (assume each state is equally likely). Choose axn

with highest expected val. 4. Minimax regret: Make regret matrix: r_ij = [p*_i – p_ij], where p*_i denotes best outcome possible for state _i. Find max regret for each alt. Choose alt with min val of max regret. Cost Benefit Ratio: User Benefits/ Sponsor Costs. Cost BENEFIT ANALYSIS FOR MUTUALLY EXCLUSIVE PROJECTS: 1. Compute the B/C ratio and remove any projects with a ratio less than 1 2. Order projects from smallest sponsor cost to largest sponsor cost 3. Compute the incremental investment B – A 4. Determine B/CB-A and apply: If B/CB-A > 1, then select B If B/CB-A = 1, then indifferent If B/CB-A < 1, then select A 5. Repeat until only one project remains.

Chapter 15: Decision Trees, Project Risk and uncertainty. Decision node [square box]: point at which decision maker must choose between several alts Chance events [circle]: point at which a random choice is made based on some survey Gate/Toll [bar across the path]: branch of the tree where a cost must be paid for choosing that path Outcomes: values at the ends of the tree. Probabiblity Rules: 1.) Baye’s Theorem: P(A|B)=(P(B|A)P(A)/P(B)) 2.) Law of total probability: P(B)=Sum of i P(B|Ai) P(Ai). Sensitivity Analysis: Reveals by how much the NPW will change in response to changes in an input variable. Break-Even Analysis: (cost=profit)Used to determine the amount that an input can change before the project begins to lose money. In particular, we vary the input until the NPW = 0. The value of the input when NPW =0 is called the break-even value. Sensitivity analysis and break-even analysis are useful but suffer from some limitations: It can be challenging to precisely determine the relationship between an input variable and NPW. Interdependencies among variables are not captured and can largely influence NPW. Scenario Analysis: A technique that considers the sensitivity of NPW with respect to changes in variables and the range of likely values for those variables o Typically, with scenario analysis, we can define various scenarios: § Best-case: use optimistic values for all inputs § Normal-case: use the best-guess for all inputs § Worst-case: use pessimistic/conservative values for all inputs. NPW Probability Distributions: Expected Value (mu)= ∑ 𝒑𝑵𝑷𝑾, Variance=sigma^2= ∑ 𝒑(𝑵𝑷𝑾 − 𝒎𝒖)^𝟐, Standard Deviation=sigma. If E(NPWA) > 0, then select A because it is expected to be profitable. If two projects have identical expected values, then the one with lower variance preferred because it has lower risk.

Chapter 8: Depreciation Depreciation: the gradual decrease in utility of fixed assets with use and time Cost basis: total cost that is claimed as an expense over an asset’s life Book value: cost basis minus total accumulated depreciation Salvage value: asset’s value at the end of its life Consumables something that you buy and use today (food) Depreciable assets Something that is bought and has a depreciable life, economic resources acquired to provide future cash flows Land does not depreciate Spending/Consuming spending is only used on consumable assets Investing money that goes towards buying a depreciable asset Physical Depreciation physical deterioration of an item (how it looks) Functional Depreciation when the equipment currently used is not up to par to current models Usually want to accelerate deprecation process. Does not mean they pay less taxes since total depreciation remains the same, but firms enjoy paying lower taxes in earlier years of an investment project TAXES economic decisions should not be based on tax values Marginality the marginal total cost per year Journal Chronological depiction of transaction General Ledger type base accounts. Book depreciation methods: P(cost of the asset) S(salvage value) N(# of years) d(depreciation rate) n(year of analysis) Dn(depreciation charge) Bn(book value) 𝐵n = 𝐵n-1 − 𝐷n SL method: d=1/N Db method: d=1/N SOYD method: SOYD=N(N+1)/2 CCA method: d=given(50%) Sinking fund method: Dn=(P-S)/N Bn=P-nDn 𝐷n = 𝑑𝑃(1 − 𝑑)n-1 , 𝑛 ≥ 1 𝐵n = 𝑃(1 − 𝑑)n 𝐷n = (𝑁 − 𝑛 + 1)(𝑃 − 𝑆)/𝑆𝑂𝑌𝐷 CCAn = 𝑑𝑃(1 – 𝑑/2)(1 − 𝑑)n-2 UCCn= 𝑃(1 – 𝑑/2)(1 − 𝑑)n-1 𝐷n = (P-S) (A/F, 𝑖, n) (F/P, 𝑖, n-1) Units of production method: Double Db method: d=multiplier*(1/N) SOYD method:

𝐷n = serivce units consumed during year 𝑛

total service units(𝑃 − 𝑆) d=2*(1/N), rest the same Bn=

(P−S)(N−n)(N−n+1)

N(N+1)+ 𝑆

Chapter 11: Replacement Analysis Economic service life: the remaining useful life of an asset that results in the min annual equivalent cost. Infinite Planning Horizon: 1.) Find AEC* for C and D, USING MARKET VALUE AS P FOR D. if AEC*c<AEC*d, REPLACE IMMEDIATELY. 2.) Find MCd, if MCd>AEC*c, then replace.

Chapter 14: Inflation Inflation: Decrease in purchasing power of money. Winners: borrowers, the amount they have to give back is less, asset owners, Losers: lenders as they get less money, people with a fixed amount of dollars. Causes of Inflation declining exchange rate and printing money. Incentive to buy goods and disincentive to save. CPI: Consumer Price Index, type of inflationary indicator that measures the Δ in

the cost of a fixed basket of G&S. 𝐶𝑃𝐼𝑋 =𝐶𝑜𝑠𝑡𝑋

𝐶𝑜𝑠𝑡𝑏𝑎𝑠𝑒× 100 Groups for mkt basket: food, shelter, household operations and furnishings, clothing and footwear, transportation, health & personal care.

Deflation. Incentive to save money, disincentive to spend. Both deflation and inflation are self-accelerating, more ppl buy during inflation makes demand go up and increases prices, increasing inflation.

To get rid of inflation: banks raise interest rates to make it difficult to buy goods. To get rid of deflation: Decrease interest rates to make buying goods easier. Japan experiences deflation, Zimbabwe inflation. Base period: point in the past with which current prices are compared (index = 100) Average inflation rate, f: 𝐹 = 𝑃 (1 + 𝑓)𝑁 <<use CPI values for F and P>> Actual (current) $ (An): Out-of-pocket dollars paid at the time of purchasing G&S Constant (nominal/real) $ (A’n): $ as if in some base year, used to adjust for the effects of inflation <<use P/F and F/P formulas to get either An or A’n

>> 𝐴𝑛 = 𝐴′𝑛(1 + 𝑓)𝑛 𝐴𝑛 = 𝐴′

𝑛(𝐹|𝑃, 𝑓, 𝑛) 𝐴′𝑛 = 𝐴𝑛(𝑃|𝐹, 𝑓, 𝑛) Nominal/Market i/rate or Inflation adjusted MARR (i): i/rate quoted by financial institutions that accounts for both earning and purchasing power <<use with actual-dollar analysis>> Real i/rate (i’): current i/r minus current inflation rate <<use with constant dollar analysis>>

Adjusted discount method: 𝑃𝑛 =𝐴𝑛

((1+𝑓)(1+𝑖′))𝑛 =

𝐴𝑛

(1+𝑖)𝑛 (1 + 𝑖) = (1 + 𝑓)(1 + 𝑖′) With continuous compounding, 𝑖′ = 𝑖 − 𝑓

Money market: part of financial market where short term assets are bought and sold.

T Accounts: Debits-left(+ve), Credits-right(-ve), crediting in cash account means debiting in some expense account. Assets/Expenses/Dividends increased with debits, Liabilities/Revenue/Equity Increased with credits. Assets: Cash, Property/Plant/Equipment, Inventory, Accounts receivable Liabilities: Capital stock, LT debt Expenses: Rent/Utility, Wages, COGS, Interest Revenues: Sales COGS = Raw materials + depreciation(any property/equipment used for making goods) + wages + extra property used to make goods Income Statement Balance sheet Revenues: Assets: Liabilities: Sales: $ Cash + A/R: $+$ Wages/Loans:$+$ Expenses: Inventory: Owner’s Equity: Expenses as in top: $ RM, WIP, FGs: $+$+$ Retained Earnings: $ Depreciation of office/equipment: $ Man. & Office eq.: $+$(depr) Capital Stock: $ Net income: $ Total Assets: $ Liab. + Equity: $

Acid Test Ratio = (Current Assets - Inventories) / (Current

Liabilities). A large portion of a retail stores’ current assets is made

up of its inventory→ Low Acid test ratio. Acid test ratio is a

measure of how well a company can meet its current obligations

without having to liquidate or depend too heavily on its

INVENTORY.

marginality is the focus on how one thing changes if something

else changes just slightly. For instance marginal utility looks at how

much utility will change if consumption changes by a single unit,

marginal product looks at how productivity would change if more

capital or labor were added to the manufacturing process, marginal

product of labor looks at how productivity will change if one more

worker is hired

Replace existing Assets. Operating costs of long run assets keep

increasing. Salvage values keeps decreasing so that might force you

to sell it ASAP. New technology might seduce to buy new machine

and replace it with defender.

The prim stock exchange where a publicly traded company's stock

is bought and sold is the primary stock exchange. Prospectus must

be prepared for a transaction to occur in a primary stock exchange.

The primary stock market is when you purchase shares directly

from a company that originally owned them (i.e. an IPO). A

secondary stock market is an avenue to purchase shares from

investors (and who potentially had bought them from the IPO). The

NYSE, and TSE/X are examples of secondary stock markets

Capital gains: profits made on previously taxed money, so you are

only charged half the taxes on these gains. Income has taxes

charged in full. When you purchase stocks and then sell them, the

money you make is called capital gains. The government says that

this is considered income and therefore it is taxed. It is taxed at a

rate of 50%

Market Capitalization is the total dollar market value of a

company’s outstanding shares. For example, if Company A has a

$100 billion market capitalization and has 10 billion shares, while

Company B has a $1 billion market capitalization and 100 million

shares, both companies will have a share price of $10, but

Company A is worth 100 times more than Company B

What is the best way for an individual to protect during a

deflationary economy? What major economy has struggled

with deflation for the past 20 years? The winners in a deflationary

economy are people who own money. So, to win, you must have a

lot of money or save a lot of it. Japan has been struggling with

deflation for the past 20 years.

Real Interest Rate = Nominal Interest rate - Inflation

rate(expected or actual)

A real interest rate is an interest rate that has been adjusted to

remove the effects of inflation to reflect the real cost of funds to the

borrower and the real yield to the lender or to an investor.

Why is it that an appreciating currency leads to declining

domestic inflation? depreciating currency will eventually increase

exports and decrease imports, improving net exports. In contrast, an

appreciating currency reduces exports and increases imports. Id say

its that the value of your money is going up ---> less countries buy

your exports cause its more expensive ---> less jobs for export

sector ---> less money being put into the hands of the public ---->

less inflation

Why might the concept of economic life of a defender not exist?

Economic life N* is the lifespan of an asset at which AEC is

minimized (i.e. AEC is a convex function of N, and its minimum

value is called AEC*). If AEC_D* < AEC_C*, we keep the

defender at least for N_D* years, so we do consider the economic

life of the defender. But the concept of "economic life of the

defender" may not exist if the defender is already such an old piece

of equipment that its minimum value of AEC is sometime in the

past (i.e. AEC is just an increasing function of N). In that case, we

replace when the marginal cost of defender exceeds AEC_C*.

Why is it important for central banks to maintain political

independence? Because if they were not independent, they could

easily be influenced by politicians to do certain things that benefit

the politicians (ex: increase inflation). In turn, this could potentially

harm the economy overall. So government cannot pressure the bank

for more inflation

Leverage: The bad thing that can happen is company cannot pay

back loans because they borrowed too much money. The good

thing: If a company uses the appropriate amount of leverage, they

can potentially make a lot more money than what they would if

they use their own money because they do not have to make the

investment themselves. How does a declining currency (rel to foreign one) contribute to

domestic inflation? A declining currency means that more exports

happen because it is cheaper for other countries to come in and

export. This leads to exports being heavily competitive. On the

other side, less imports will occur because they’re expensive.

Overall, this leads to a decrease in availability for goods because

more exports and less imports. This means, that less supply, same

demand, and an increase in cost of goods. This means that things

are expensive and this leads to more inflation occurring. So, it’s a

self perpetuating cycle Best way for individual to protect wealth during inflationary

economy? Purchase long term assets that appreciate with (or even

beat) the inflation rate(basically buy but do not save money during

this period). an example of such an asset is housing. Commodity? commodity is a good that is widely available from

indistinguishable suppliers - whose price is determined by the

market. Exgold, wheat, oil, corn, etc. Depletion? Depletion is a commonly used term in the business of

harvesting natural resources. It is a cost associated to the

depreciation of natural resources. example, if you have a mine and

the amount of gold in the mine decreases because it has been mined

Why government favor little inflation? Inflation stimulates the

economy. If you want to buy a car in 2014, and prices are

rising....you would buy the car soon out of fear that prices might

become too high by next year. A little inflation encourages you to

buy sooner and that boosts economic growth. Also, the government

is in a huge debt. With the help of inflation, tax revenue will go up

Compound amount (F/P, 𝑖, N): 𝐹 = 𝑃(1 + 𝑖)𝑁 Present worth (P/F, 𝑖, N): 𝑃 = 𝐹(1 + 𝑖)−𝑁

Compound amount (F/A, 𝑖, N): 𝐹 = 𝐴 [(1+𝑖)𝑁−1

𝑖]

Sinking fund (A/F, 𝑖, N): 𝐴 = 𝐹 [𝑖

(1+𝑖)𝑁−1]

Present worth (P/A, 𝑖, N): 𝑃 = 𝐴 [(1+𝑖)𝑁−1

𝐼(1+𝑖)𝑁]

Capital recovery (A/P, 𝑖, N): 𝐴 = 𝑃 [𝑖(1+𝑖)𝑁

(1+𝑖)𝑁−1]

Present worth (P/G, 𝑖, N): 𝑃 = 𝐺 [(1+𝑖)𝑁−𝑖𝑁−1

𝑖2(1+𝑖)𝑁]

Annual worth (A/G, 𝑖, N): 𝐴 = 𝐺 [(1+𝑖)𝑁−𝑖𝑁−1

𝑖[(1+𝑖)𝑁−1]]

Present worth (P/A, g, 𝑖, N): 𝑃 = {𝐴1 [

1−(1+𝑔)𝑁(1+𝑖)−𝑁

𝑖−𝑔]

𝐴1 (𝑁

1+𝑖) , (𝑖𝑓 𝑖 = 𝑔)

∗ 𝐴n = 𝐴(1 + 𝑔)n−1

Liquidity ratios: Working capital = current assets – current liabilities Current ratio = current assets/ current liabilities Acid test ratio = (current assets-inventories)/current liabilities Debt ratio = total liabilities/total assets Debt-to-equity = total liabilities/total equity Profitability Ratios: Gross profit margin = gross profit/total sales Net profit margin = net profit/total sales

Return on assets = net income+interest expense(1−

income tax

income before tax)

𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑠𝑠𝑒𝑡𝑠,

avg assts=(total as. + last year/2) Return on equity = net income/average common equity Book value per share = common owner’s equity/# of shares Dividend yield = annual dividend per share/earning per share Price-earnings ratio = (market price) / (Earnings/share)

Inventory turnover ratio = sales/average inventory Market Capitalization: Current stock price x shares outstanding PROBLEM FORMULAS

Effective interest rate: 𝑖 = (1 +𝑟

𝑀)

𝐶− 1, 𝑀 = 𝐶𝐾

K = # of payment periods per year C = # of compounding periods per payment periodbM = # of compounding periods per year

Continuous compounding: 𝑖 = 𝑒𝑟/𝐾 − 1

V