If you can provide some explanation to the calculation (finance calculator if po

Question

If you can provide some explanation to the calculation (finance calculator if possible). It would be appreciated. Before Mrs. Smith arrives, you study her account file and notice she has different investments: 1. A promissory note entitling her to receive a lump sum of $100,000, 5 year from today. Similar notes today yield 5% per year. 2. An insurance settlement that will pay her $1,200 per month for the next 40 months. A finance company, GJ Worthless, is willing to buy this settlement from her today as long as it can obtain a yield of 0.85% per month on its investment. 3. A retirement account that has always paid an APR of 6% per year (0.5% per month) compounded monthly, into which she has deposited $310 at the end of every month for the last 10 years. 4. 50 shares of a stock that will pay a $25 quarterly dividend (per share) three months from today and is expected to continue paying the same $25 per quarter forever. Similar investments today are priced to yield 1.25% per quarter.

Explanation / Answer

What are financial ratios? Financial ratios are a means of evaluating a company's performance or health that uses a standard of comparisons of items on the company's financial statements rather than a direct reading of the financial figures. For example, one common ratio used is the Current Ratio. This is derived by dividing the Total Current Assets by Total Current Liabilities. The result is an indication of the company's ability to cover current liabilities and how much of a margin of safety there is to cover a possible shrinkage in current assets. How do I use the Financial Ratios Calculator The Calculator has been set up to do all of the calculations of financial ratios for you, all you have to do is input the raw financial data. All of the data requested can be found in the company's annual financial statements, either the 10K or the Annual Report. The input table indicates which financial table the infomation is from, and the fields have been set up is approximately the same order that you will typically find the data. Once all, or as many of the fields are filled in as possible, simply click on the Calculate Ratios button at the bottom. To get an idea of how this works, you can go to the Sample page which already has most of the data entered. Caveat: Not all of the data will appear in every company's financial tables. Sometimes a company will leave out a field like Total Liabilities or Total Assets. If the information is not present in the table you are using, you can still use the Calculator, but some of the ratios will not compute. If this is the case, you will see a message to that effect in the output screen. In the case of Total Current Assets and Total Assets, the Calculator will try to compensate for the missing information by taking the sum of the asset information that is present. This may produce a ratio that is not completely accurate, or worse, grossly inaccurate. If this eventuality is unacceptable, you can either fill in these fields based on your own calculations of these figures, or completely ignore any of the ratios that are produced based on the figures in these fields. What ratios will it give me? The ratios produced by the Calculator are based on those that appear in Dun & Bradstreet's Industry Norms and Key Business Ratios and the RMA Annual Statement Studies. Most of these ratios can also be found in the Almanac of Business & Financial Ratios (commonly referred to as Troy's). Some ratios have been intentionally left out primarily because the data required to calculate the ratio does not come from the Annual Report or 10K. What do the ratios mean? Explanations of the ratios and their significance can be found in the introductory pages of Dun & Bradstreet's Industry Norms and Key Business Ratios and the RMA Annual Statement Studies. To avoid both copyright violations and finger fatigue, I have not copied those explanations here. I have, however, created a table that gives the formulae for the various ratios. I strongly encourage you to look at the explanations in D&B; and RMA since they will likely provide you far greater insight than I possibly could.

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