Ch4 TVM Flashcards
WACC
weight average cost of capital
WACC is the average ___ on required by all the firm’s ___.
rate of return investors
FCF is net profit after ___.
required investments in operating capital
FCF
free cash flow
timing of cash flows affects: ___ values and ___ of return.
asset values rate of return
TVM is also called DCF
time value of money discounted cash flow analysis
PV
present value
FV(N)
future value after N periods
CF(t)
Cash flow. Cash flows can be positive or negative.
I
interest rate earned per year
i is the same as r
interest rate of return
INT
dollar of interest per year.
N
number of periods
FV=
FV=PV(1+1)n
FV=
FV=PV(1+1)eN
five variable for TMV
N, I/YR, PV, PMT, FV Number of periods Interest rate Present value (+/-) Payment Future Value (-/+) TMV calculators assume that either PV or FV must be negative. If we do a deposit it is negative because this is an outflow.
the formula
formaula try with attach images
When must you use a positive value and when
must you use a negative value?
The answer is that whenever you set up a time line and use either a financial calculator’s time value functions or Excel’s time value functions, you must enter the signs that correspond to the“direction”of the cash flows. Cash flows that go out of your pocket (outflows) are negative, but cash flows that come into your pocket (inflows) are positive.
What is the first step in setting up a TVM problem?
The first step in solving any time value problem is to understand what is happening and
then to diagram it on a time line.
What is the secon step of TVM?
to pick one of the four
approaches shown in Figure 4-1 to solve the problem.
Brigham, Eugene F.; Ehrhardt, Michael C. (2013-01-28). Financial Management: Theory & Practice (Finance Titles in the Brigham Family) (Page 141). Cengage Textbook. Kindle Edition.
TVM business formula
All business students should know Equation 4-1 by heart and should also know how to
use a financial calculator.
Brigham, Eugene F.; Ehrhardt, Michael C. (2013-01-28). Financial Management: Theory & Practice (Finance Titles in the Brigham Family) (Page 141). Cengage Textbook. Kindle Edition.
coumpund interest
when interest is earned on the interest earned in prior periods, we call it
compound interest.
Brigham, Eugene F.; Ehrhardt, Michael C. (2013-01-28). Financial Management: Theory & Practice (Finance Titles in the Brigham Family) (Page 143). Cengage Textbook. Kindle Edition.
simple interest
interest. If interest is earned only on the principal, we call it simple interest.
Brigham, Eugene F.; Ehrhardt, Michael C. (2013-01-28). Financial Management: Theory & Practice (Finance Titles in the Brigham Family) (Page 143). Cengage Textbook. Kindle Edition.
describe simple interest
The total interest earned with simple interest is equal to the principal multiplied by the interest rate times the number of periods: PV(I)(N). The future value is equal to the principal plus the interest: FV = PV + PV(I)(N).
For example, suppose you deposit $100 for 3 years and earn simple interest at an annual rate of 5%. Your balance at the end of 3 years would be:
opporunity cost
opportunity cost, or the rate of return you would
earn on an alternative investment of similar risk if you don’t invest in the security under
consideration.
Brigham, Eugene F.; Ehrhardt, Michael C. (2013-01-28). Financial Management: Theory & Practice (Finance Titles in the Brigham Family) (Page 143). Cengage Textbook. Kindle Edition.
discounting
Finding present values is called discounting, and as previously noted, it is the reverse of
compounding:
Brigham, Eugene F.; Ehrhardt, Michael C. (2013-01-28). Financial Management: Theory & Practice (Finance Titles in the Brigham Family) (Page 144). Cengage Textbook. Kindle Edition.
copare FV and PV
what excel fuction finds I if you no PV and FV?
RATE
What fx finds the number of years
NPER
perpetuity
called“consols.”The term
stuck, and now any bond that promises to pay interest perpetually is called a consol,
or a perpetuity.
Brigham, Eugene F.; Ehrhardt, Michael C. (2013-01-28). Financial Management: Theory & Practice (Finance Titles in the Brigham Family) (Page 149). Cengage Textbook. Kindle Edition.
perpetuity/consol
A consol, or perpetuity, is simply an annuity whose promised payments extend out
forever.
Brigham, Eugene F.; Ehrhardt, Michael C. (2013-01-28). Financial Management: Theory & Practice (Finance Titles in the Brigham Family) (Page 149). Cengage Textbook. Kindle Edition.
formula for perpetuity
annuities
payments. If the payments are equal and
are made at fixed intervals, then we have an annuity. For example, $100 paid at the end of
each of the next 3 years is a 3-year annuity.
Brigham, Eugene F.; Ehrhardt, Michael C. (2013-01-28). Financial Management: Theory & Practice (Finance Titles in the Brigham Family) (Page 150). Cengage Textbook. Kindle Edition.
type in FV fx
Type Optional. The number 0 or 1 and indicates when payments are due. If type is omitted, it is assumed to be 0.
Set type equal to
If payments are due
0
At the end of the period
1
At the beginning of the period
what is the difference between annuity and annuity due
type is 1 for annuity due
if time is asked, formula is:
NPER
if interest or rate of return is asked, Fx is:
RATE
There are two important classes of uneven cash flows: (1) those in which the cash
flow stream consists of a series of annuity payments plus an additional final lump sum
in Year N, and (2) all other uneven streams. Bonds are an instance of the first type,
while stocks and capital investments illustrate the second type.
Brigham, Eugene F.; Ehrhardt, Michael C. (2013-01-28). Financial Management: Theory & Practice (Finance Titles in the Brigham Family) (Page 160). Cengage Textbook. Kindle Edition.
The future value of an uneven cash flow stream (sometimes called the terminal, or
horizon, value) is found by compounding each payment to the end of the stream and
then summing the future values:
Brigham, Eugene F.; Ehrhardt, Michael C. (2013-01-28). Financial Management: Theory & Practice (Finance Titles in the Brigham Family) (Page 163). Cengage Textbook. Kindle Edition.
