Ch4 TVM Flashcards by sophanet phoeun

WACC

weight average cost of capital

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WACC is the average ___ on required by all the firm’s ___.

rate of return investors

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FCF is net profit after ___.

required investments in operating capital

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FCF

free cash flow

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timing of cash flows affects: ___ values and ___ of return.

asset values rate of return

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TVM is also called DCF

time value of money discounted cash flow analysis

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present value

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FV(N)

future value after N periods

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CF(t)

Cash flow. Cash flows can be positive or negative.

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interest rate earned per year

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i is the same as r

interest rate of return

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INT

dollar of interest per year.

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number of periods

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FV=

FV=PV(1+1)n

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FV=

FV=PV(1+1)eN

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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.

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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.