Chapter 7 Essentials Flashcards
Chapter 7 focuses on
The time value of money
Refers to the idea to the idea that one dollar today is worth more than one dollar tomorrow
Time Value of Money
Time value of money reflects risk and inflation and what?
Opportunity Costs
Cash flows at some specified upcoming date are called what?
Future Values
Any interest earned is what? Generating interest on both the principle and accrued interest
Compounded
Future value is computed at
PV (1 + r)
The future value of a single amount over multiple periods is calculated as
PV (1 + r)^n
Represent the amount and timing of cash inflows and outflows
Timelines
The current value of cash flows at some specified time in the future
Present values
The interest rate or investment rate is known as the what and reflects the opportunity cost or the return required by investors that accounts for the risk of the investment
Discount Rate
Present value of a single amount in one period is calculated as
FV (1 + r)
The present value of a single amount in multiple periods is calculated as
FV / (1 + r)^n
A stream of equal cash flows
Annuity
A formula for the present value of an annuity
(PMT / r) x (1 - [1 / (1 + r)^2] )
A stream of continuous cash flows such as preferred shares
Perpetuity
Formula for the present value of a perpetuity
CF / r
A stream of continuous cash flows that grow at some constant rate
Growing Perpetuity
Formula for the present value of a growing perpetuity
CF1 / (r - g)
Key financial securities
Bonds, preferred shares, common equity
The amount of principle to be repaid of a bond
Face or Par Value
the discount rate of a bond
Yield to Maturity or YTM
The percentage of the par value of the bond paid annually as interest
Coupon Rate
Preferred shares generally provide preferred shareholders with a steady stream of dividends with no principal what?
Repayments
Determining the price of a common share for a firm that is expected to pay a stream of common share dividends
Dividend Discount Model
General formula for present valuation of a common share where PV or current price of common share =
DIV1 / (1 + r)^1 + DIV2 / (1 + r)^1 + DIV3 / (1 + r)^3…
General formula for valuation of a common share assuming perpetual constant growth
DIV1 / (r - g)
Relevance for managers
A firm runs on the capital invested and therefore is important to all
