Chapter 7 Essentials

Question 1

Chapter 7 focuses on

Answer 1

The time value of money

Question 2

Refers to the idea to the idea that one dollar today is worth more than one dollar tomorrow

Answer 2

Time Value of Money

Question 3

Time value of money reflects risk and inflation and what?

Answer 3

Opportunity Costs

Question 4

Cash flows at some specified upcoming date are called what?

Answer 4

Future Values

Question 5

Any interest earned is what? Generating interest on both the principle and accrued interest

Answer 5

Compounded

Question 6

Future value is computed at

Answer 6

PV (1 + r)

Question 7

The future value of a single amount over multiple periods is calculated as

Answer 7

PV (1 + r)^n

Question 8

Represent the amount and timing of cash inflows and outflows

Answer 8

Timelines

Question 9

The current value of cash flows at some specified time in the future

Answer 9

Present values

Question 10

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

Answer 10

Discount Rate

Question 11

Present value of a single amount in one period is calculated as

Answer 11

FV (1 + r)

Question 12

The present value of a single amount in multiple periods is calculated as

Answer 12

FV / (1 + r)^n

Question 13

A stream of equal cash flows

Answer 13

Annuity

Question 14

A formula for the present value of an annuity

Answer 14

(PMT / r) x (1 - [1 / (1 + r)^2] )

Question 15

A stream of continuous cash flows such as preferred shares

Answer 15

Perpetuity

Question 16

Formula for the present value of a perpetuity

Answer 16

CF / r

Question 17

A stream of continuous cash flows that grow at some constant rate

Answer 17

Growing Perpetuity

Question 18

Formula for the present value of a growing perpetuity

Answer 18

CF1 / (r - g)

Question 19

Key financial securities

Answer 19

Bonds, preferred shares, common equity

Question 20

The amount of principle to be repaid of a bond

Answer 20

Face or Par Value

Question 21

the discount rate of a bond

Answer 21

Yield to Maturity or YTM

Question 22

The percentage of the par value of the bond paid annually as interest

Answer 22

Coupon Rate

Question 23

Preferred shares generally provide preferred shareholders with a steady stream of dividends with no principal what?

Answer 23

Repayments

Question 24

Determining the price of a common share for a firm that is expected to pay a stream of common share dividends

Answer 24

Dividend Discount Model

Question 25

General formula for present valuation of a common share where PV or current price of common share =

Answer 25

DIV1 / (1 + r)^1 + DIV2 / (1 + r)^1 + DIV3 / (1 + r)^3…

Question 26

General formula for valuation of a common share assuming perpetual constant growth

Answer 26

DIV1 / (r - g)

Question 27

Relevance for managers

Answer 27

A firm runs on the capital invested and therefore is important to all