Exam 1 9/20 Flashcards
Real Assest
An asset used to produce a product which will then be sold to generate cash flow
Financial Asset
An intangible asset, such as debt or equity
4 areas of Finance
Corporate finance
Investments
Financial institutions
International finance
Corporate (Business) finance answers what 3 questions?
What long-term investments?
How to get financing long-term?
How to manage every day financial activities?
3 Financial Management Decisions
Capital budgeting
Capital structure
Working capital management
Capital budgeting
The process of planning and managing a firm’s long-term investments
- consider: size, timing, and risk of cash flows
Capital structure
The specific mixture of long-term debt and equity the firm uses to finance its operations
- consider: How much should the firm borrow? What are the least expensive sources of funds?
Working capital management
a firm’s short-term assets and liabilities
- consider: How much money and inventory should be kept on hand? How to obtain any needed short-term financing? Should the firm sell on credit to customers?
What is the goal of financial management?
To maximize the market value of the existing owner’s equity
Future value
The amount an investment is worth after one or more periods
Compounding
The process of accumulating interest in an investment over time to earn more interest; earning interest on the already accumulated interest
Compound interest
The result from combining interest earned on both the initial principal and the interest reinvested from prior periods
Simple interest
The interest is not reinvested and so the interest is earned each period only on the original principal
Future value interest factor
(1+r)^t
Discount factor
1/(1+r)^t
Present value
The current value of future cash flows discounted at the appropriate discount rate
Discount
Calculation of the PV of some future amount
Rule of 72
The time(t) it takes your money to double can be calculated approximately by 72/r%=t
Annuity
A level stream of cash flows for a fixed period of time
Annuity due
An annuity for which the cash flows occur at the beginning of the period
Annuity due value=
= Ordinary annuity value x (1+r)
Perpetutity
An annuity in which the cash flows continue forever
Effective Annual Rate
The interest rate expressed as if it were compounded once per year (accounting for the number of periods within the year)
- This can be used to compare rates
PV=
How much do I need to invest today to get a specified FV?
=FV/(1+r)^t
FV=
What is the FV of my original principal investment?
=PVx(1+r)^t
PV=
for a perpetuity
=C/r
PV=
(for an annuity)
How much would we offer for this annuity?
=C[[1-(1/1+r)^t]/r]
FV=
for an annuity
=C[[(1/1+r)^t]-1/r]
EAR=
Compare interest rates
=[1+(quoted rate/m)]^m-1
