Finance

Question 1

What is a project?

Answer 1

series of cash flows

Question 2

What is a firm?

Answer 2

A group of projects

Question 3

What are the characteristics of a stock?

Answer 3

• Ownership/Control: yes
• Cash flows: Dividends
• Tax status of cash flows: non-deductible
• Priority of cash flows: last in line

Question 4

What are the characteristics of a bond (debt)?

Answer 4

• Ownership/control: none
• Cash flows: Interest (fixed)
• Tax status of cash flows: deductible
• Priority of cash flows: first in line

Question 5

What is a cash flow?

Answer 5

amount of money paid at a specific time

Question 6

What are financial markets?

Answer 6

where securities are issued and traded

Question 7

What are Financial intermediaries?

Answer 7

organizations that raise money from investors and provide financing to individuals, corporations, other organizations

Question 8

What is Future Value?

Answer 8

FV=PV x (1+r)^t

FV = Future Value
PV = Present Value (the initial amount of money)
r = Interest rate per period (expressed as a decimal)
t = Number of periods

Question 9

What is Present Value?

Answer 9

PV=FV/(1+r)^t

PV = Present Value
FV = Future Value (the amount of money to be received in the future)
r = Interest rate per period (expressed as a decimal)
t = Number of periods

Question 10

What is the DCF perpetuity formula?

Answer 10

1. Perpetuity formula (A stream of equal cash payments that never ends)

PV=CF/r
PV = present value
CF = Cash Flow
r = discount rate1. Perpetuity formula (A stream of equal cash payments that never ends)

PV=CF/r
PV = present value
CF = Cash Flow
r = discount rate

Question 11

What is the DCF annuity formula?

Answer 11

2. Annuity formula (A stream of equal cash payments for a limited period of time)

PV=CF( 1/r-1/(r(1+r)^t ) )

Question 12

What is 1 + Effective Annual Interest Rate (EAR)?

Answer 12

1+EAR=(1+monthly rate)^12