finance lec 1 Flashcards
any descison company makes is
financial
what are the 2 main tyopes of ddesicsions
investments to make
how to finance investments
when to invest
economic assumption is we like to have more of
something we like
£1 today is wort morethan
a poun tomrrow / in future
if you decide to invest money today you give up the oportunity
spend it on something now or invest in something else
opportunity cost
value of next best alt foregone
if we tie up money in savings we et a reward called
interest , yield , return
how is interest measured -
rate
what are the two elements of an interest rate
compensation for inflation
real rate above inflation
rea IR can be +ve or -ve t/f
yes
cashflows at differnet times are not the
same
you cannot add cashflows that are at
differnent times
when we bring money from future to the present
discounting
if we bring money from present to future
compounding
who is present value referred to
t0
if present value is t0 what is next period/year referred to
t1
if we had 100 and got an interest rate of 10% - and got 110 what is this mad eof
original investment of 100
10 interest payment
catrrying on from the £100 investment of 10% is 100 = £110 a year from now = £121 two years from now
yes same value expressed at diff points in time
compounding effect means you’re earning interst on your
interest
what is the equation for calculating a future valu
CF0(cashflow today) * (1+ interest rate)^t = FVt
t = time desired
what is the eqaution for bringinng a future value back to present
FV *1/(1+r)^t
or
FV/(1+r)^t
when you discount your future cahs flow and you get your number what does this mean
if someone offerig you a pound x amount of time from now that is the maximum price we will be willing to pay
discount rate
reward you get for your investmet
discount factor
1/(1+r)^t
how many dp do we express discount factor to
4 dp
disocunt rate aka
opportunity cost of capital
as rational individual teh higher the risk /longer we got to wait
the bigger the reward we’re asking for
its the default in finance that what type of risk individuals are we
risk averse
how do we work out net present valur
sum of all future cashflows - required investment
in net present value what mut you do to be entitled to future +ve cf
incur a cost
in net present value you may not incur a cost
but
at that exact moment maybe instead a year from now or suttin
everything needs to be discounted back to teh day you made the descisoin
