Liabilities and Time value of Money Flashcards
Capital structure
A firm’s capital structure refers to the mix of debt and equity sources that they use to finance the acquisition
of assets
So Debt = Funds from creditors
Which is current liabilites and long term liabilities
Equity = funds from owners
Liability is and give examples:
Liability is amount owed
– An obligation resulting from past events, the settlement of which means transfer of assets, services or other economic benefits
Accounts Payable
* owed to suppliers for goods/services acquired on credit
Notes Payable
* like accounts payable except expressed as a contractual promise to pay on a certain date; usually involve interest
Accrued Liabilities End of period AJE * estimated obligations which will likely be paid in the future
* salaries, interest, taxes, warranties
4
Unearned Revenue
End of period AJE
* cash received from customers before product is delivered
Contingent liabilties
Liabilities that depend on the outcome of an event that has not yet occurred (ie. a future court ruling)
A contingent liability should be recorded on the balance sheet if the obligation is more likely than not to be incurred, and its value can be reasonably estimated
Time Value of Money Concept:
and the
– The difference between the present value of cash flows and their future value represents
Time Value of Money Concept: The right to receive an amount of money now is worth more than the right to receive the same amount in the future
Compound interest
The reason our money grows is because it earns interest – Interest is rent paid for the use of money over time
* Earned interest gets added to our investment, so we’ll start earning interest on our interest!
– This is the concept of Compound Interest
The Future Value of a Single Amount is
and what is the formula for the future value of a singe amount?
The Future Value of a Single Amount is the amount of money that a dollar will grow to at some point in the future
FV = PV *(1+i)^n
i=interest rate per per, so if you have an interest rate of 10 percent and its monthly it would be divided by 10. so 1% +1. And n is number of compouning periods, so periods * years
Present value of a single sum
and formula
PV = FV/ (1+i)^n
OR PV = FV* (1 / (1+i)^n)
(1 / (1+i)^n) = present value factor
What if we know the future value but want to know what something is worth today?
Saving: Assume you plan to
Assume you plan to buy a new car in 5 years and you think it will cost $20,000 at that time.
What amount must you invest today in order to accumulate $20,000 in 5 years, if you can earn 8% interest compounded annually?
An annuity
An annuity is a series of equal periodic payments.
Example you get paid 10,000 in year 1, 10,000 in year 2 etc
Financial instruments (bonds, pension obligations, leases) typically specify equal periodic payments.
Future / present value of annuity
The sum of future/present values of individual payments
Ordinary annuity
An annuity with payments at the end of the period is known as an ordinary annuity.
Present Value of an Annuity
Example: Saving for Retirement:
You wish to withdraw $10,000 at the end of each of the next 4 years from a bank account that pays 10% interest compounded annually.
How much do you need to invest today to meet this goal?
We could calculate PV of each future payment individually:
2. PV Factor (i = 10%, n=2) 3. PV Factor (i = 10%, n=3) 4. PV Factor (i = 10%, n=4)
$10,000 * 0.8264 = $8,264 $10,000 * 0.7513 = $7,513 $10,000 * 0.6830 = $6,830
Instead, we’ll use the Present Value of Ordinary Annuity of $1 table:
Slide 20 of 25
$10,000 × 3.1699 (i = 10%, n = 4) = $31,699
Future Value of an Annuity
Example:
We plan to invest $2,500 at the end of each of the next 3 years.
We can earn 8%, compounded interest annually on all invested funds. What will be the fund balance at the end of 3 years?
$2,500 × 3.2464 (i = 8%, n = 3) = $8,116
