Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

BUSA523 - Corporate Finance > Unit 2: Fundamental Concepts in Financial Calculations > Flashcards

Unit 2: Fundamental Concepts in Financial Calculations Flashcards

You may prefer our related Brainscape-certified flashcards:
Series 66 flashcards SIE Exam flashcards Series 63 flashcards Series 79 Top-Off Exam flashcards Series 7 Top-off Exam flashcards CFA flashcards Series 65 flashcards
1
Q

What is a Discounted Cash Flow (DCF)?

A

The present value of a future cash flow.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is simple interest?

A

Interest earned only on the original principal amount invested.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is “interest on interest”?

A

Interest earned on the reinvestment of previous interest payments

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is Future Value?

A

The amount an investment is worth after one more more periods. Also compound value.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

The 3 ways to calculate time value of money are….

A
  1. Use A financial calculator
  2. Use a mathematical formula
  3. Use a (present/future) value factor table
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

The rule of 72 is calculated as…..

A

72/ the interest rate

Note: interest rate is NOT in decimal format.

e.g. 72/8% = 72/8

(not 72/0.08)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

(Calculator Question)

What is the order you should always enter values in the financial calculator?

A
  • N
  • I/Y
  • PV
  • PMT
  • FV
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

True or false:

A dollar’s worth will be worth as much in the future as it is today.

A

False.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is the formula for Present Value Factor?

A

PVF = 1/(1+r)t

r = discount rate

t = time (or interval)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the basic Future Value formula?

A

FV = PV * (1+r)t

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

The higher the risk, the _____

A

larger the discount rate and the lower the present value.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

As you increase the length of time involved, what happens to future values?

A

It increases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

As you increase the length of time involved, what happens to present values?

A

It descreases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

The discount rate is also called…

A

The rate of return.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

True or false

Assuming positive cash flows, both the present and future value of an annuity will rise

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the formula for Future Value Factor?

A

(1+r)t

r = interest rate

t = time (or interval)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

True or False:

Inflation will make a dollar in the future be worth less than a dollar today.

A

True.

18
Q

True or false:

The value of money will remain constant across different time horizons.

A

False

19
Q

Calculator question:

When will you use the I/Y button?

A

When you hear one of these terms

  • Cost of Capital
  • Interest rate
  • Discounted rate
  • Opportunity cost
20
Q

What si the formula for Present Value Interest Factor for Annuities (PVIFA)?

A

PVIFA = 1 - PVF/ r

PVF = Present Value Factor

r = discount rate

21
Q

What is the difference between an “Ordinary Annuity” and an “Annuity Due”?

A
  • Oridnary annuity: Cash flow occurs at the end of each period
  • Annuity Due: Cash flow occurs at the beginning of each period
22
Q

_______ will make a dollar in the future be worth less than a dollar today.

A

Inflation.

23
Q

What is compound interest?

A

Interest earned on both the initial principal and the interest reinvested from prior periods

24
Q

What happens to Present Value when the discount rate goes up?

A

Present value goes down.

25
Q

What is the formula for Annuity Future Value Factor?

A

(FVF - 1)/r

FVF = Future Value Factor

r = interest rate

26
Q

Interest earned on both the initial principal and the interest reinvested from prior periods is called ________ _________

A

Compound Interest.

27
Q

The Present Value of a future cash flow is commonly called…

A

Discounted Cash Flow (DCF)

28
Q

What is a discount rate?

A

The rate used to calculate the presnt value of future cash flows

29
Q

_______ means to calculate the present value of a future amount.

A

Discounting

30
Q

What is the basic Present Value formula?

A

PV = FV/(1+r)t

31
Q

What happens to the discount rate when risk of cash flow increases?

A

The discount rate goes up.

32
Q

What is Present Value?

A

The current value of a future cash flows discounted at the appropriate discount rate

33
Q

True or false:

The discount rate is also called the rate of return.

A

True.

34
Q

What are the four factors of evaluating Annuity Present Value?

A
  • PV: Present Value
  • C : Periodic Cash Flow
  • r : discount rate
  • t : number of payments (or life of annuity)
35
Q

True or false:

Discounting is the opposite of compounding.

A

True

36
Q

Using your calculator:

When entering in values a cash outflow should be represented by…

A

a (-) sign.

Note: This is usually used when entering Present Value.

Note: When computing for Present Value a (-) sign should be taken as a positive value

37
Q

What does EAR stand for?

A

Effective Annual Rate

38
Q

What is “discounting”?

A

to calculate the present value of some future amount

39
Q

What is the “rule of 72”?

A

The rule of 72 is a shortcut to estimate the number of years required to double your money at a given annual rate of return.

The rule states that you divide the rate, expressed as a percentage, into 72: Years required to double investment = 72 ÷ compound annual interest rate.

40
Q

What is Compounding?

A

The process of accumulating interest in an investment over time to earn more interest

41
Q

What is the formula for calculating Interest Rate?

A

r = (FV/PV) (1/n) -1

BUSA523 - Corporate Finance (9 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions