week 13 Flashcards
what is the present value
the current value of future cash flows discounted at the appropriate discount rate
value at t=0 on a timeline
refers to the current value of an amount to be received in the future
what is the future value
the amount an investment is worth after one or more periods
later money on a timeline
what is the interest rate
the exchange rate between earlier and later money
discount rate
cost of capital
opportunity cost of capital
required return
terminology depends on usage
how do you calculate future value
FV = PV x (1+r)^t
what is simple interest
interest earned only on the original principle
what is compound interest
interest earned on principle and on interest received
interest on interest - interest earned on reinvestment of previous interest payments
how do you calculate future value with simple interest
FV = PV x (1 +rt)
how do you calculate future value with compound interest
FV = PV x (1+r)^t
how do you calculate dividend growth
FV = D0 x (1+r)^t
how do you calculate present value
PV = FV / (1+r)^t
how do you calculate discount rate
r = (FV/PV)^(1/t) -1
how do you calculate the number of periods
t = (ln (FV/PV)) / (ln (1+r))
what is the rule of 72
approximation method
way of checking how long it will take to double your money at a given interest rate and compound interest
do 72 / interest rate percentage
eg for 8% interest, 72/8 = 9
what are multiple cash flows
an asset or project typically has multiple cash flows
since money has time value, the value of such an asset or project is not the sum of individual cash flows
we need to transform all cash flows to one point in time before they can be meaningfully added together
this transformation is either done through compounding or dicounting
what are multiple cash flows
an asset or project typically has multiple cash flows
since money has time value, the value of such an asset or project is not the sum of individual cash flows
we need to transform all cash flows to one point in time before they can be meaningfully added together
this transformation is either done through compounding or discounting
assumed cash flow occurs at the end of the period
