Week 3 - Valuation I: Introduction to Valuation and Finance Math Flashcards
Define Value?
The worth of assets or liabilities: the total of what the asset can earn over the period held and the total of what a liability costs over the period held.
Fill in the following gap: Assets _____ money/cash flow
earn
Fill in the following gap: Liabilities ____ money/cash flow
cost
What is a benchmark in terms of finance?
the bare minimum amount we need to make to break even or not go into a loss.
Does value influence supply and demand?
Yes
What can an asset be termed as overpriced?
Value ($8) < Price ($10)
what can an asset be termed as underpriced?
Value ($10) > Price ($8)
What is Price Ceiling?
the maximum amount we would pay for something
What is the Price Floor?
the minimum we would sell something for.
Fill in the following gap: Money paid sooner or today is _____ in cost to the payer than if paid at a later date
greater
Can you add money from different periods?
no, as the value of it is different during different times
What’s the formula for calculating future value (FV)?
FV = PV(1 + i)^n
What’s the formula for Present Value (PV)?
PV = FV / (1 + i)^n
Define Value Creation?
buying productive assets that are worth more than they cost.
What does the time-value of money reflect?
reflects the notion that people prefer to consume things today rather than at some time in the future.
What is a timeline?
A horizontal line that starts at time zero and shows cash flows as they occur over time
What is the Principal in terms of Finance?
the amount of money on which interest is paid
Define Simple Interest?
the amount of interest paid on the original principal amount.
Define Interest on Interest?
the interest earned on the reinvestment of previous investment payments.
Fill in the following gap: Higher interest rates leads to _____ growth
faster
What is the Effective Annual Return (EAR)?
The effective return that includes the compounding effect of the frequency of payment per annum. It is used to compare the returns of assets and liabilities, which have different payment terms.
What is the formula we can use to calculate the Effective Annual Rate (EAR)?
EAR = (1 + i/m)^m - 1
Fill in the following 2 gaps: The ____ the frequency of payment (m), the ____ the effective return
Higher, greater
What is the relationship that you want with assets and liabilties in terms of Effective Annual Return (EAR)?
For assets, you desire the highest Effective Annual Return (EAR), for liabilities, you want the lowest Effective Annual Return (EAR).
