Assignment
Corporate Finance, Ch. 4: Discounted Cash Flow Valuation
Consider the following as you read:
1. Identify the factors used to calculate present and future cash flows.
2. Distinguish between the annual percentage rate and effective annual rate, and how each is used in financial decision making.
3. Describe the various types of annuities and how they are calculated.
RESPOND TO Present Value
Present value has been an interesting term to learn about in the chapter. On the surface, present value would seem like an obvious term; the value something currently has. However, from a finance perspective, it can be more complex than that. Example 4.10 in the text helped me visualize this best. The example involves a lottery winner getting a $20k payout on year one, and a $50k payout on year two. By doing the present value calculation, we learn that it would be essentially the same to receive $63,367.70 now instead of $70k over two years. Without knowing present value, one would naturally assume $70K over two years is better than $63k right away.
It is important to understand how less money now can be the same as more money later, thanks to earning interest. It is necessary to do the calculation for present value to determine how much of a discount one can take one receiving a lower initial payment versus a greater payment amount over a longer time period. If calculated correctly, it will often be advantageous to take the entire, yet reduce sum right away and begin investing, versus waiting for it to be paid over time.
RESPOND TO Compound Interest
Compound Interest
Afternoon Professor Mellett and Everyone,
Compound interest is calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. Compound interest is interest on top of interest and it will make your money grow faster than having simple interest, which is only calculated on principle interest. The rate at which the interest is compounded it accrues on the rate of the frequency the money compounds. So, the higher the number of compounding interest over said periods the greater the interest compounds.
The formula for calculating compound interest is:
Compound Interest = Total amount of Principal and Interest in future (or Future Value) less Principal amount at present (or Present Value)
= [P (1 + i)n] - P
= P [(1 + i)n - 1]
(Where P = Principal, i = nominal annual interest rate in percentage terms, and n = number of compounding periods.)
Take a three-year loan of $10,000 at an interest rate of 5% that compounds annually. What would be the amount of interest? In this case, it would be: $10,000 [(1 + 0.05)3] - 1 = $10,000 [1.157625 - 1] = $1,576.25.
Keith Morton
https://www.google.com/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=compound+interest
Corporate Finance, Ch. 8: Interest Rates and Bond Valuation
Consider the following as you read:
1. Understand the relationship between interest rates and bond values.
2. Review how time to maturity and the coupon rate affect interest rate risk.
3. Compare and contrast the characteristics of zero coupon bonds, government bonds and corporate bonds.
4. Describe the difference between real and nominal rates.
Corporate Finance, Ch. 9: Stock Valuation
Consider the following as you read:
1. Describe how capital gains and dividend growth affect stock prices.
2. Review how the price-to-earnings ratio and enterprise value ratios are used to compare stock values.
3. Understand how the NYSE and NASDAQ are organized and operate.
o RESPOND TO Earnings and Enterprise Ratio
The price-to-earnings ratio shows the price of a stock in relation to the per share earnings. This ratio indicates what an investor would need to contribute in order to earn one dollar back from the company. In general the higher the ratio the better growth and earnings are expected by the investor. Enterprise value is determined by taking minority interest, preferred stock, and debt divided by earnings. The earnings in this ratio would not consider depreciation, interest, or taxes.
According to Ross, Westerfield, Jaffe, and Jordan (2016), "Enterprise value is equal to the market value of the firm's equity plus the market value of the firm's debt minus cash" (pg. 286).
Resource
Ross, S., Westerfield, R., Jaffe, J., & Jordan, B. (2016). Corporate Finance (11th). New York, NY: McGraw-Hill.