Time Value of Money

What are the earnings per share (EPS) for a company that earned Rs.100,000 last year in after-tax profits, has 2,00,000 common shares outstanding and Rs.1.2 million in retained earning at the year end?

0.50 paise

If the nominal rate of interest is 10% per annum and there is quarterly compounding, the effective rate of interest will be:

10.38% per annum

If nominal rate of return is 10% per annum and annual effective rate of interest is 10.25% per annum, determine the frequency of compounding:

2

You are considering investing in a zero-coupon bond that sells for Rs.250. At maturity in 16 years it will be redeemed for Rs.1,000. What approximate annual rate of growth does this represent?

9%

lump sum

A single payment

Time value of money indicates that

A unit of money obtained today is worth more than a unit of money obtained in future

Financial management mainly focuses on

All elements of acquiring and using means of financial resources for financial activities

The objective of wealth maximization takes into account

Amount of returns expected Timing of anticipated returns Risk associated with uncertainty of returns

annuity

An annual allowance, payment, or income.

Amortization Schedule

Calculates the total payments of each of the remaining years in a table. The interest paid is given by the beginning balance multiplied by the interest rate. The beginning balance is given by the ending balance from the previous year. Interest paid declines each period,given that the total payment is fixed, the principal, paid must be rising each period.

Heterogeneous cash flows can be made comparable by

Discounting technique Compounding technique

Relationship between annual nominal rate of interest and annual effective rate of interest, if frequency of compounding is greater than one:

Effective rate > Nominal rate

time value of money

Money's potential to grow in value over time. The relationship between time, money, a rate of return, and earnings growth.

Mr. X takes a loan of Rs 50,000 from HDFC Bank. The rate of interest is 10% per annum. The first installment will be paid at the end of year 5. Determine the amount of equal annual installments if Mr. X wishes to repay the amount in five installments.

Rs 19311

You want to buy an ordinary annuity that will pay you Rs.4,000 a year for the next 20 years. You expect annual interest rates will be 8 percent over that time period. The maximum price you would be willing to pay for the annuity is closest to

Rs.39,272

future value of an annuity

The amount of money that accumulates at some future date as a result of making equal payments over equal intervals of time and earning a specified rate of interest over that time period.

rule of 72

The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest.

compounding frequency

This refers to how often interest is credited to the account. Once interest is credited it becomes, in effect, principal.

The only feasible purpose of financial management is

Wealth Maximization

time line

a graphical depiction of the cash flows in a time value of money problem

wealth maximization

a modern approach to financial management. It is a superior goal compared to profit maximization as it takes broader arena into consideration. Wealth or Value of a business is defined as the market price of the capital invested by shareholders.

graduated annuity

a series of cash flows that increases over time at a constant rate for a finite number of periods

perpetuity

a state of infinite or indefinitely long duration

compounding

a technique used to find out the future value of a present money

The controller's responsibilities are primarily ---- in nature, while the treasurer's responsibilities are primarily related to ---------

accounting; financial management

present value of an annuity

an amount invested at a given interest rate that supports the payments of an annuity

annuity due

an annuity for which the cash flows occur at the beginning of the period

Regular Annuity

an annuity in which payments occur at the END of the period

investment Decision

decisions that involve utilization / application of funds in the right mix of projects and fixed assets to maximize the returns for the organization.

dividend decisions

decisions which deal with the appropriation of of after tax profits.

financing decisions

decisions which deal with the financing pattern of the firm

In a typical loan amortization schedule, the rupee amount of interest paid each period

decreases with each payment

Time value of money supports the comparison of cash flows recorded at different time period by

discounting all cash flows to a common point of time

In 3 years you are to receive $5,000. If the interest rate were to suddenly increase, the present value of that future amount to you would

fall

The market price of a share of common stock is determined by:

individuals buying and selling the stock.

compound interest

interest earned on both the principal amount and any interest already earned

The decision function of financial management can be broken down into the decisions.

investment, financing, dividend and liquidity

The term "capital structure" refers to:

long-term debt, preferred stock, and common stock equity.

The long-run objective of financial management is to:

maximize the value of the firm's common stock.

A corporation in which you are a shareholder has just gone bankrupt. Its liabilities are far in excess of its assets. You will be called on to pay:

nothing

To increase a given present value, the discount rate should be adjusted (increased or decreased)

reduced

In a typical loan amortization schedule, the total rupee amount of money paid each period

remains constant with each payment

A(n) would be an example of a principal, while a(n) would be an example of an agent.

shareholder; manager

You can use------ to roughly estimate how many years a given sum of money must earn at a given compound annual interest rate in order to double that initial amount .

the Rule of 72

future value

the amount of money in the future that an amount of money today will yield, given prevailing interest rates

The focal point of financial management in a firm is:

the creation of value for shareholders.

"Shareholder wealth" in a firm is represented by:

the market price per share of the firm's common stock.

discounting

the process of finding the present value of funds that will be received in the future

profit maximization theory

the traditional approach and the primary objective of financial management. It implies that every decision relating to business is evaluated in the light of profits. All the decision with respect to new projects, acquisition of assets, raising capital, distributing dividends etc are studied for their impact on profits and profitability. If the result of a decision is perceived to have a positive effect on the profits, the decision is taken further for implementation.