FIN221 Ch1&5

npv (ueven cash flow)

=NPV(rate, value 1, value 2...)

corporation

A corporation is a legal entity chartered by a state and is its own legal entity separate and distinct from its owners and managers.

Ordinary annuity

A series of equal cash flows that are paid or received at regular intervals, such as a day or a month, is called an annuity. When the cash flows occur at the end of each of the regular intervals, the series is called an ordinary annuity. An example of an ordinary annuity is the 60 monthly payments of $676.65 made at the end of each month to repay a $35,000 loan that charges 6% interest and is to be repaid over five years. If the cash flow were to occur at the beginning of each of the regular intervals, then the annuity would be called an annuity due.

simple interest

FV = PV + (PV x I x N)

rate

RATE(nper, pmt, pv, [fv], [type])

Investments

Security analysis, portfolio theory, market analysis, and behavioral finance fall under the area of investments.

Shareholder intervention

Shareholder intervention is most effective when institutional investors—such as pension and mutual funds—have significant stock holdings and can concentrate on and organize investors. Institutional investors can exert more influence on the firm's management than individual investors can, because they tend to own a larger portion of the company than most individual shareholders own.

Annual percentage rate

The annual percentage rate (APR) is the cost of borrowed funds as quoted by lenders and paid by borrowers, in which the interest required is expressed as a percentage of the principal borrowed. This rate does not reflect the effects of compounding if interest is earned more than once per year.

Corporate Finance

The finance function within a business. One of the three main areas of finance. Corporate finance focuses on financial decisions that corporations need to make to run the firm. The objective of these decisions is to achieve the primary goal of the corporation: maximize shareholder value.

Time value of money

The financial concept that maintains that the timing of a receipt or payment of a cash flow will affect its value is called the time value of money (TVM). The time value of money illustrates that, due to its capacity to earn interest, a cash flow received today is worth more than an identical cash flow to be received on a future date. The exact current value of a future cash flow is a function of the magnitude of the future cash flow, the return required by the owner (recipient) of the cash flow, and when in the future the cash flow will occur.

Opportunity cost of funds

The interest rate that represents the return on an investor's best available alternative investment of comparable (equal) risk is the investor's opportunity cost of funds.

The US Securities and Change Commission (SEC), a US federal agency, is considered to be an investor's advocate. Its purpose is to protect investors, maintain market integrity, and facilitate capital formation. Under the Sarbanes-Oxley Act of 2002, the SEC requires CFOs to certify that the firm's:

earnings numbers are accurate

simple interest (total interest earned)

interest rate x number of years

Capital Markets

The capital market includes the stock market and the bond market

know loan ammortization schedule

yr, beginning, payment, interest, principal, ending bal 1. Fill in payment (PMT) 2. interest paid=beg balance x interest rate 3. principal paid=payment-interest paid 4. ending=beg balance-principal paid **make sure last entry is zero

number of years

= NPER(rate, pmt, pv, [fv], [type])

Sole Proprietorship

A business owned by one person, unlimited liability

overvalued

A stock trading at a price above its intrinsic value

undervalued

A stock trading at a price below its intrinsic value

present value

Finding the present value of cash flows tells you how much you need to invest today so that it grows to a given future amount at a specified rate of return.

CFO is NOT responsible for

Research and development Human resources Production

The primary goal of corporations

The owners of a corporation are the shareholders of the company . The primary goal of the corporate management team is to maximize the shareholders' wealth by maximizing the company's stock price over the long run.

effective IR

[1+(Inom/M)]^M -1

LLC/LLP

combine advantages of corporation and partnership, investors are members, and those who manage are called managers; liability limited to member investment

Other things remaining equal, the present value of a future cash flow decreases if the investment time period increases.

true

payment

= PMT(rate, nper, pv, [fv], [type])

Future value

A future value represents the amount to which a current (present) value will grow over a given period of time when compounded at a given rate of interest. Mathematically, a future value is calculated as FV = PV x (1 + r)nn.

hostile takeover

A hostile takeover is likely when a firm's stock price is trading below its intrinsic value. If this continues for a long time, outside investor groups start believing that the existing management of the firm is underperforming and new management can boost the firm's long-run stock prospects

Perpetuity

A perpetuity is a series of equal cash flows that are expected to continue forever. A perpetuity can be considered to be a special type of annuity. While both a perpetuity and an annuity exhibit constant periodic cash flows, the annuity has a definite end date, and the perpetuity does not. Instead, a perpetuity's cash flows are expected to continue indefinitely.

Which of the following are characteristics of a perpetuity?

A perpetuity is a series of regularly timed, equal cash flows that is assumed to continue indefinitely into the future. In a perpetuity, returns—in the form of a series of identical cash flows—are earned. The present value of a perpetuity is calculated by dividing the amount of the payment by the investor's opportunity interest rate.

Amortization schedule

An amortization schedule or table reports the amount of principal and the amount of interest that make up each payment made to repay a loan by the end of its regular term. Remember, the term amortization has two meanings. One meaning refers to the process of decreasing the principal outstanding on a loan via payments containing both interest and principal. The second meaning refers to the depreciation of the intangible assets owned by a firm.

Amortized loan

An amortized loan is one that is repaid with payments that are composed of both the interest owed on the loan and a portion of the loan's principal. In contrast, a zero-interest loan is one on which interest is not charged and the payments made to repay the loan will consist only of principal.

Annuity due

An annuity due is the name given to a series of equal cash flows that occur at the beginning of each of the equally spaced intervals (such as daily, monthly, annually, and so on).

Discounting

Discounting is the process of calculating the present value of a cash flow to be received or paid in the future. Compounding, which is the process of determining the future, or terminal, value of a current cash flow, is the opposite of discounting.

Which is not true about mortgages?

If the payment is less than the interest due, the ending balance of the loan will decrease.

market equilibrium

the intrinsic value of the stock will be equal to the market price of the stock.

partnership

the owners are subject to unlimited personal liability, which allows claims over the partners' personal assets.