FIN 3320 Notes
What do we mean by discounted cash flow, or DCF, valuation?
Calculating the present value of a future cash flow to determine its value today.
How does compound interest differ from simple interest
Compound interest increases exponentially, while simple interest increases at a flat rate
It is argued that, left to themselves, managers would tend to maximize the amount of resources over which they have control, or more generally
Corporate power or wealth
Capital structure question
How a firm chooses to finance its operations
What is meant by the present value of an investment?
How much do we have to invest today at X% to get $X in a year?
What does it mean to compound interest?
Interest earned on both the initial principal and the interest reinvested from prior periods.
In a shareholder-manager relationship, who is the agent?
Managers
In general, what is the present value of $1 to be received in t periods, assuming a discount rate of r per period?
PV = $1 × [1/(1 + r)^t] = $1/(1 + r)^t
basic present value equation
PV = FVt/ (1+r)^t = FVt x [1/ (1+r)^t]
________ financial statements provide for comparison of firms that differ in size.
Standardized
what do we mean by the future value of an investment?
The amount an investment is worth after one or more periods.
Rule of 72
The number of years it takes for a certain amount to double in value is equal to 72/r%
Capital Budgeting Decision
What fixed assets should we buy?
Balloon Payment
a final loan payment that is much larger than the regular monthly payments
On the balance sheet, assets are listed at their _____ value.
book
Under GAAP, U.S. firms must carry assets at:
book value
Interest Only Loan
calls for the borrower to pay interest each period and to repay the entire principal (the original loan amount) at some point in the future.
What is the most important issue in corporate finance?
capital budgeting questions
The process of discounting a future amount back to the present is the opposite of doing what?
compounding the money forward into the future
The more debt a firm has, the greater its:
degree of financial leverage
Some of the cash flow generated by a firm goes back to the financial markets in the form of ______.
dividends and debt payments
True or false: For financial analysis, financial statements and accounting numbers are more important than cash flows.
false
working capital question
how a firm manages its short-term operating activities
What is the goal of a for-profit business
maximize existing owners' equity
pure discount loan
the borrower receives money today and repays a single lump sum at some time in the future
Strategic Asset Allocation
the process of capital budgeting - decisions made cencerning a companies product line
Another name for short-term financial management is _______ management.
working capital
In general, what is the future value of $1 invested at r per period for t periods
$1x(1+r)^t
