Class notes

Class notes FIN401 (FIN401) (Cash Flow, Discounting, Annuities, & Perpetuties)

3 views 0 purchase

Course
FIN401 (FIN401)

Institution
Ryerson University (Ru )

explanation of Cash flows, Discounting, Annuities, and Perpetuities with examples and step by step explanation on how to solve it.

[Show more]

Preview 2 out of 9 pages

View example

Uploaded on October 5, 2023
Number of pages 9
Written in 2023/2024
Type Class notes
Professor(s) Daniel tut
Contains All classes

CA$11.57

Added

Add to cart Add to wishlist

100% satisfaction guarantee
Immediately available after payment
Both online and in PDF
No strings attached

FIN401: Lecture 1
Goal
● Understand more fully the role of capital budgeting, leasing, and mergers
and acquisitions in the corporate financial decision-making process.
● Understand the issue involved in the capital structure and dividend policy
decision, why the decisions are not irrelevant, and what types of financing
are available to firms.
● Understand the importance of risk management in the corporate financial
decision-making processes.
● Be able to recognize some of the ethical issues inherent in corporate
financial decision-making.
Time Value of Money (A review of Chapter 4,6,7)
● Money received soon rather than later allows you to:
○ Use the funds for investment and/or consumption purposes
○ Minimize Inflation
○ Minimize Uncertainty
The Importance of Time
● When valuing or comparing cash flows that occur at different points in
time, we cannot just combine them together
○ A dollar today and a dollar in one year are not equivalent!
● We need to convert the cash flows into the same units first by moving them
to the same point in time
○ To move a cash flow forward in time, we use compounding
○ To move a cash flow earlier in time, we use discounting
Compounding vs Discounting:
The case of single cash flow
Compounding
● Determining the future value of a cash flow (or set of cash flows)
● Compound interest: Interest is earned on the principal amount invested
and on any accrued interest
● The basic compounding equation (for a single CF):
● FV = Future Value, PV = Present Value, r = annual interest rate, n = number of
years, (1+r) = interest rate factor
Example 1: You worked tirelessly all summer and made $9,000 in cash. You would
like to invest this money today in a special bank account that pays 5% interest
per year for a locked-in 15-year term. How much will you have in the account after
those 15 years?
● Formula Approach:
15
𝐹𝑉15 = $9000 × (1 + 0. 05) = $18, 710. 35
● Financial Calculator Approach:
○ Casio: TVM > F2 (Compound Interest)
○ Number of Years: N = 15
○ Interest Rate: I% (or I/Y) = 5%
○ Deposit Today: PV = $9000

, ○ Additiona; deposits (PMT) = 0
○ Payments & Compounding Periods (P/Y & C/Y) = 1
○ Looking for future Value > Compute FV = $18,710.35
Example 2: Suppose instead that you were able to make only $1,200 over the
summer. You want to deposit it today in a different savings account that has an
interest rate of 8% locked in for 10 years. How much money will you have in the
account at the end of the:
a. First Year
1
𝐹𝑉 = (1, 200)(1. 08) = $1, 296
b. Fifth Year
5
𝐹𝑉 = (1, 200)(1. 08) = $1, 763. 19
c. Tenth Year
10
𝐹𝑉 = (1, 200)(1. 08) = $2, 590. 71
Example 3: Fill in the Missing Values

Discounting
● Discounting is the process of translating a future value (or a set of future
cash flow) into a present value
● In order to get the present value, we rearrange the formula seen under the
compounding to set:
𝐹𝑉𝑛
𝑃𝑉0 = 𝑛
(1+𝑟)
● Where 1/(1+r) = discount factor
Example 4: Just imagine that you are holding a big-winning LottoCash ticket. For
your winnings, you can choose to receive either $3.2 million today or $8.5 million
10 years from now.
a. If the interest rate is 11%, which option should you choose?
Solution: compare present (or future) values
● Formula Approach:
$8.5𝑚
𝑃𝑉 = 10 = $2, 993, 568 < $3. 2𝑚
(1.11)

The benefits of buying summaries with Stuvia:

Guaranteed quality through customer reviews

Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.

Quick and easy check-out

You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.

Focus on what matters

Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!

Frequently asked questions

What do I get when I buy this document?

You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.

Satisfaction guarantee: how does it work?

Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.

Who am I buying these notes from?

Stuvia is a marketplace, so you are not buying this document from us, but from seller wareeshazafar. Stuvia facilitates payment to the seller.

Will I be stuck with a subscription?

No, you only buy these notes for CA$11.57. You're not tied to anything after your purchase.

Can Stuvia be trusted?

4.6 stars on Google & Trustpilot (+1000 reviews)

60434 documents were sold in the last 30 days

Founded in 2010, the go-to place to buy study notes for 14 years now

Start selling