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CORPORATE FINANCE EXAM #2
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CORPORATE FINANCE EXAM #2
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CORPORATE FINANCE EXAM #2Future Value (FV) - answer- refers to the amount of money an investment will grow to
over some period of time at some given interest rate. The cash value of an investment
at some time in the future.
If you invest $100 in a savings account that pays 10 percent interest per year find future
value - answer- Principal * % interest rate that you earn = future value
% interest rate calculation for one period - answer- 1+.r = per dollar invested
ex: 10% = r
1+.10 = 1.10
If you invest $100 and leave it in the bank for two years at 10% interest rate how much
will you earn? - answer- 1.1^2 = 1.21 * 100 = $121
1.1 = rate
^p = amount of periods
* principal
compounding - answer- the process of accumulating interest on an investment over
time to earn more interest
interest on interest - answer- interest earned on the reinvestment of previous interest
payments
compound interest - answer- interest earned on both the initial principal and the interest
reinvested from prior periods
simple interest - answer- interest earned only on the original principal amount invested
If you invest $325, how much will you have the end of 2 yrs if you have an investment
that pays 14% per year? - answer- 1.14 = interest rate
1.14^2 = 1.2996
$325*1.2996=$422.37
If you invest $325, how much will you have the end of 2 yrs if you have an investment
that pays 14% per year. How much of this is simple interest? How much is compound
interest? - answer- 2nd year earned: $422.37
1st year earned: $370.50
$422.37-$325.00= $97.37 total interest
-------
$325.00 * .14 = $45.50 each year
$45.50 * 2 = $91.00 --> two-year total of simple interest
----
$45.50*.14=$6.37 --> interest on interest (compounding)
, Future Value Calculation - answer- Principal * (1 + r)^t
r=percentage rate
t=amount of time periods
Present Value - answer- The current value of future cash flows discounted at the
appropriate discount rate
Suppose you need $400 to buy textbooks next year. You can earn 7% on your money.
How muc do you have to put up today? - answer- PV * 1.07 = $400
PV = ($400)(1/1.07) = $373.83
Calculation for PV - answer- $1/(1+r)
Need: $1,000
Interest Rate: 7%
Period: 2 yrs
How much do you need to invest now? - answer- $1,000/(1.07^2)=$873.44
FV/(r^p)=PV
Discount rate - answer- the rate used to calculate the present value of future cash flows
Discounted Cash Flow (DCF) valuation - answer- The process of valuing an investment
by discounting its future cash flows
Suppose you invest $500 in a mutual
fund today and $600 in one year. If the
fund pays 9% annually, how much will
you have in two years? - answer- FV = 500(1.09)^2 + 600(1.09) = 1,248.05
You are considering an investment that will pay
you $1,000 in one year, $2,000 in two years and
$3000 in three years. If you want to earn 10%
on your money, how much would you be willing
to pay? - answer- PV = 909.09+1,652.89+2,253.94=4,815.92
Annuity - answer- finite series of equal payments that occur at regular intervals
Perpetuity - answer- infinite series of equal payments
Perpetuity Formula - answer- PV = C/r
Annuities Formula - answer- PV = C/r(1-(1/((1+r)^n))
Annuities and Perpetuity C & R means - answer- Cashflow each period,
Discount Rate
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