Chapter 10- Discounted Cash Flow Valuation Questions and Correct Answers
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Course
Discounted Cash Flow
Institution
Discounted Cash Flow
Discounted cash flow valuation value equals the sum of expected cash flows discounted for time and risk
value of a financial investment the present value of the investment's expected future cash flows
Three steps to DCF valuation 1.) Estimate the expected future cash flow of the investment 2.) de...
Chapter 10- Discounted Cash Flow
Valuation Questions and Correct
Answers
Discounted cash flow valuation ✅value equals the sum of expected cash flows
discounted for time and risk
value of a financial investment ✅the present value of the investment's expected future
cash flows
Three steps to DCF valuation ✅1.) Estimate the expected future cash flow of the
investment
2.) determine the appropriate interest rate to use to discount the expected cash flows of
the investment
3.) find the present value of each of the expected future cash flows and total them to
find the value of the investment
bonds ✅the future cash flow are the payments of periodic interest and the repayment
of principal at maturity
mortgage ✅the future cash flows are monthly payments that consist of both interest
and principal payments
stock ✅the future cash flows are payments of dividends by the stock, if there are any,
and capital gains or capital losses related to the movement in the price of the stock
loan payments ✅when you are making a payment on a loan, some of the money from
the payment goes to interest, and the rest goes to pay down your principal
amortization table ✅a tool used to break down how much of each loan payment goes
to interest and how much goes to principal
capital budgeting ✅- planning and managing a firm's long-term investments
- managing a firm's long-term assests
- financial managers want to invest in opportunities that will be worth more than they
cost to build or purchase
- financial managers maximize the value of the firm by investing in projects that have a
present value of cash flows that is greater than the cost of the project
factors financial managers need to take into account when making capital budgeting
decision ✅1.) return- how much will they earn on the investment
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