Premium Essay

Principles Finance

In: Business and Management

Submitted By spitzohr1
Words 2013
Pages 9
M.I.T. Sloan School of Management

Spring 1999 15.415

First Half Summary
Present Values • Basic Idea: We should discount future cash flows. The appropriate discount rate is the opportunity cost of capital. • Net Present Value: The net present value of a stream of yearly cash flows is N P V = C0 + C1 C2 Cn + + ··· + , 2 1 + r1 (1 + r2 ) (1 + rn )n

where rn is the n year discount rate. • Monthly Rate: The monthly rate, x, is x = (1 + EAR) 12 − 1, where EAR is the effective annual rate. The EAR is EAR = (1 + x)12 − 1. • APR: Rates are quoted as annual percentage rates (APR’s) and not as EAR’s. If the APR is monthly compounded, the monthly rate is x= AP R . 12
1

• Perpetuities: The present value of a perpetuity is PV = C1 , r

where C1 is the cash flow and r the discount rate. This formula assumes that the first payment is after one period. 1

• Annuities: The present value of an annuity is P V = C1 1 1 − r r(1 + r)t ,

where C1 is the cash flow, r the discount rate, and t the number of periods. This formula assumes that the first payment is after one period. Capital Budgeting Under Certainty • The NPV Rule: We should accept a project if its NPV is positive. If there are many mutually exclusive projects with positive NPV, we should accept the project with highest NPV. The NPV rule is the right rule to use. • The Payback Rule: We should accept a project if its payback period is below a given cutoff. If there are many mutually exclusive projects below the cutoff, we should accept the project with shortest payback period. There are two problems with the payback rule. First, it does not take into account cash flows after the cutoff. Second, it does not discount cash flows. Discounted payback fixes the second problem but not the first. • The Internal Rate of Return (IRR): The IRR of a project is the discount rate in the NPV calculation that makes the NPV equal to zero....

Similar Documents

Premium Essay

Principle of Finance

...Principles of Managerial Finance The Prentice Hall Series in Finance Adelman/Marks Entrepreneurial Finance Andersen Global Derivatives: A Strategic Risk Management Perspective Bekaert/Hodrick International Financial Management Berk/DeMarzo Corporate Finance* Berk/DeMarzo Corporate Finance: The Core* Berk/DeMarzo/Harford Fundamentals of Corporate Finance* Boakes Reading and Understanding the Financial Times Brooks Financial Management: Core Concepts* Copeland/Weston/Shastri Financial Theory and Corporate Policy Dorfman/Cather Introduction to Risk Management and Insurance Eiteman/Stonehill/Moffett Multinational Business Finance Fabozzi Bond Markets: Analysis and Strategies Fabozzi/Modigliani Capital Markets: Institutions and Instruments Fabozzi/Modigliani/Jones/Ferri Foundations of Financial Markets and Institutions Finkler Financial Management for Public, Health, and Not-for-Profit Organizations Frasca Personal Finance Gitman/Joehnk/Smart Fundamentals of Investing* Gitman/Zutter Principles of Managerial Finance* * denotes Gitman/Zutter Principles of Managerial Finance— Brief Edition* Goldsmith Consumer Economics: Issues and Behaviors Haugen The Inefficient Stock Market: What Pays Off and Why Haugen The New Finance: Overreaction, Complexity, and Uniqueness Holden Excel Modeling and Estimation in Corporate Finance Holden Excel Modeling and Estimation in Investments Hughes/MacDonald International......

Words: 4858 - Pages: 20

Premium Essay

Finance Principles

...Wal-Mart annual report was very easy to understand and provided the details on following the principles and standards under...

Words: 276 - Pages: 2

Premium Essay

Principles of Finance

...A. The first key feature of a bond is Par or face value which is generally assumed at $1,000 par value, but par can be anything and often $5,000 or more is used. Whatever amount you purchase a bond for that is the amount on the certificate. The second key feature is the coupon rate the dollar coupon is the “rent” on the money borrowed which is generally the par value of the bond. The coupon rate is the annual interest payment divided by the par value, and it is generally set at the value of r on the day the bond is issued. The third key feature is maturity this is the number of years until the bond matures and the issuer must repay the loan (return on par value). The fourth key feature is the issue date, this is the date the bonds were issued. Finally the fifth key feature is default risk, this is a risk that every bond except treasury bonds have that the issuer cannot pay the money that is promised. B. A call provision is a provision in a bond contract that gives the issuing corporation the right to redeem the bonds under specified terms prior to the normal maturity date. Which means that if the corporation calls in a bond sooner than the maturity date that they are paid a greater amount than the par value. There is also a call premium that must be paid if called in sooner and that means the amount is equal to one year’s interest the first year and then the amount is reduced after that year is called in later. A sinking fund provision is a bond contract that requires the...

Words: 593 - Pages: 3

Free Essay

Principles of Finance

...Olympia Minniefield FIN 301 Module 1 SLP Professor Sewkarran January 16, 2014 Trident University Company of Choice Citi Trends is my company of choice. I chose this company because I shop there for my kids and myself. The clothing is of good quality and they always new and fresh clothing that appeals to every age and they are affordable. They always have new ideas and stay focused on the latest trends. Interesting facts They offer name brand clothing at a cheaper cost than you would find in an upscale retail store. It is a value priced retailer of urban fashion apparel. They provide recognized branded merchandise at discounts off department and specialty store prices at a rate of 20-70% discounted prices. It became a publicly trade company in 2005 on the Nasdaq exchange with CTRN as its symbol There was a closing of one store and they either relocated or expanded three stores in the third quarter giving a total of 505 stores (Citi Trends, 2012). Edward Anderson has been the CEO of Citi Trends has been Chairman of Board of Directors since May 2006. He has served as CEO from 2001 to April 2009 and ahs recently returned to the position in January 2012. He was CFO of Variety Wholesalers. Prior to that he was Chairman and CEO of Rose’s Stores (Citi Trend, 2014). Bruce D. Smith is CFO, Executive Vice President of Citi Trend since March 2010. He......

Words: 726 - Pages: 3

Free Essay

Principle of Finance

...Q: What are the social consequences due to poverty in Bangladesh? Bangladesh is one of the world's most densely populated countries with 150 million people, 31.5 percent of whom live below the national poverty line. According to the World Bank in 2005, 40% of the population was still below the national poverty line. The Poverty headcount ratio at national poverty line (% of population) in Bangladesh was last reported at 31.51 in 2010, according to a World Bank report published in 2012.There are several consequences of poverty those are mentioned below: Women and Child trafficking: Women and children trafficking is a perennial problem, not only in Bangladesh but also in the world. Poverty is one of the major reasons behind women and children trafficking in Bangladesh. Nowadays, trafficking is an easy way of making money by targeting the poor segment of the country. A group of heinous criminals have adopted it as a profession. They allure the victims' parents and guardians to voluntarily put them in (the victims) their hands. Sometimes they kidnap individuals to traffic them outside the country. In the name of providing employment they entice innocent people into their trap. They are brought over to Dhaka and forced into antisocial activities. Good-looking women are being trafficked abroad. Although Dhaka is their hub of activity they have networks across the country. According to United nation's statistics, during the last ten years, more than 2 lac women were......

Words: 509 - Pages: 3

Premium Essay

Principles of Finance

...Questions 16-1) The need for external financing depends on 5 key factors: Sales growth which is symbolized as S. Companies experiencing rapid growth in sales require large amounts of assets. Capital intensity (A*/S0). The amount of assets required per dollar of sales, the capital intensity ratio, has a major effect on capital requirements. Companies with high assets-to-sales ratios require more assets for a given increase in sales, hence have a greater need for external financing. Spontaneous liabilities-to-sales ratio (L*/S0). Companies who spontaneously generate large amounts of funds from accounts payable and accruals have less of a need for external financing. Profit margin (M). The higher the profit margin is, the larger the net income available to support increases in assets, there the need for external financing is going to be lower. Retention ratio (RR). Companies that are capable of retaining a high percentage of their earnings rather than having to pay them out as dividends acquire more retained earnings and thus need less external financing. 16-5) a) x(0.90) = $5 billion, where x equal sales when doing business at full capacity $5 billion/0.90 = $5,555,555,555.56 b) Fixed assets/Sales = $1.7/5.0 = 0.34 c) Sales increase by 12% = $5.0 billion (1.12) = $5.6 billion x/5.6 = 0.34 Solve for x = 0.34*5.6 = $1.904B $1.904 - $1.7 = $0.204B, or $204M increase in fixed assets Problems 16-1) AFN = (A*/S0)ΔS - (L*/S0)ΔS - MS1(RR)......

Words: 557 - Pages: 3

Premium Essay

Principles of Managerial Finance

...Principles of Managerial Finance The Prentice Hall Series in Finance Adelman/Marks Entrepreneurial Finance Andersen Global Derivatives: A Strategic Risk Management Perspective Bekaert/Hodrick International Financial Management Berk/DeMarzo Corporate Finance* Berk/DeMarzo Corporate Finance: The Core* Berk/DeMarzo/Harford Fundamentals of Corporate Finance* Boakes Reading and Understanding the Financial Times Brooks Financial Management: Core Concepts* Copeland/Weston/Shastri Financial Theory and Corporate Policy Dorfman/Cather Introduction to Risk Management and Insurance Eiteman/Stonehill/Moffett Multinational Business Finance Fabozzi Bond Markets: Analysis and Strategies Fabozzi/Modigliani Capital Markets: Institutions and Instruments Fabozzi/Modigliani/Jones/Ferri Foundations of Financial Markets and Institutions Finkler Financial Management for Public, Health, and Not-for-Profit Organizations Frasca Personal Finance Gitman/Joehnk/Smart Fundamentals of Investing* Gitman/Zutter Principles of Managerial Finance* * denotes Gitman/Zutter Principles of Managerial Finance— Brief Edition* Goldsmith Consumer Economics: Issues and Behaviors Haugen The Inefficient Stock Market: What Pays Off and Why Haugen The New Finance: Overreaction, Complexity, and Uniqueness Holden Excel Modeling and Estimation in Corporate Finance Holden Excel Modeling and Estimation in Investments Hughes/MacDonald International......

Words: 4858 - Pages: 20

Premium Essay

Principle Finance 100

...Pete McDaniel Principles of Finance-FIN100 November 16, 2010 Explain why market prices are useful to a financial manager? The Valuation Principle states that we can use the current market prices to determine the value today of the different costs and benefits associated with a decision. A financial manager’s job is to make decisions on behalf of the firm’s investors; it also involves using skills from marketing to determine the increase in revenues resulting from advertising campaigns. Economics determine the increase in demand from lowering the price of a product, organizational behavior is used to determine the effect of changes in management structure on productivity, strategy is used to determine a competitors response to price increase, and operations are used to determine production costs after the modernization of a manufacturing plant. The financial manager’s job is to compare the cost and benefits and determine the best decision to make for the value of the firm. Discuss how the Valuation Principle helps a financial manager make decisions. The Valuation Principle helps a financial manager make decisions by the value of commodity or an asset to the firm or its investors is determined by its competitive market price. The benefits and costs of the decision should be evaluated by using those market prices, when the value of the benefits exceeds the value of the costs, the decision will increase the market value of the firm....

Words: 490 - Pages: 2

Premium Essay

Principles of Finance Assignment

...Andrew Wolford BYS330 Principles of Finance Week Four Assignment March 4th, 2014 Chapter Ten Study Problem 10-4: (Payback period, NPV, PI, and IRR calculations) You are considering a project with an initial cash outlay of $80,000.00 and expected free cash flows of $20,000.00 at the end of each year for 6 years. The required rate of return for this project is 10 percent. a. What is the project’s payback period? Remember first that payback period is the number of years needed to recover the initial cash outlay related to an investment as is determined by the number of years just prior to complete payback + the unplaid-back amount at beginning of yearfree cash flow in year payback is completed. Here, simply enough, you just have to take the initial cash outlay of $80,000.00 divided by the incremental cash flow of $20,000.00. So, the payback period is 4 years. b. What is the project’s NPV? First, NPV or net present value is the present value of an investment’s annual free cash flow less the investment’s initial outlay....

Words: 1437 - Pages: 6

Premium Essay

Basic Principles of Finance

...Discuss how the Valuation Principle helps a financial manager make decisions. The concept of value is at the heart of financial management, yet the introductory case demonstrates that valuation of companies is by no means an exact science. Inability to make precisely accurate valuations complicates the task of financial managers. The financial manager controls capital flows into, within and out of the enterprise attempting to achieve maximum value for shareholders. The test of his effectiveness is the extent to which these operations enhance shareholder wealth. He needs a thorough understanding of the determinants of value to anticipate the consequences of alternative financial decisions. If there is an active and efficient market in the company’s shares, it should...

Words: 1067 - Pages: 5

Premium Essay

Principle of Corporate Finance

...Fin 326/337 Principles of Corporate Finance 2January 2013 SessionThe marking scheme for the Group Assignment | | | Expected Answers | Marks allocated | Marks awarded | 1. | i. | Calculate the number of shares that would be repurchased given the current market price [3 marks *2 firms = 6 marks] + Presentation & Explanation [4 marks] | 10% | | | ii. | Calculate the dividend per share that could be paid given the total number of shares outstanding [3 marks *2 firms = 6 marks] + Presentation & Explanation [4 marks] | 10% | | 2. | i. | Show the effects of cash dividend on stockholders’ equity using [2 marks *2 firms = 4 marks] + Presentation & Explanation [3 marks] | 7% | | | ii. | Show the effects of stock split on stockholders’ equity [2marks *2 firms = 4 marks] + Presentation & Explanation [3 marks] | 7% | | 3. | Evaluate the dividend policies of the two chosen firms, including all justification and explanation [Calculation: 4 marks * 2 firms =8 marks + Explanation: 4 marks * 2 firms = 8 marks] + the comparison between the dividend policies of the two firms [8 marks] + Explain which firm investors should choose [6 marks] + Harvard Referencing [3 marks] | 33% | | 4. | Evaluate the performances, including all calculation and explanation, of the two chosen firms over the time period from year 2008 to year 2011 by using the profitability ratios, activity ratios, and investor ratios[Calculation: 8 marks * 2 firms =16 marks + Explanation: 3......

Words: 6259 - Pages: 26

Premium Essay

Principles of Corporate Finance

...An overview of Corporate Finance. 14.1 Cash for investments is generated mostly (USA: 80%) internally as depreciation and retained earnings. Still, companies have a gap between cash they need and cash they generate internally. This gap is financial deficit. So companies have to either sell new equity or borrow.This causes two different kinds of problems: 1) The plow back ratio? => Dividend policy 2) The proportions of debt and issue of equity? => Debt policy. • Net stock issue is negative = Company repurchases more stocks than issues them. Reasons for internally generated funds: a) avoid cost of issuing securities b) investors don’t get the message from lower future profits and higher risk. Recent years firms have issued more debt than equity. Still, there are many ways to calculate the Debt ratio of company: 1) Debt / total assets = ( Short + long term debt ) / Total assets, or 2) Proportion of debt in long term financing) = Long term liabilities Long term liabilities + stockholders’ equity The Debt Ratios has risen since 1950 because of the book value of the corporate assets falls as behind the actual value of those assets. This is caused the inflation....

Words: 17960 - Pages: 72

Premium Essay

Principles of Finance Final

...Grantham University Final Exam Chapter 2 Problem 2-4, Pearson Brothers recently reported an EBITDA (Earnings before interest, taxes, depreciation, and amortization) of $7.5 million and net income of $1.8 million. It had $2.0 million of interest expense, and its corporate tax rate was 40%. What was its charge for depreciation and amortization? (income statement) The taxable income would be 7.5 less 2 million less depreciation and amortization. $5.5m - $1.8m is the total available to pay taxes and depreciation. $370,000 to pay depreciation and taxes. 3.7-Depreciation =(5.5-Depreciation)*40% 3.7-2.5=(5.5-2.5)*40% (2.0)*40%=1.2 $2,500.000 Depreciation & Amortization Problem 2-7, The Talley Corporation had a taxable income of $365,000 from operations after all operating costs but before (1) interest charges of $50,000, (2) dividends received of $15,000, (3) dividends paid of $25,000, and (4) income taxes. What are the firm’s income tax liability and its after-tax income? What are the company’s marginal and average tax rates on taxable income? (Corporate Tax Liability) Income $365,000 Less Interest deduction (50,000) Plus: Dividends received 4,500 Taxable income $319,500 70% of dividends received are excluded from taxes = $15,000(1 - 0.70) = $4,500 Tax = $22,250 + ($319,500 - $100,000)*0.39 Tax= $22,250 + $85,605 = $107,855 Marginal tax rate is 39 percent Average tax rate is......

Words: 2525 - Pages: 11

Free Essay

Principle of Banking and Finance

...Question 1 A loan officer states that “Thousands of dollars can be saved by switching to a 15-year mortgage from a 30-year mortgage.” Calculate the difference in payments on a 30-year mortgage at 9% interest versus a 15-year mortgage with 8.5% interest. Both mortgages are for $100,000 and have monthly payments. What is the difference in total dollars that will be paid to the lender under each loan? | Loan amount = $100,000 | Loan term | 15 years = 180 months | 30 years = 360 months | Interest | 8.5% p.a | 9% p.a | Payment | Monthly | Monthly | Total amount paid | ? | ? | * 15-year mortgage: Monthly payment= (8.5%12×100,000)1-1+8.5%12-180=$984.7396 Total amount paid=984.7396×180=$177,253.128 * 30-year mortgage: Monthly payment= (9%12×100,000)1-1+9%12-360=$804.6226 Total amount paid=804.6226×360=$289,664.136 * Conclusion: If one were to switch from 30-year mortgage to 15-year mortgage, he/she would save: 289,664.136 – 177,253.128 = $112,411.008 Question 2 Explain how competition among investors can lead to efficient markets? Your discussion should include the different forms of market efficiency. __________ We may all know that the objective of many companies is to ‘maximize’ the value of the shares, through which investors benefit from. Under many circumstances, especially under academic perspective, it is assumed that investors would react quickly to news about a specific company released in the market, and accordingly, the......

Words: 1288 - Pages: 6

Premium Essay

Principle of Finance Acc311

...More frequently the business finance problems assume no salvage value because it’s so hard to foresee. Then tooling is depreciated over its Expected life? And any salvage value simply comes back in the last Year. And another disclaimer: the IRS has a half-year convention for equipment put in place but since I am using the full-year in this problem, we’ll ignore that too. STRAIGHT-LINE DEPRECIATION Depreciation expense = Acquisition cost - residual value Estimated useful life in years Depreciation expense per year 22,500 = 100,000 - 10,000 = 90,000 $90,000 over 4 years, which gives 25% per year? Salvage value= $10,000 Estimated useful life= 4 years Depreciation expense= 100,000 - 10,000 = 22,500 4 D= $22,500 per year Single-line Depreciation Balances at End of Year 1 2 3 4 Acquisition cost of Equipment $ 100,000 $100,000 $100,000 $100,000 Accumulated Depreciation $ 22,500 $ 45,000 $ 67,500...

Words: 833 - Pages: 4