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AEM 324 Finance Prelim 1 Book Notes

# AEM 324 Finance Prelim 1 Book Notes - Finance Notes from...

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Finance Notes from Text Book Chapter 1 Financial Management Decisions Capital Budgeting: long term investment management Capital Structure: the mixture of debt and equity maintained by the firm Working capital management: short term investments of the firm Sabanes-Oxley Chapter 2 The use of debt in a firms capital structure is called financial leverage Product costs: include things such as raw materials, direct labor expense, and manufacturing overhead. Reported on the income statement as cost of goods sold, but include both fixed and variable costs. Period costs: occur in some specific time period and may be associated with selling, general and administrative costs. Cash flow identity: cash flow from assets = cash flow to creditors + cash flow to stockholders Cash flow from assets : operating cash flow, capital spending, and change in net working capital. Cash flow from assests : Operating Cash flow (check page 35) - Net capital spending - change in NWC Cash flow from assets = \$87 aka know as “free cash flow” MAKE SURE TO LOOK AT page 38 and 39 to go over calculations Chapter 5 Introduction to Valuation: The time value of Money Future Value = \$1 x (1 + r)^t Present Value and Discounting: We discount the money back to the present PV = \$1 / (1 + r) Multiple periods o Find the PV factor then use it as the divider o Discount Rate [1/(1 + r)^t] o PV = \$1 x [1/(1 + r)^t] o Discounted Cash flow valuation: calc the PV of a future cash flow to determine its worth today As the length of time until payment grows, present value declines. o Higher the discount rate the lower the present value Determining the discount rate Rule of 72

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Chapter 6 Discounted Cash Flow Valuation Future and Present Value of Multiple Cash Flows Two ways to calc future values of multiple cash flows 1. compound the accumulated balance forward one year at a time 2. calculate the future value of each cash flow first then add them up Present Value with multiple cash flows (Two ways to do it) 1. Discount back one period at a time 2. or just calculate the present values individually and add them up Present value of a series of future cash flows is simply the amount you would need today to exactly duplicate those future cash flows (for a given discount rate) Valuing Level Cash Flows: Annuities and Perpetuities Look at pg 158 example 6.6 its confusing Future Value for Annuities o Annuity due value = ordinary annuity value x (1+r) Perpetuities Comparing rates: the effect of compounding Effective Annual Rate: the rate you will actually earn with compounding taking place ANY TIME you do a present or future value calculation the rate must be the EAR Loan Types and Loan Amortization Pure Discount Loans Interest Only Loans Amortized Loans: HAVE to be able to make a AMORIZATION TABLE Chapter 7 Coupon rate: Is the annual coupon divided by the face value of the bond.
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