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Unformatted text preview: Ehrhardt Chapter 8 Page 1 21 Finance is not Accounting Accounting dates back to 1494 (Fr. Luca Pacioli) Finance dates back to the early 1900s. Financial methods really took off in the 1950s. heavily quantitative; much advanced math BlackScholes developed in 1970s Finance and accounting then began to diverge. very separate fields now finance a branch of economics accounting cannot keep up with financial innovation 22 To Do Well in This Class Read the Book and Attend Lectures • lectures highlight key points and provide only partial information Do the Homework • practicing problems is essential • do more than is assigned • tests resemble homework Ask Questions The More You Put In The More You Will Get Out • not enough to “try really hard” Ehrhardt Chapter 8 Page 2 23 To Do Well in This Class Memorize these equations: Set up the Problems Correctly Always Draw a Timeline Master Your Calculator and Spreadsheet Remember the accounting identity: Assets = Liabilities + Equity (A = L + E) n i PV FV ) 1 ( + = n i FV PV ) 1 ( + = 24 The Math You Need to Know Basic Algebraic Operations Including Use of ln and e x . Calculations for: Arithmetic Mean Geometric Mean Weighted Average Variance ( σ 2 ) and Standard Deviation ( σ ). Ehrhardt Chapter 8 Page 3 25 On Solving Problems There is No One Way to Solve Problems true for all math, algebra, calculus Do Not Look for Formulaic Solutions formulas are only tools, like words Fixed Rules Solve Very Few Problems flexibility in thought is more important Trial and Error is Best takes more time Finance is Not Precise Solve Problems Your Own Way 26 The Basics Time Value of Money Discrete Compounding Continuous Compounding Effective Annual Rate Present and Future Values of Annuities Basic Evaluation Model Ehrhardt Chapter 8 Page 4 27 What are financial assets? A financial asset is a contract that entitles the owner to some type of payoff. Debt Equity Derivatives Remember the accounting identity: Assets = Liabilities + Equity (A = L + E) 28 Time Value of Money Review Future Value Present Value Rates of Return Amortization Ehrhardt Chapter 8 Page 5 29 What is Time Value of Money? Finance is Basically About Two Things: Discounting Future Cash Flows to the Present (PV) Compounding Present Cash Flows to the Future (FV) TVM Explains How Value of Money Grows (Appreciates) or Falls (Depreciates) Over a Given Period of Time at a Given Interest Rate 210 Time lines show timing of cash flows. CF 0 CF 1 CF 3 CF 2 0 1 2 3 i% Tick marks at ends of periods, so Time 0 is today; Time 1 is the end of Period 1; or the beginning of Period 2. Ehrhardt Chapter 8 Page 6 211 Time line for a $100 lump sum due at the end of Year 2....
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This note was uploaded on 10/18/2009 for the course AGB 7510 taught by Professor Slezak during the Fall '09 term at Cal Poly.
 Fall '09
 slezak

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