HPm 340_Exam II Formula Sheet

# HPm 340_Exam II Formula Sheet - Time Value of Money takes...

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Time Value of Money : takes account of both curr and future cash flows; \$ in hand today is worth more than a \$ to be received in the future, bc of: Inflation; Risk; Pref for curr consumption; Opp cost Types of Cash Flows: Lump sum: single payment at one period of time; Annuity : Equal payments that you receive at the end of equal periods in time; As discount rates rise, the value today of funds due in the future decreases; you could earn more interest if you had the money today so the farther out you receive it, the less it’s worth to you Compound Interest – Interest earned on interest Ord. annuity : CFs at ends of per’s; Annty due: CFs at beg. of periods || EAR- Annual rate - PV to grow to the same FV as under intra-yr compnd’g || If interest rate rises – PV dec’s à would invest less today because you are getting more money for the \$ invested || Interest rate (opportunity cost rate) – your next best alternative of similar risk Financial performance of an investment measured by its return; measured either in \$ terms or as a rate of return (%) || Discounting process recognizes the opportunity cost of capital ; FORMULAS FV N (compnding- lump sum)= PV x (1 + I) N FV(ord annty) = PMT * [(1+I) N - 1] / I EAR = (1+ I stated /M) M -1 PV N (discting- lump sum )= FV N / (1 + I ) N PV/ FV (ann due) = (PV/ FV ord ann) *(1+ I ) PV(ord ann) = PMT* [1 – 1/ (1+I) N ] / I m- #compounding per’s/yr Coupon PMT = coupon rate * par value Bond value = PV(ord ann) + PV(lump sum) NPV (uneven cash flows)= (inv. cost)+ (310/ 1.08 1 ) + (400/ 1.08 2 ) + (500/ 1.08 3 ) Days in A/R = (Net A/R) / (Net Pt. rev/365 Avg Daily Billings = (Net Pt Rev/ 365) A/R = Avg Daily Billings X Avg Collection Period periodic rate= I stated /M 2/10 net 30 – 2% disct off of invoice if paid within 10 days; Full price due in 30 days Approx. Annual Trade credit Cost = [(disc%) / (1- disc%) ] X 360/ (days tkn – disc per) Amortizing Loans : (ordinary annuity) step 1: calc. PMTs from PV(ord ann) = PMT * ADF where PV is loan amount || Step 2: INT =beg bal. X Int Rate; step 3: Repayment(Prin) = PMT – INT; step 4: end bal= beg bal- repayment(prin) || Amortization table: yr(1 à n) | beg bal (↓) | pmt (const) | int (↓) | prin pmt (↑) | end bal (↓) BONDS- Discount rate is the return available on your next best alternative investment of similar risk ; Par value : Stated face value of bond (amount borrowed and repaid at maturity) | Coupon rate: Stated interest rate on the bond. Maturity date: Date when the par value will be repaid to investors. Effective maturity declines each year after issue. New versus seasoned bonds: When a bond is issued, its coupon rate reflects current conditions. When conditions change, bond values change. When you buy a new bond, you will require the interest rate to be equal to the coupon rate Debt service requirements: Total debt service pmts, including interest expense and repayment of principal. | Interest over life (bond coupon pmts) = ANNUITY | Par value at maturity = LUMP SUM

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HPm 340_Exam II Formula Sheet - Time Value of Money takes...

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