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74
Business Finance
Lecture 13
Review of the Previous Lecture
±
Using Financial Statement Information
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Internal Uses
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External Uses
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Benchmarking
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Time trend Analysis
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Peer Group Analysis
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Time Value of Money
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Simple vs. Compound Interest
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Future Value Concept
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One Period valuation
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MultiPeriod Valuation
Topics under Discussion
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Present Value Concept
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One period Valuation
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Multiperiod Valuation
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Determining the Discount Rate
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Finding the Number of Periods
Future Value
¾
Usually simple interest is used in financial institutions for interest periods of less than one
year.
¾
If the rate is expressed as an annual rate (normal practice), then the time period (t) must
be a fraction of a year.
¾
By investing $10,000 in an 8%, 90day certificate of deposit, total proceeds at the end of
the CD period will be:
¾
FV = (10,000)+(10,000x.08x90/365) = $10,197.26
Future Value
±
If you were to invest $10,000 at 5percent interest for one year, your investment would grow
to $10,500
$500
would be interest ($10,000 × .05)
$10,000
is the principal repayment ($10,000 ×1)
$10,500
is the total due. It can be calculated as:
$10,500 = $10,000×(1.05).
±
$10,000 today is worth $10,500 in one year, given that interest rate is 5%
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Present Value
±
It refers to the current value of the future cash flow discounted at the appropriate discount rate.
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 Spring '11
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