lecture 13 - Business Finance Lecture 13 Review of the...

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74 Business Finance Lecture 13 Review of the Previous Lecture ± Using Financial Statement Information ± Internal Uses ± External Uses ± Benchmarking ± Time trend Analysis ± Peer Group Analysis ± Time Value of Money ± Simple vs. Compound Interest ± Future Value Concept ± One Period valuation ± Multi-Period Valuation Topics under Discussion ± Present Value Concept ± One period Valuation ± Multi-period Valuation ± Determining the Discount Rate ± 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%, 90-day 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 5-percent 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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75 Present Value ± It refers to the current value of the future cash flow discounted at the appropriate discount rate.
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lecture 13 - Business Finance Lecture 13 Review of the...

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