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Week02_LectureNotes_6SlidesPerPage

# Week02_LectureNotes_6SlidesPerPage - Lectures so far.Week 1...

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2010-7-25 1 Lectures so far…Week 1 Business finance decisions:- – The Investment Decision – The Financing Decision – The Dividend Decision Firm’s objective = Maximise firm value How do we measure value? 1 FINS1613_s2_2010_L2 FINS1613 Business Finance Lecture 2: Introduction to Financial Mathematics Readings: RTBWJ Chapters 4 & 5 Lecture 2: Learning Objectives Recognize how to measure value Distinguish between different types of cash flows Calculate present and future values for different types of cash flows ( time value of money concepts), i.e., • Future Value and Compounding Future Value and Compounding • Present Value and Discounting More on Present and Future Values Understand and solve problems involving simple and compound interest, including compounding, discounting and making comparisons using the effective interest rate (i.e., this point is mostly Ch 5 material). 3 FINS1613_s2_2010_L2 Basic Tool: Time Lines 0123 4 5 Today End of period 1, start of Period 2 Time Time 0 is today, Time 1 is one period from today or the end of the first period (year, month, etc.), or the beginning of the second period, and so on. 4 FINS1613_s2_2010_L2 Basic Tool: Time Lines (cont.) Information on a time line is usually written as: – Cash flows are written immediately below the tick marks Unknown cash flows are denoted with a – Unknown cash flows are denoted with a question mark – Interest rates are written above the line and between the tick marks. 5 FINS1613_s2_2010_L2 Basic Tool: Time Lines (cont. .) Assume you have agreed to lend your brother \$1000 today. Your brother has agreed to repay this loan in two installments of \$600 at the end of each of the next two years. 6 0 1 2 - 1000 600 Time Cash flows 600 FINS1613_s2_2010_L2

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2010-7-25 2 A dollar received today is worth more than a dollar received in the future. –Why? Time Value of Money: Concept If you invest the dollar you receive today, it would generate a return so you would have more than a dollar in the future. 7 FINS1613_s2_2010_L2 Time Value of Money: Example You have been given \$100 today and you decide to deposit it in a savings account offering a yearly rate of 10%. How much will you have in 1 year st ime? \$100 + (100*10%) = \$110 So \$100 today is worth \$110 in a year s time. 8 FINS1613_s2_2010_L2 Time Value of Money : Definitions Present Value ( PV ) – The amount you have today, or earlier money on a time line = \$100 Future Value ( FV ) The amount you will have in the future or later money on a time line – The amount you will have in the future, or later money on a time line = \$110 Interest rate ( r ) – The rate amount the bank pays on money invested each period, or Exchange rate between earlier money and later money =10% – Also called: rate of return, discount rate, cost of capital.
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Week02_LectureNotes_6SlidesPerPage - Lectures so far.Week 1...

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