The Time Value Of Money And Financial Analysis Essay
The Time Value of Money and Financial Statement Analysis
Kenosha D. Coston
Module 1 Case Assignment
Conducting Financial Ratio Analysis?
FIN 501 Strategic Corporation Finance
Dr. William L. Anderson
2 May 2016
Introduction It is essential to evaluate long-term projects by comparing cash flows accruing at different points in time. The present and future value concept converts streams of cash flow to a common point in time to support investment appraisal; this enables comparison of costs and benefits accruing over the life of a project. Present Value Concept Discounted cash flow techniques acknowledge the time value for money (Frick). …show more content…
Its computation is similar to compound interest. The difference between cash flows currently and in the future represents the time value of money. Computing the future value of a lump sum involves compounding the amount in a given year; for ordinary annuities, it involves summation of the compounded cash flows for every period. Perpetuities are streams of cash flow accruing at regular intervals and they last forever. Conclusion In conclusion, the present value concept determines the current value of annuities and lump sums based on a given rate of interest. The future value concept, on the other hand, determines the value of these two at a later predetermined period. Short Essay The public corporations issue bonds to raise long-term capital. The holders of the financial instrument give debt capital based on the existing capital structure and gearing level of the organization. Furthermore, they acknowledge the expected asset and capital structure after lending such institutions. In return, the corporation makes commitments to pay accruing interest and the principal amount on maturity. In the US, corporate bonds constitute the largest proportion of the bond market. Corporations utilize proceeds from issuing bonds in many ways. They may undertake research and development, purchase new equipment, and finance mergers and acquisitions. A credit or default risk is the uncertainty that the corporation may fail to pay the interest and principal amount on maturity. Other risks include the interest rate risk; the price of a bond decreases with a rise in interest rates. Bonds with a long maturity period are susceptible to this risk compared to those with a shorter maturity period. To compensate for it, the former offers a higher interest rate than the latter. Inflation risk is the potential decline in the purchasing power of amounts received as interest and principal in the future.