Running head: The Time Value of Money and Financial Statement Analysis
The Time Value of Money and Financial Statement Analysis
Trident University
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…
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. Liquidity risk is the probability that investors seeking to sell bonds may fail to accrue prices reflected as …show more content…
A call risk is potential that the issuing company may fail to exercise its right to repurchase bonds issued. A benchmark for classifying bonds is their maturity period, which may be short-term, medium-term, or long-term. The credit quality of a corporation is another technique for classifying bonds. Financial agencies assign credit ratings to a company upon successful evaluation of the default risk; they review them periodically and revise them if conditions change. Bonds rated as investment grade is likely to pay accruing interest and the principal amount promptly at maturity. Non-investment grade bonds, on the other hand, offer higher interest rates to compensate the default risk. A method of classifying bonds is by coupons, which are interest payments accruing from the bond. In most instances, these instruments have a fixed coupon rate that does not fluctuate to reflect changes in the market interest rate.
The Time Value of Money and Financial Statement Analysis
Trident University
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…
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. Liquidity risk is the probability that investors seeking to sell bonds may fail to accrue prices reflected as …show more content…
A call risk is potential that the issuing company may fail to exercise its right to repurchase bonds issued. A benchmark for classifying bonds is their maturity period, which may be short-term, medium-term, or long-term. The credit quality of a corporation is another technique for classifying bonds. Financial agencies assign credit ratings to a company upon successful evaluation of the default risk; they review them periodically and revise them if conditions change. Bonds rated as investment grade is likely to pay accruing interest and the principal amount promptly at maturity. Non-investment grade bonds, on the other hand, offer higher interest rates to compensate the default risk. A method of classifying bonds is by coupons, which are interest payments accruing from the bond. In most instances, these instruments have a fixed coupon rate that does not fluctuate to reflect changes in the market interest rate.