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28 Cards in this Set
- Front
- Back
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role of financial manager |
financial managers job is too make decisoin on behalf of the firms investors |
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role of competitive market prices |
a market in which a good can be brought and sold at the same price |
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corporate finance note |
discussion establishes competitive market price as way to evaulate costs and benefits of cash today. |
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the valauation principle |
1 value of a commodity or an asset to the firm or its investors is determined by competitve market price. 2 benefits and costs of a decision should be evaluated using those market prices 3 when the value of the benefits exceeds the value of the costs, decison will increase the market value of the firm. |
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why there can be only one competitve price for a good |
valuation principle finance rely on using competitve market price to value a cost or benefit |
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law of one price |
competitve markets, securities with the same cash flows must have same price |
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arbitrage |
the practice of buying and selling equivalent goods ot take adv of a price difference |
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arbitrage opportunity |
any situation in which it is possible to make a profit without taking any risk or making investments |
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time value of money |
diff value between money received today and money received in the future |
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present value |
value of a cost or benefit computed in terms of cash today |
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future value |
value of a cash flow moved forward in time |
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discount factor |
value today of a dollar rec in future |
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discount rate |
rate to discount a cas h flow to det its value at an earlier time |
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timeline |
a linear representation of timing of cash flows |
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representing various time periods |
1 timelines can represent cash flows 2 that take place at any point in time |
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rules to finanacial decision making |
rule 1: comparing and combing values a)only cash flows in the same units can be compared or combined b)compare or combine cash flows that occur at diff points in time first, convert cash flows into same units by moving them to same point in time. rule 2: compounding computing the return on an investment over a long horizon by multiplying the return factors associated with each intervening period. rule 3: discounting describes how to put a value today on a cash flow that comes in the future |
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Chapter 4 |
Time Value of Money |
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Applying Rules of Valuing Cash Flows to a Cash Flow Stream |
1. only values at same point in time can be compared or combined. 2. to calculate cash flows future value compound it using Eq. 3.1. 3. to caculate present value of a future cash flow |
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corporate finance note |
rule of cash flow valuation allow us to compare and combine cash flows that occur at different points in time. |
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Rules of Cash Flow Valuation |
compute present value of cash flow 2 steps: a) compute present value of individual cash flow b) once cash are common unitw of dollars today combine them |
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special note corporate finance |
present value of cash flow stream is the sum of the present values of cash flow. present value as dollar amount you would need to invest today to produce single cash flow in future. present value is amount you need to incest today to generate cash flows stream C0, C1...Cn receiving those cash flows is equivalent to having their present value in bank today |
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types of cash flow |
perpetuities annuities |
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perpetuity |
a stream of equal cash flows that occurs at regularl intervals and lasts forever |
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annuity |
is a stream consisting of a fixed number of equals cash flows paid at regular intervals ends after some fixed number of payments |
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perpetuity |
continues forever |
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examples of annuities |
car loans mortgages bonds |
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growing perpetuity |
a stream of cash flows that occurs at regular intervals and grows at a constant rate forever |
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growing annuity |
a stream of cash flows, growing at a constant rate and paid at regular intervals, that end after a specified number or periods. |
