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Team 1 - BUSA523 - Corporate Finance > Unit 2: Fundamental Concepts in Financial Calculations > Flashcards

Unit 2: Fundamental Concepts in Financial Calculations Flashcards

1
Q

What is Compounding?

A

The process of accumulating interest in an investment over time to earn more interest

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2
Q

What is Present Value?

A

The current value of a future cash flows discounted at the appropriate discount rate

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3
Q

_______ will make a dollar in the future be worth less than a dollar today.

A

Inflation.

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4
Q

(Calculator Question)

What is the order you should always enter values in the financial calculator?

A
  • N
  • I/Y
  • PV
  • PMT
  • FV
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5
Q

_______ means to calculate the present value of a future amount.

A

Discounting

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6
Q

Using your calculator:

When entering in values a cash outflow should be represented by…

A

a (-) sign.

Note: This is usually used when entering Present Value.

Note: When computing for Present Value a (-) sign should be taken as a positive value

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7
Q

What happens to Present Value when the discount rate goes up?

A

Present value goes down.

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8
Q

What is simple interest?

A

Interest earned only on the original principal amount invested.

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9
Q

What is the formula for Annuity Future Value Factor?

A

(FVF - 1)/r

FVF = Future Value Factor

r = interest rate

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10
Q

What si the formula for Present Value Interest Factor for Annuities (PVIFA)?

A

PVIFA = 1 - PVF/ r

PVF = Present Value Factor

r = discount rate

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11
Q

What is “interest on interest”?

A

Interest earned on the reinvestment of previous interest payments

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12
Q

Calculator question:

When will you use the I/Y button?

A

When you hear one of these terms

  • Cost of Capital
  • Interest rate
  • Discounted rate
  • Opportunity cost
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13
Q

What is a discount rate?

A

The rate used to calculate the presnt value of future cash flows

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14
Q

What is “discounting”?

A

to calculate the present value of some future amount

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15
Q

The discount rate is also called…

A

The rate of return.

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16
Q

What is the formula for Present Value Factor?

A

PVF = 1/(1+r)t

r = discount rate

t = time (or interval)

17
Q

What is the difference between an “Ordinary Annuity” and an “Annuity Due”?

A
  • Oridnary annuity: Cash flow occurs at the end of each period
  • Annuity Due: Cash flow occurs at the beginning of each period
18
Q

As you increase the length of time involved, what happens to present values?

A

It descreases

19
Q

The higher the risk, the _____

A

larger the discount rate and the lower the present value.

20
Q

What is Future Value?

A

The amount an investment is worth after one more more periods. Also compound value.

21
Q

What happens to the discount rate when risk of cash flow increases?

A

The discount rate goes up.

22
Q

As you increase the length of time involved, what happens to future values?

A

It increases

23
Q

True or false:

The value of money will remain constant across different time horizons.

A

False

24
Q

The 3 ways to calculate time value of money are….

A
  1. Use A financial calculator
  2. Use a mathematical formula
  3. Use a (present/future) value factor table
25
Q

True or False:

Inflation will make a dollar in the future be worth less than a dollar today.

A

True.

26
Q

What is the “rule of 72”?

A

The rule of 72 is a shortcut to estimate the number of years required to double your money at a given annual rate of return.

The rule states that you divide the rate, expressed as a percentage, into 72: Years required to double investment = 72 ÷ compound annual interest rate.

27
Q

What is compound interest?

A

Interest earned on both the initial principal and the interest reinvested from prior periods

28
Q

What is the formula for Future Value Factor?

A

(1+r)t

r = interest rate

t = time (or interval)

29
Q

What is the basic Future Value formula?

A

FV = PV * (1+r)t

30
Q

The Present Value of a future cash flow is commonly called…

A

Discounted Cash Flow (DCF)

31
Q

What is the basic Present Value formula?

A

PV = FV/(1+r)t

32
Q

True or false:

The discount rate is also called the rate of return.

A

True.

33
Q

The rule of 72 is calculated as…..

A

72/ the interest rate

Note: interest rate is NOT in decimal format.

e.g. 72/8% = 72/8

(not 72/0.08)

34
Q

True or false:

A dollar’s worth will be worth as much in the future as it is today.

A

False.

35
Q

Interest earned on both the initial principal and the interest reinvested from prior periods is called ________ _________

A

Compound Interest.

36
Q

What is a Discounted Cash Flow (DCF)?

A

The present value of a future cash flow.

37
Q

What is the formula for calculating Interest Rate?

A

r = (FV/PV) (1/n) -1

38
Q

True or false:

Discounting is the opposite of compounding.

A

True

Team 1 - BUSA523 - Corporate Finance (8 decks)

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