Table 1: F uture Value Interest F actor (F. V. IF.) ($1 at r% for n periods). F. V. IF. ( 1+r) n. ; F. V PV (F. V. IF r,n.) n/r. 1%. 2. %. 3%. 4. %. 5%. 6. %. 7%. 8. %. 9%. Present Value and Future Value Tables. Table A-1 Future Value Interest Factors for One Dollar Compounded at k Percent for n Periods: FVIF k,n = (1 + k) n. Present value and Future value tables. Visit calgatunazi.cf for practice questions, videos, case studies and support for your CPA studies.
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PVIF Table - Download as PDF File .pdf), Text File .txt) or read online. 1, Future value interest factor of $1 per period at i% for n periods, FVIF(i,n). 2, Period, 1%, 2%, 3%, 4%, 5%, 6%, 7%, 8%, 9%, 10%, 11%, 12%, 13%, 14%, 15% . Jun 27, Future value interest factor, FVIF(i,n) Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1.
Be careful to make sure your entry has been acknowledged by the calculator. Payments are cash outflows and may appear as negative - depending on the calculator used. What is the effective rate?
The display will go to 0. The field NOM will appear. Press CPT and the calculator will return the effective rate of 8. Press 2nd and QUIT. Press 5. Press N again. Press and then the PV key. A sinking fund is a series of payments leading to an accumulation. Examples are IRA and K programs.
Problem: You want to retire in 30 years. How much will you have in 30 years? Press Press N. This will change the sign of the from positive to negative. The display should be Next press PMT. Sample Problem 4: Special Case of the Annuity Problem - Amortization An amortization is a payment to pay down a loan that has been made in the present. What will your monthly payments be?
Press 7. Press , and then press PV. Cost of Credit A. Interest rates reflect the cost of borrowing money or capital B. Four Principal Factors Influencing Rates 1. Investment opportunities 2. Time preferences for consumption 3.
Riskiness of objectives 4. Inflation C. Other Factors Influencing Interest rates. Federal Reserve Monetary Policy. Investor expectations about economy. Business Decisions. Normal Yield Curve: relation between time or risk x-axis and return y-axis 1. Upward sloping to the right 2. The higher the risk, the greater the required rate of return B.
Inverted Yield Curve 1. Downward sloping to the right 2. When short-term risk or inflation is greater than longer term levels. Composition of Nominal Interest Rates. Real rate of return.
Inflation premium. Default premium. Liquidity premium. Maturity Risk premium D. Self-Test: ST-1, parts b, c, d, e, f F. Questions: , , , G. Indenture Agreement, 1. Loan contract between lender and company. Appoints the trustee; a fiduciary responsible for guarding the lenders' interests. Terms and conditions, legal remedies. Sources of risk 1. Bonds require the borrower to make periodic payments interest and to repay the principal at some specified date in the future the maturity date.
Corporations issue various types of bonds. Some are secured by liens on specific property mortgage bonds and equipment trust certificates , and other bonds are unsecured deben- tures which are backed only by the creditworthiness of the firm.
Convertible bonds allow the bond investor to exchange the bonds for the company's common stock. Bondholders will do so if it be- comes profitable to convert, otherwise they can continue to enjoy reasonably high interest income. Mortgage bonds: bonds secured by real property B. Equipment trust certificates: bonds secured by equipment rolling stock C.
Debentures: unsecured bonds no collateral. Income bonds: interest paid only if a specified level of earnings is achieved E. Convertible bonds: bonds that may be converted into the firm's common stock F.
Variable interest rate bonds: coupons that change with changes in interest rates G. Zero coupon bonds: 1. Do not pay coupons. Eurobonds: bonds issued abroad denominated on dollars or other currency.
Bond prices fluctuate with changes in interest rates. When interest rates rise, bond prices fall and vice-versa. The current price of a bond depends on how much interest it pays, how long before it matures, and what investors can earn on comparably risky bonds. The bond valuation formula implicitly assumes that all future cash flows i. When this assumption is violated, then the value of bond is different from the theoretical value the calculated PV.
Inverse relationship between a bond's price and interest rates; 16 3. YTM go up bond prices go down and vice-versa. If the company gets riskier, then YTMs go up, prices down and vice-versa. This yield does not consider changes in the bond's price that may occur if the bond is held to maturity.
If the bond is held to maturity, the total return is de-fined as the yield to ma- turity, which considers not only the current price but whether the bond is selling for less than face value i. If prices are bid up, YTMs are forced down and vice-versa. Bonds downloadd at discount below par value accrue a capital gain in addition to the coupon. The capital gain makes the YTM greater than the current yield.
If bonds are downloadd at a premium above par value , then the capital loss makes the YTM less than the current yield. Investors download the YTM on bonds. As bonds approach their maturity date, the current yield and the yield to maturity converge; become nearly equal. At ma- turity, the YTM is identical to the bond's coupon rate. Bonds issued with varying maturities are called serial redemption bonds. Corporations do not always retire their long term debt; they roll it over instead.
Most companies sell new bond issues and use the proceeds to pay off the maturing issue. Some bond issues have a sinking fund provision in the indenture agreement which re-quires that the firm set aside a sum of money each year to retire the bonds at maturity.
Corporations may also retire bonds by calling them if the bonds have a call feature or repur- chasing the bonds in the secondary market. Bonds will be called only if interest rates have fallen and the firm can refinance the debt at lower interest rates. Companies desiring to permanently reduce their LTD may wait for interest rates to rise and then redownload the bonds at a discount; the firm can retire the debt for less than its face value and hence realize a gain on the redownload.
However, when the indenture agreement so specifies, corporations may repay the debt as follows; A. Serial Redemption Bonds; called by lottery for repayment. Sinking funds; Companies regular deposits into trust fund to accumulate FV C.
Other Possible Strategies; 5. The companies may redownload debt in the secondary bond market; especially if in- terest rates have risen, reducing market values of their bonds. The companies may issue callable debt; early redemption with additional premium.
If interest rates drop, firms reduce interest expense by refunding the existing bonds. State and local governments also issue bonds. The interest paid on state and local gov- 17 ernment bonds is currently exempt from federal income taxation.
The interest paid on treasuries is exempt from local taxation. Federal government bills and bonds 7. Interest is taxable by Federal Government but non taxable by State Governments. Price Quotations different from corporate bonds.
Tax-exempt municipal bonds 9. The Pre-Tax Equivalent Yield; compare to taxable yields. Interest not taxable by Federal Government. If the current yield rates are 9 percent, how much should this bond sell for? Self-Test: ST-1, par value, e, h B.
Questions: , , , C. Problems: , , part a 18 19 IX. What is the purpose of the indenture agreement? What are the principal sources of risk when investing in bonds? What is the difference between a mortgage bond and a debenture bond? Be able to compute bond prices and describe effects of YTM changes on prices. What is the difference between a current yield and a yield-to-maturity?
An years until maturity corporate bond pays an 8. What is the yield to maturity YTM of the bonds? If the bonds in question 6 are priced to yield 9. Investment Risk A. Investment risk is related to the probability of earning a low or negative actual return. The greater the chance of lower than expected or negative returns, the riskier the investment. Risk is measured as a probability distribution 1.
Standard deviation s 3. Treasury bills 3. Analysis of Standard Deviations A. Standard deviation si measures total, or stand-alone, risk. The larger si is, the lower the probability that actual returns will be closer to expected returns.
Larger si is associated with a wider probability distribution of returns e. Standard deviations are scale sensitive. Scale-Free Measure of Risk A. Coefficient of variation CV : A standardized measure of dispersion about the expected val- ue, that shows the amount of risk per unit of return. Average Standard Coeff. Investor Attitude Towards Risk A. Investors are assumed to be risk averse.
Risk aversion — assumes investors dislike risk and require higher rates of return to encourage them to hold riskier securities. Risk premium — the difference between the return on a risky asset and a riskless asset, which serves as compensation for investors to hold riskier securities.
Managing Investor Risk A. Primary Strategy to Manage Risk 1. Holding a diversified portfolio of securities Stocks common, preferred, foreign Bonds treasury, municipal, corporate Mutual Funds Growth, Income, Balanced, etc.
Sources of Portfolio Risk 1. Firm-specific diversifiable, non-systematic risk 2. Market related non-diversifiable, systematic risk C. Correlation 1. Positive two stocks move in same direction 2. Negative two stocks move in opposite direction 3. Zero two stocks move randomly VII.
Capital Asset Pricing Model A. Asset Pricing Theory seeks to explain why certain assets have higher expected returns than other assets and why expected returns vary over time. Expected returns are those returns when assets are priced in equilibrium: B. Primary conclusion: The relative riskiness of a stock b is its contribution to the riskiness Pf Beta of a well-diversified portfolio. Market Risk Premium G.
Additional return over the risk-free rate needed to compensate investors for assuming an av- erage amount of risk.
Fundamentals of Financial Management, Third Edition by Vyuptakesh Sharan
Investors pre- fer stocks with positive alphas. Selt-Test: ST-1, parts a, c, e, i B. Questions: , C. Hybrid Security; 1. PS have fixed [dividend] payouts like bonds 2. PS are equity investments similar to common stock. Preferred stocks are riskier than bonds 4. Dividends paid from after tax income. Attributes of Preferred Stock 1.
Par value. Cumulative Features; missed dividends must be made up. Participating; in years of high profits, an extra dividend. Non-Voting; except as provided in corporate charter.
Convertibility; typically into common. Some dividends are partially tax exempt returns of capital. Corporate Charter; specifies rights of stockholders 1. Voting to elect directors. Direct or via proxy; power to cast ballot. Majority; if you own Voting to amend the charter. Voting to raise capital. Voting to enter into mergers.
Preemptive rights; maintain proportionate ownership share. Classes of Common 1. Voting; the "vanilla flavor. Non-Voting: some classes may be non-voting unusual. Dividend Policy 1. Declaration date, Record date, and Payment date. Cash vs.
Stock Dividends vs. Stock Splits 3. Automatic Dividend Reinvestment Plans D.
Redownload Of Stock 1. Implied statements about investment opportunity set.
Reduction in outstanding shares makes shares more expensive. The fixed divi- dend payment is subject to the discounted future cash flows method. When interest rates rise the value of preferred stock falls and vice-versa. Hence, preferred stock prices behave very much like bond prices. Valuation model; the perpetuity assumption. Impact of changes in interest rates; bond-like behavior. Preferred Stock dividends tend to be fixed. Fixed dividends makes preferred stock prices sensitive to changes in interest rates.
Dividend-Growth Valuation Model Common stock prices depend on the firm's dividend, the rate of growth in earnings, and inves- tors' required rates of return.
In its simplest form, the required rate of return depends on expected dividends and capital gains, and the anticipated level of risk. Zero Growth Model same as preferred model. Normal Growth; the growth in dividends over time. Normal valuation models not viable for non-dividend paying stocks. Models don't capture other aspects of firm non-income items. Self-Test: ST-1, a, b, f B. Questions: C. Problems: , , 25 VI.
What characteristic of preferred stock causes sensitivity to interest rate changes? Why is cumulative voting for directors an important feature of common stock? What are preemptive rights and why are they important to common stockholders? Dividends are subject to double taxation. Why might stockholders prefer the company to re- invest all earnings in the company rather than pay dividends?
Why is the record date for dividends important to stockholders and the markets? What reasons are given to explain stock redownloads by the company? What are the important assumptions in the stock valuation model? The world can market appears to be very risky right now. Accordingly, you believe you require a 13 percent rate of return on the common Ks. How much should you pay for CAN's stock? From Most to Least Used Sources 1. Retained Earnings 2. Sale of Corporate Bonds 3.
Sale of Common Stock 4. Sale of Preferred Stock B. Capital consists of: 1. Debt bonds 2. Equity preferred and common stocks 3.
Retained Earnings C. Market-based weighted-average of these costs WACC is also termed the hurdle rate. How are the weights Wi determined? Use accounting numbers easiest — uses book values 2. Use market value of issued securities preferred method 3. Some Observations: 1. The Cost of New Debt: Kd 1.
Where: a. The cost of Preferred Stock; Kpfd 1. Hurdle rate; minimum rate of return a project must earn. Ceteris paribus…. If just the hurdle rate is earned, then value of firm is maintained. If less that the hurdle rate is earned, then value of firm declines. If more that the hurdle rate is earned, then value of firm increases.
Homework Assignment B. Self-test: ST-1, parts b, e, f C.
Questions: , parts a, b, h, i D. Problems: , , VII. Why is the hurdle rate an important concept in capital budgeting? What important considerations must we make when computing the cost of capital?
What factors should managers consider when planning a capital structure strategy? Reasons for Investment Projects 1.
Increase sales or diversify product lines. Replace worn-out equipment. Achieve a variety of corporate objectives. How Projects Are Evaluated; 1. Companies have a variety of opportunities.
Data is collected on each attractive opportunity. Companies select best investments to increase the value of the firm. They will select as many investments as they have funds. They will seek to diversify their investments in order to diversify their risks. They will periodically reevaluate decisions in order to make decisions relative to continu- ance abandonment analysis.
Learning Objectives 1. To learn the basic methodology for capital budgeting and the relevant decision rules. Business Objectives 1. Minimize the probability of losses 2. We want to make the most informed decision E. Type of project; new investment or replacement? Expected economic life of the project in years. Initial outlay of cash required to finance project. Identifying the timing and magnitude of future cash flows F.
The Hurdle Rate: In the "time value of money" we are concerned with the present value of an amount to be re- ceived in the future. Capital investments are subject to the same general analysis. We make in- vestments in order to realize future benefits. We are, however, subject to an important con- straint. Obviously, if we pay 12 and earn 9, we are losing money.
Better to stay in bed. The preferred situation is to borrow at 9 and earn When capital investments are made, an important decision criterion is discount rate or hur- dle rate used to compute present values of future benefit streams. The net present value NPV of a project is equal to the present value of future cash streams minus the cost of the investment required to produce those cash streams.
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Why not share! Embed Size px. Start on. Show related SlideShares at end. WordPress Shortcode. Published in: Full Name Comment goes here. Are you sure you want to Yes No. Yuniar Melawati , Siswi at Kelas 9A. Rani Harahap.Non-Voting; except as provided in corporate charter. How long will it take to recover the initial outlay from ATCF? How much interest income will you earn?
Primary conclusion: The relative riskiness of a stock b is its contribution to the riskiness Pf Beta of a well-diversified portfolio. You must press the 1107 to save this value.