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Level 29

Concept of Present Value


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Net Working capital is the
difference between current assets and current liabilities
maximize share price
Primary goal of publicly owned firm interested in serving stockholders should be to:
Primary Market
financial market where issues of a security are sold to initial buyers by the borrower
Corporations
Limited Liability is faced by owners of:
Primary Market (funding a new project/first time selling)
IBM has decided to issue stock to fund a new project. When the stock is issued it will be sold on the:
Ann is the principal. Mary is the agent
Ann is interested in purchasing Teds factory. Since Ann is a poor negotiator, she hires Mary to negotiate a purchase price. Identify the principal and the agent.
Best example of an agency problem:
Paying management bonuses based on the number of store locations opened during the year.
Present Value or PV= $12,050.53
What is the present value of $13,950 to be received 3 years from today if the discount rate is 5% ?
Agency costs refer to:
the cost of the conflict between stockholders and management
both sole proprietorship's and general partnerships
Unlimited liability is faced by the owners of:
118+(118 x .05 x 5)= $147.50
Gerald invested $118 in an account that pays 5% simple interest. How much money will he have at the end of 5 years?
capital structure
The mixture of debit and equity used by a firm to finance its operations is called:
Number of years=16.01 years
You are trying to save to buy a new $150,000 Ferrari. You have $59,000 today that can be invested at your bank. The bank pays 6.0% annual interest on its accounts. How many years before you have enough?
Has owned land for 22 years; I/Y=5%; PV=$-15,090; PMT=0; FV=$44,142
Some time ago Julie purchased eleven acres of land costing $15,090. Today the land is valued at $44,142. How long has she owned the land is the price of the land has been increasing at 5% per year?
Present Value=$247,183,170; N=20 years; I/Y= 5.5%; PMT=0; FV=$800,000,000
Imprudential Inc. has a unfunded pension liability of $800 million that must be paid in 20 years. If the relevant discount rate is 5.5%, the present value of the liability is?
8% increase per year; N=112(2007-1895) PV=$-120; PMT=0; FV=$665,000
In 1895 the winner of a competition was paid $120. In 2007 the winners prize was $665,000. What is the interest rate increase per year?
Present value=$389,394,793; N=16 years; I/Y=5%; PMT=0; FV=$850,000,000
Imprudential Inc. has a unfunded pension liability of $850 million that must be paid in 18 years. If the relevant discount is 5%, what is the present value of this liability?
16,252.06; N=25 years; I/Y=10%; PV=$1500; PMT=0; For 7 years $8,339.88; N=18(25-7); I/Y=10%; PV=$1500; PMT=0
You have just made $1500 contribution to your retirement account. Assuming you earn 10% rate of return and make no additional contributions what will your account be worth in 25 years? What if you wait 7 years before contributing?
return of investment
Total amount of cash returned, regardless of initial investment.
net return
Difference between return and initial investment.
rate of return
r - net return expressed as percentage of original investment
dividend
interim payment from a stock
coupon
interim payment from a bond
Rent
Profit you expect to get when you build the plant, assuming it all goes to plan
dividend yield
dividend divided by price
Capital Gain
an increase in the value of an asset
capital yield
difference between purchase price and final price, not counting interim payments, divided by purchase price
basis point
1/100 of a percent
Future Value
value of a present cash amount at some point in the future
r (rate of return)
(FV - PV) / PV
compound interest
(1+r)^t - 1
Present value of annuity in arrears
discounted value today of series of future payments
Present value of annuity due
discounted value today of a series of payments made at beginning of period
PV (annuity, i, n) = A
Converting the time value money factor from ordinary annuity to annuity due
Accounting for notes payable/receivable
short term: record at maturity value
Treatment of direct loan origination fees
defer and recognize over life of loan
Treatment of note exchanged for cash with rights/privilege attached
PV of right/privilege = PV of note - cash
record at PV of cash exchanged
Treatment of note exchange for cash with no rights/privilege attached
record at FMV of good or service exchanged
Treatment of note exchanged for noncash item with fair interest rate
Treatment of note exchanged for noncash item with unfair interest rate and known FMV
record at FMV of goods or FMV or note if FMV of goods unknown
used imputed interest rate to value note
Treatment of note exchanged for noncash item with unfair interest rate and unknown FMV
expense as incurred
Treatment of indirect loan origination fees
Lender's treatment of fees
carrying amount = principal + loan costs - charged fees
Borrower's treatment of fees
carrying amount = principal - charged fees