FIL 240 Lecture 12 Outline of Last Lecture I Lowering Fixed Costs II Time Value of Money a Definition b Future Value Equation c Present Value Equation d Finding k and n e FV Annually f FV Semiannually g Effective Yield Outline of Current Lecture I Level vs Unlevel Annuities a Level annuity b Unlevel annuity II Ordinary Annuity vs Annuity Due a Ordinary Annuity b Annuity Due c Rule d Calculations III Preferred Stock a Cumulative b Debt vs Equity financing IV Perpetuity a Rule b Equation Current Lecture Annuities and Perpetuities I Level vs Unlevel Annuities a Level annuity where cash flow components are all the same Ex you get 200 every year b Unlevel annuity where cash flow components are different Ex you get payments of 200 300 300 These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute II III IV Ordinary Annuity vs Annuity Due a Ordinary Annuity each cash flow component occurs at the end of the period b Annuity Due each cash flow component occurs at the beginning of each month c Annuity due is of higher value than ordinary d Calculations i N of periods ii PV 0 iii PMT 200 iv FV 0 v P Y 1 vi end begin vii Ordinary 662 43 viii Annuity due 715 42 e 22 000 5 year loan APR 6 95 monthly payments i 435 11 Preferred Stock a Cumulative preferred stock s dividends must always be paid no matter if the payments were missed or not b Bonds are debt financing stock is equity financing Perpetuity a The same amount of money comes every period forever b PV CF k i 88 02 discount rate 44 ii Premium to par stock sells for more than par value iii PV 88 025 35 20 iv As interest rates fall security prices rise v As interest rates rise security prices fall
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