FIL 240 Lecture12Outline of Last Lecture I. Lowering Fixed CostsII. Time Value of Moneya. Definitionb. Future Value Equationc. Present Value Equationd. Finding “k” and “n”e. FV Annuallyf. FV Semiannuallyg. Effective YieldOutline of Current Lecture I. Level vs. Unlevel Annuitiesa. Level annuityb. Unlevel annuityII. Ordinary Annuity vs. Annuity Duea. Ordinary Annuityb. Annuity Duec. Rule d. CalculationsIII. Preferred Stocka. Cumulativeb. Debt vs. Equity financingIV. Perpetuitya. Ruleb. EquationCurrent LectureAnnuities and Perpetuities I. Level vs. Unlevel Annuitiesa. Level – annuity where cash flow components are all the same. Ex: you get $200 every yearb. Unlevel – annuity where cash flow components are different. Ex: you get payments of $200, $300, $300These 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. Ordinary Annuity vs. Annuity Duea. 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 monthc. Annuity due is of higher value than ordinaryd. Calculationsi. N=# of periodsii. PV=0iii. PMT=200iv. FV=0v. P/Y=1vi. end/beginvii. Ordinary=662.43viii. Annuity due=715.42e. 22,000 5-year loan APR 6.95% - monthly payments?i. $435.11III. Preferred Stocka. Cumulative preferred stock’s dividends must always be paid – no matter if the payments were missed or notb. Bonds are debt financing; stock is equity financingIV. Perpetuity a. The same amount of money comes every period foreverb. PV = CF/ki. .88/.02(discount rate) = $44ii. Premium to par – stock sells for more than par valueiii. PV = .88/.025 = $35.20iv. As interest rates fall, security prices risev. As interest rates rise, security prices
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