NEW MATERIAL SINCE EXAM II TIME VALUE OF MONEY, Pt. IIIknow how to calculate present value of a lump-sum and explain the resultPV= FV/(1+I)^N. A lumpsum is a one time cashflow or payment, and it occurs on one year or less. “If you wish to have $$ (FV) and XX years (n) and you can earn %% compounded annually (i) you must invest $$ today.be able to calculate present value when compounding occurs more frequently than annuallyPVLS: FV / (1+I)^N . Multiply N, Divide ( i). Semiannual=2, Quarterly= 4, Monthly=12 Daily=365understand the effect of compounding more frequently than annually on PV (see Time Value of Money, Pt. III - Discussion for Prob. 5-24, parts a and b)When it is compounded more frequently than annually, PV gets smaller than what it would have been annually. understand the relationship between PV and i-TIME VALUE OF MONEY, Pt. IVknow the difference between an ordinary annuity and an annuity dueOrdinary annuity has regularly occurring payments and the END of the period, Annuity Due comes at the BEGINNING of the period. know how to find the future value of an annuity (and explain the result)EX: $2000 end of year, for 20 years, compounded annually at 4%. “ ORDINARY”FVA=PMT x ( 1+i)^n – 1 / i: 2000x(1.04)^20-1/.04 or PMT:2000, PV:0, I/Y: 4, N:20 years, CPT FV“If you invest (pmt) at the end of every year for XX (n) years and earn % compounded annually (i), you will have (fva).”IF you want to find out FVA annuity due you the number for ordinary due anduse this equation:*FVAannuitydue= FVAordinary x (1+i)*know how to find the present value of an annuity (and explain the result)PVAordinary= PMT x 1-1/(1+i)^n/i““If you invest (pmt) at the beginning of every year for XX (n) and earn % compounded annually (i), you will have (pva).”INTRO TO VALUATION - entire topic (same as for QUIZ #2) Know other names for the fundamental value – “intrinsic or theoretical value”be able to explain how to calculate the fundamental value (V) of an assetPVLS=FV x 1 / (1+i)^n “ If you invest $$ today and receive $$$ in XX years, your compound annual rate of return will be %%. be able to calculate the fundamental value of an asset, given its cashflowsVpvls 1st payment + PVLS 2nd payment. “if %% is your required return for an investment that pays your $$ in XX years from now and another $$ XX years after that, you should pay $$$ for the investment.”know how to follow the steps in the valuation process, but you won’t have to list themknow the following terms and how they relate to whether you should invest in the asset or not: undervalued, overvalued, fairly valuedMarket Value < Fundamental value “UNDERVALUED” *BULLISH OUT LOOKMarket Value = Fundamental value “FAIRLY VALUED” *NUETRALMarket Value > Fundamental value “OVERVALUED” * BEARISH OUTLOOKdifference between bullish and bearishBOND VALUATION - entire topic (most of this was covered on QUIZ #2)be able to calculate current yield, YTM and YTC.-Current Yields : Annual Interest / Current Market ValeYTMYTC[review] know another term for growth-APRRECIATION, CAPITAL GAINKnow which components of return (income, growth or both) are measured by current yield, YTM, and YTM Current yield : measures income of total return both income and growthYTM + YTC : Both measures total return, YTC measures return on callable bonds be able to find the theoretical value of a bond and decide whether to buy or sell it based on the market value (i.e., whether it is undervalued or overvalued and whether you are bullish or bearish)know how to interpret YTM and YTC when compared to the required return for the bond, like in Prob. 7-9b, Bond Valuation Discussion #2Be able to determine whether interest rates have risen or fallen since the bond was issued based on the bond’s YTM or its current market value (like Bond Valuation Disc. #5e)be able to determine whether the issuer is likely to call the bond issue given the bond's coupon rate, YTM and YTC (like Bond Valuation Disc. #5e)be sure to go through the Bond Valaution COMPREHENSIVE discussion and the 3 Bond Valuation SELFIEQsCOMMON STOCK VALUATIONknow how to solve for any variable in the Dividend Discount model, given all the restKnow the definitions of asset-based approach to valuation and relative valuation and be able to spot examples of them-Asset based approach: the company’ value lies in its assets than cash flow generated. A company with a patent.-Relative Valuation: Determine the intrinsic value and compare it a similar investment to determine if it is cheap to the other. “An analyst” CORPORATE FINANCE The goal of financial management -Maximize the wealth of the business owners How the goal is accomplished Who the true owners of the corporation are -Common shareholders are the true owner because they have voting rights, and they are last in line corporate liquidation.How finance differs from accounting-FNCE: Future projections, pro forma, ACCT: historical earningswhat accrual-basis accounting is -Revenue is recorded when earned, expense is recorded when incurredfree cash flow - Cash flow generated by the business above and beyond the capital needed to operateTotal operating capital- Capital needed to run a businessCEO- Chief Executive Officer, highest ranking employeeCFO- Chief Financial Officer, oversees treasury and accounting department, and interface with board directors, leaders, shareholders, potential investors.Treasurer- Head of treasury departmentAccountantConflicts in financial relationships1) Agency conflict: potential for mgmt. to act on its own best interest thanthe shareholders2) Owner Lender Conflict: owners may take risk that jeopardize lender principal3) Owner Worker Conflict: owners exploit workers, and workers should unite to overthrow capitalist ( owners) Know the difference between wealth and income; Wealth: What you have (own) “Asset – Liability = “net worth”, assets, car, investmentsIncome: How much you make (earn), salary, interest, dividend, rent SKIP: calculating free cash flow (FCF) CAPITAL BUDGETING Independent projects -Some proposed projects are independent. If Proposed Projects A and B are independent, choosing to undertake Project A does not affect whether Project B is chosen.Mutually exclusive projects- choosing to pursue one project eliminates the possibility of choosing one or more other projects. The one with the larger NPV is chosen over the otherCalculate: Payback periodNPV:IRRAnd interpret the