Interest Rate < Inflation Rate, how much would you be able to buy with the money with

that account?
Less than today

Buying a single company’s stock usually provides a safer return than a stock mutual fund. FALSE,
diversification

Stock price – based on confidence of investors

Agency Theory: managers are inclined to act on their own interest

No equity securities in money markets because normally their maturity is more than a year.

Future Value Examples

Lump Sum: P2,662,000

Ordinary Annuity: P3,972

1.1 x x = = - 1 / 0.1 * 1,200

Annuity Due: P4,369.20

1.1 x x = = - 1 / 0.1 * 1.1 * 1,200

Mixed Stream: P8,550

(1.1 xx = * 5,000)  n – t = 3 - 1

P6,050 + P2,500

Compound Interest:

P [(1 + i)n – 1]

Compounding more frequently than annually:

2,861,537.57

APR: 0.12; EAR: 0.1268

Present Value Examples

Lump Sum: P1,728,024.04

the amount an investor would be willing to give to the company in exchange for P2,300,000 to be
received in three years.

Ordinary Annuity: P2,984.22

Annuity Due: P3,282.64

This type of annuity requires payments/deposits be made at the beginning of each period.

Mixed Stream: P6,423.74

*Basic Calcu: for the first one, just 1.1 (press divide sign twice) then multiply by FV. Add all.

Level Perpetuity: P12,000

If somebody were to offer you $500 payments every year to infinity at the end of each year with n%
interest, this is your present value.

In finance, perpetuity is a constant stream of identical cash flows with no end.

Growing Perpetuity: P12,244.90

the current value of an infinite series of cash flows that grow (or decline) at a proportionate rate.

Simply initial cashflow divided by the difference between the discount rate and growing rate.

PV of P1,200,000 is 745,105.60.

FV of P1,000,000 is 1,610,510.

Rule of 72: 72 divided by the rate example: 72 / 5 how much 5% ….

Illustrative Time Value Problem: P154,747,428.97

FV = 30,746,846.64

????

Knowledge Check (Theory)

1. FALSE, this describes accounting; is the art and science of managing money
2. TRUE
3. FALSE,
4. FALSE
 5. FALSE, should increase
6. FALSE
7. TRUE
8. FALSE, should equal
9. TRUE
10. TRUE

11. D
12. D Preserve personal wealth
13. B
14. B
15. D, Dividends Per Share (DPS) is the number of declared dividends issued by a company for
every ordinary share outstanding.
16. A
17. C
18. B
19. ?
20. C

The earlier you receive money, the higher the PV.

Knowledge Check (Problem Solving)

23.
Shared Notes
(1) simple interest

(5M x 12% x 3) + 5M = 6.8M

(2) Compound

1st year: 5M x 12% = 600,000

2nd year: (5M + 600K) x 12% = 672,000
3rd year: (5M + 600K + 672K) x 12% = 752,640

2,024,640 + 5,000,000 = 7,024,640

FV examples:
    
    Lumpsum: 2M x (1.1^3) = 2,662,000
    Ordinary annuity= 1,200 x [(1.1^3-1)/10%] = 3,972
    Annuity Due: 3,972 x 1.1 = 4,369.20
    Mixed stream: (5,000 x 1.1^2) + 2,500 = 8,550
    
    Compounding monthly:
        
•2,000,000 x [1+(12%/12)]^(12x3) = 2,861,537.57

APR = 1% x 12 = 12%
EAR = (1 + 1%)^12 -1 = 12.68%

Continuous: 2M x e^(12% x 3) = 2,866,659

EAR = e^12% - 1 = 12.75%

PV examples:
    PV = 2,300,000/ (1+10%)^3 = 1,728,024.04
    Ordinary annuity: (1200/10%) x (1-(1/(1.1^3))) = 2,984.22
    Annuity due: 2,984.22 x 1.1 = 3,282.64
    Mixed Stream: (5,000/1.1) + (2,500/1.1^3)= P6,423.74
    –Level perpetuity: 1,200/10% = P12,000
Growing perpetuity: 1,200/(10%-0.2%) = P12,244.90

CF5 = 1,209.6288 
CF1 = 1,209.6288/ ((1+0.2%)^4)= 1,200

1.2M / (1.1^5) = 745,105.59 vs. 1M

Illustrative:
    FV in 7 years: 25M x (1.03^7) = 30,746,846.6356
    30,746,846.6356/ [(1.09^7-1)/9%] = 3,341,890.6

Unit I Knowledge Check and Practice Problems:

Knowledge check answers:
1-5. F, T, F, F, F
6-10. F, T, F, T, T
11-15. D, D, B, B, D
16-20. A, C, A, B, C

1.
21. 42,500/ (1.02^12) = 33,510.96
22. (12,000 x 6%) + (12,720 x 6%) = 1,483.20
23. ln 2/ ln 1.15 = 4.96 years (rule of 72: 4.80 years)
24. (a) 1.5% x 12 = 18%; (b) (1+1.5%)12-1 = 19.56%
25. (570,000/300,000)(1/5)-1 = 13.70%
Practice problem answers:
5-6: (a) ordinary annuity- $1,725.22; annuity due- = $1,845.99
5-12 14.87%
5-17 $714.29
5-25 MYR 1,744,760
5-30 Bank A- 4%; Bank B- 3.56%
5-40 (a) 55 months; (b) 12 months; (c) $140.88
5-41 $309,014.91