exam 2 financial management chapter 5, chapter 6, chapter 9

Chapter 5 Summary - Correct Answer valuation: the time value of money what is the time value of money? - Correct Answer -a dollar received today is worth more than a similar amount to be received sometime in the future; prefer current availability to future availability -$1 $1 why we prefer current availability to future availability? - Correct Answer 1. inflation 2. potential earning capacity -time allows us the opportunity to postpone consumption and earn interest applications of the time value of money - Correct Answer corporate and personal finance corporate finance - Correct Answer capital budgeting (investing), capital structure (borrowing), working capital management personal finance - Correct Answer planning for retirement, valuing stock and bonds, understanding loan and mortgage payments what is PV - Correct Answer present value present value is - Correct Answer the money today or value today what is FV - Correct Answer future value Future Value is - Correct Answer the value at future point in time discount rate - Correct Answer -the interest rate to convert future value to present value -the relationship between PV and FV is established through interest rate Future Values: General Formula - Correct Answer FV = PV(1 + r)^t what is future values general formula - Correct Answer value of a current sum of money at a future point in time for a given interest rate future value interest factor - Correct Answer (1+r)^t simple interest - Correct Answer interest paid on the principal alone example of simple - Correct Answer $200 invested with a rate of 3% for 2 years= year 1 200x3%=6 year 2 200x3%=6 total=$12 compound interest - Correct Answer interest earned on both the principal amount and any interest already earned