Finance 301, week 3 notes
Finance 301, week 3 notes Fin 301
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This 2 page Class Notes was uploaded by Eugene Barretto on Thursday September 1, 2016. The Class Notes belongs to Fin 301 at University of Illinois at Chicago taught by Stanley Waite in Fall 2016. Since its upload, it has received 37 views. For similar materials see Managerial Finance in Finance at University of Illinois at Chicago.
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Date Created: 09/01/16
Introduction to Managerial Finance CH 3: Time Value of Money Role of a Financial Manager: 1) Marketing – see how much revenues the firm made from advertising a product. 2) Economics – see how much consumers are willing to buy a product from a price decrease. 3) Organizational Behavior – determining the change in Management structure to increase efficiency. 4) Strategy – determining the competitor’s reaction to a move made by a firm such as: price increase or decrease. 5) Operations – determining the production costs after implementing the manufacturing plant. - The Financial Manager’s goal is to make sure the value of its benefits exceeds the cost and therefore, will increase the value of the firm. Competitive market – the value of the good is determined by the price in which it is traded in a competitive market. In a competitive market, the goods can be sold and bought at the same price. Valuation principle – when the value of the benefits exceeds the value of the costs, the decision will increase the market value of the firm. Law of One Price - In competitive markets, goods and securities must have the same prices because of the buy and sell orders cycle that will push the two prices together until there is no more profit. Arbitrage – the practice of going to different markets that have the same goods to buy and sell in order to take advantage of the price difference (a way of reducing costs and increasing benefits). Arbitrage opportunity – a situation in which it is possible to not make any investments or risks and still make a profit. Time Value of Money – difference in the value of money today and the value of money in the future. Also, the observation of the cash flows of money today and in the future have different values. Interest rate – r, the rate at which money can be lent or borrowed increases over time. Interest rate factor – converting cash flows across time using (1+r). Present Value (PV) – value expressed in present time. Formula: C/(1+r)^n Future Value (FV) – Value expressed in future terms. Formula: C X (1+r)^n Discount Factor – 1/(1+r). It is a discount today to buy money in the future. - The discount rate = interest rate Introduction to Managerial Finance Timeline – visual representation of the cash flows of an investment. - Steps for a timeline: 1) Construct it 2) Identify dates 3) Distinguishing Cash inflows from Cash outflows 4) Show time periods - Valuing Cash Flows at Different Points in Time 1) Compare and combine values at the same time. 2) Compounding – the process of moving forward along a timeline to determine a cash value in the future. Compound Interest – effect of earning interests to your original investment year after year. 3) Discounting – to find the value of a future cash flow, we must discount it at an earlier point in time. In order to do this, we can divide the cash flow by 1 plus the interest rate (1+r).