Finance 331 Corporate Financial Management Week 1 Week 3 Note: For formulas, a Texas Instruments BAII Plus calculator was used.

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1 Chapter 1 Finance 331 What is finance? - Finance has to do with decisions about money and/or cash flows. These decisions have to do with money being raised or used. General parts of finance include: - Financial Markets and Institutions, Investments (Stocks and Bonds), Financial Services (help w/ managing money), and Managerial Finance (cash flows). Alternative forms of Business Organization Organization # of Business 1) Sole Proprietor 80% 2) Partnership 10% 3) Corporations 10% (In addition to above) For a Sole Proprietor, there is only one owner and it s the easiest to start because there are few regulations. You are only taxed at your personal rate with unlimited liability (meaning you are fully responsible if the business goes bankrupt). Though they are easy to start, it is difficult to raise money and it has a limited life and would end if ownership is not passed on. For a Partnership, there can be 2 or more owners. Other than the amount of owners, it has the same advantages and disadvantage of a Sole Proprietor. For a Corporation, there is a legal entity, meaning that there is a person or people who can make agreements/contracts with banks or other companies. The ownership is very easy to pass on. There is limited liability (meaning if the company goes bankrupt, no owners or investor will have personal assets seized to make up for debt). They have to file taxes and financial statements with State and Federal. Must file with the SEC. Lastly, they are taxed twice under something known as Double Taxation Hybrid Forms of Business 1) Limited Liability Partnership (LLP) 1 general partner is fully liable, other partners have limited liability 2) Limited Liability Company (LLC) Limited Liability, Pass Through Taxes (only taxed once), unlimited # of people but they must take active roles in the company 3) S Corporation Limited Liability, Pass Through Taxes, Limited # of shareholders (100) The primary goal of a corporation is to Maximize Stockholder Wealth. By doing this that means they would be maximizing stock price of the company. Factors by managers that influence stock price: - Projected cash flows

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3 Finance Political risk Chapter 4 Time value of money The principles and computations used to revalue cash payoffs from different times so they are stated in dollars of the same time period. PV = Present Value the initial value invested today. FV = Future Value what the PV will eventually amount to after n periods. Lump Sum Amount a single payment that occurs either today or at some future date. Annuity Multiple equal payments made over equal time periods. Uneven Cash Flows Multiple payments of different amounts made over a period of time. Equation: Future Value of a lump sum FV n = PV(1 + r)^n n = number of years, r = rate If you invest $700 right now for an interest rate of 10%, what will the future value be in 3 years? FV 3 = 700(1 + 10%) 3 FV 3 = 700(1.1) 3 FV 3 = 700(1.331) FV 3 = So you would have $ at the end of the 3 years. Calculator: n = 3, r = 10, PV = -700, PMT = 0 (for annuity) Enter the number followed by the button it represents, for rate you will not find an r but instead you will use the 1/y button. We enter -700 for the PV because it is money we are putting in the bank and no longer have in possession After you have entered all the information press CPT (compute) then, in this case, FV to get your answer. You should get the same answer of Annuity a fixed payment Ordinary Annuity Payment at the end of a period Annuity Due Payment at the beginning of a period

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5 Finance 331 Calculator: Solving for Time (n) A security costing $68.30 will provide a return of 10% per year and you want to keep the investment until it grows to a value of $100. How long will it take? r = 10, PV = , PMT = 0, FV = 100 Then press CPT, N. You should get 4 years. Annual Compounding is the process of determining the future value of a cash flow or series of cash flow when interest is added once a year. But Semiannual Compounding is finding the future value of a cash flow when interest is added twice a year. Comparison of different types of interest rates: - r simple (Simple Rate) is used to computer interest paid per period. Periods per year (m). - r EAR (Effective Annual Rate) is the annual rate of interest actually being earned. - APR (Annual Percentage Rate) is used to compare returns on investments with different payments per year. Periodic Rate = r per = r simple where m is the number of compounding periods per year. So for m Quarterly m = 4, Monthly m = 12, and Daily m = 365. Equation: Effective Annual Rate r EAR = (1 + r simple m )m 1 How do we find Effective Annual Rate for a simple rate of 10%, compounded semi-annually? = ( )2 1 = (1.05) 2 1 = = 10.25% Amortized Loans Loans that are repaid with equal payments over its life time (i.e. mortgages, auto loans, business loans, retirement loans). Calculator: Figuring out an Amortized Loan (Mortgage) Jacob just bought a new house, he took out a 30 year mortgage for $220,000. The mortgage has a fixed interest rate of 6% compounded monthly. What are Jacob s monthly payments? PV = -220,000, FV = 0, n = 30, r = 6 Then press CPT, PMT. You should get $15, This is the yearly payment. To find the monthly payment we take this divided by 12. The final answer should be $1, per month.

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