Additive property of NPV rule One of the important attractions of NPV rule is its additive property. It can be stated as NPV(X+Y)=NPV(X)+NPV(Y) Let us look at a one period case of cash flow stream X. A person invests X0 now and expects to receive X1 one period later. The NPV of this investment would be: NPV=-X0+PVX1 Under equilibrium, the market forces would ensure that the NPV is zero. Hence, PVX1=X0. We know that, r=(X1-X0)/X0 The Capital Asset Pricing Model states that:
Words: 354 - Pages: 2
many companies, however, the single most important long-term obligation is still traditional debt financing. GAAP in this area is quite clear. Noncurrent monetary liabilities are initially recorded at the discounted present value of the contractual cash flows—that is, the issue price. The effective interest method is then used to compute interest expense and net carrying value each period. Interest rate changes occurring after the debt has been issued are ignored. GAAP accounting for long-term debt
Words: 3268 - Pages: 14
along with the different sale ranges. Keywords: NPV, NPV Profile, NPV, IRR, multiple IRRs, ranking conflict of NPV vs. IRR, payback period, profitability index, discount rate, cost of capital concept, cash flow analysis, cash flow timeline, conventional cash flow stream, non-conventional cash flow stream, sunk cost, opportunity cost, independent projects, mutually exclusive projects Overview of the Capital Budgeting Process Every business requires some source of funds to maintain operation and
Words: 1692 - Pages: 7
* * Cash Equivalents Cash equivalents are short-term, highly liquid investments that have both of the following characteristics: * a. Readily convertible to known amounts of cash * b. So near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only investments with original maturities of three months or less qualify under that definition. Original maturity means original maturity to
Words: 763 - Pages: 4
of Corporate Finance, Seventh Edition I. Value 3. How to Calculate Present Values © The McGraw−Hill Companies, 2003 IN CHAPTER 2 we learned how to work out the value of an asset that produces cash exactly one year from now. But we did not explain how to value assets that produce cash two years from now or in several future years. That is the first task for this chapter. We will then have a look at some shortcut methods for calculating present values and at some specialized present value
Words: 12654 - Pages: 51
filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark whether the registrant is a large accelerated
Words: 2264 - Pages: 10
There are four main financial statements. They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders’ equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time. Cash flow statements show the exchange of money between a company and the outside world also over a period of time. The fourth financial statement, called a “statement
Words: 2913 - Pages: 12
CHAPTER 9 SOURCES OF CAPITAL: OWNERS’ EQUITY Changes from Eleventh Edition Updated from Eleventh Edition Approach By comparison with Chapter 8, this chapter’s equity topics are relatively straightforward. I try to downplay the differences between equity accounting for unincorporated and incorporated businesses. As a consultant to the former, I urge them to impute market salaries for their employee-owners, so that their income can be compared with the pretax earnings of incorporated firms. Cases
Words: 5515 - Pages: 23
SECTION A Question A1 is COMPULSORY Question A1 Below are extracts from the financial statements of a listed company which operates a chain of bakery and sandwich retail outlets in the United Kingdom. Income statements | |2012 |2011 | | |£’000 |£’000 | |Revenue
Words: 4527 - Pages: 19
Financial Mathematics for Actuaries Chapter 8 Bond Management Learning Objectives 1. Macaulay duration and modified duration 2. Duration and interest-rate sensitivity 3. Convexity 4. Some rules for duration calculation 5. Asset-liability matching and immunization strategies 6. Target-date immunization and duration matching 7. Redington immunization and full immunization 8. Cases of nonflat term structure 2 8.1 Macaulay Duration and Modified Duration • Suppose an investor purchases
Words: 7983 - Pages: 32
