Rachel Van Diepen
April 17, 2015
Dr. Kang
Finance 304
Van Diepen !1
Time Value Money Concepts
People in general would like to have the same amount of money now instead of the same amount later on, this is concept is time value of money; the interest added to the money deposited into a savings account. Time value of money (TVM) is the prospect that money can grow over time. This is a central concept of finance, considering any amount of money can earn interest, it is worth more the sooner than it is received. TVM is reliant on both the time interval being contemplated and the discount rate used in computing present or future values. With all this being said, one can use TVM to calculate how much a person will need to invest to meet a future value goal.
For example, suppose there is 6% interest rate, $500 invested today will be worth $530 in
Year 1 ($500 multiplied by 1.06). This is more than one would have had if they received
$500 at that point.
Goals and Functions of Finance
The firm's primary financial goal is to increase the stock price, which also leads to an increase in the firm's value and the shareholder wealth. Long-run profitability coincides with ethical behavior to create a positive professional atmosphere. Furthermore, the difference between manager and the stockholders is that managers act in their own best interests creating the Principal-Agent Problem. Ways that stockholders and managers are able to work out a system together is through offering the managers a compensation plan. Plus there’s a higher demand for good managers, and if those points do not work, the stockholders can purpose a threat of firing or even a takeover. Functions of finance management are planning and controlling, allocating funds, and obtaining of funds. Some factors that affect the stock price are projected cash flows to
Van Diepen !2
the shareholders through capital budgeting, the timing of the cash flow stream through TVM, riskiness of cash flows explained by the risk and return, capital structure, and dividend policy; all in which will be discusses further throughout the paper.
Financial Environment
Financial markets are where people and businesses who want to borrow money synthesize with others who have the ability to provide funding. There are money markets and capital markets, money markets are short-term implements, such as commercial paper, negotiable certificate of deposit, Treasury bills, federal funds, and bankers acceptances are traded. Capital markets are long-term safeties such as, mortgages, stocks, and bonds. There are two types of capital markets: primary and secondary markets. The primary market is when new securities are traded, in particularly secondary offering or initial public offering. The secondary market is when securities are already issued, sold, or traded; for example, over-the-counter market and securities exchange. Additionally, there are financial derivative markets, derivatives are contracts that values are acquired from the prices of present assets. Some of the current assets could be securities, foreign money, commodities, or stocks.
Financial institutions include commercial/investment banks, mutual funds, hedge funds, pension funds, credit unions, private equity companies, and saving/ loan associations. With that being said, inflation is always a possibility and will happen in businesses, whether it's from demand-pull or cost-push. The formulas needed to solve inflation are:
Nominal rate = real rate + inflation
Interest rate = real risk-free rate + inflation premium + liquidity premium + default risk premium + maturity risk premium
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Nominal risk-free rate = real risk-free rate + inflation premium
Sole proprietorships, partnerships, and corporations are forms of business organizations.
Proprietorships and partnerships advantages are they are easy to start, have few regulations, and there are no corporate income taxes; however the disadvantages
