Cheat Sheet for Finance...

CHAPTER 5: INTRODUCTION TO VALUATION: TIME VALUE OF MONEY… Future Value: (FV) The amount an investment is worth after one or more periods. Also compound CLEAR value. CAL: Compounding: the process of accumulating interest in an investment overtime to earn more interest. 2nd, (+/-) Interest on interest: interest earned on the reinvestment of previous interest payments. enter Compound interest: interest earned on both the initial principle and the interest reinvested from reset, prior periods. Simple interest: interest earned only on the original principle amount invested. Present Value: the current value of future cash flows discounted at the appropriate discount rate.BEG: 2nd, PMT, Discount: To calculate the present value of some future amount. 2nd enter Discount rate: The rate used to calculate the present value of future cash flows. CHAPTER 6: DISCOUNTED CASHFLOW VALUATION… Stuart Gabriel, a second­year MBA student, has just been offered a job at $80,000 a year. He anticipates his salary increasing by 9 percent a year until his retirement in 40 years. Given an interest rate of 20 percent, what is the present value of his lifetime salary? Clear time value of money memory: 2nd CLR TVMCompounding should remain at  P/Y = 1 (third row second column), ENTER (first row second column), down arrow (first row fourth column), C/Y = 1. Annuity: a level steam of cash flows for a fixed period of time. First step: find out I and PMT Annuity due: an annuity for which the cash flows occur at the I = {(interest rate­growth rate)/(1+growth rate)}*100 beginning of the period.   = {(.20­.09)/(1+.09)}*100 Perpetuity: An annuity for which the cash flows continue   =10.09 forever. Press STO, 1 to store the number CONSOL: a type of perpetuity PMT = Current Annual Salary/ (1+growth rate) Growing Perpetuity: A constant stream of cash flows without          = (80,000/1.09) end that is expected to rise indefinitely.          =73,394.50 Growing annuity: a finite number of growing annual cash flow. Stated interest rate/quoted interest rate: the interest rate Press STO, 2 to store the number expressed in terms of the interest payment made each period. Second Step: enter the following  N = 40, number of payment/cash flows in the growing annuity. Also quoted interest rate. Effective annual rate: Interest rate expressed as if it were I = press RCL, 1 to recall the number we saved compounded once per year. PV = Unknown Annual percentage rate (APR): the interest rate charged per PMT = RCL, 2 to recall the number FV = 0 TI BA II Plus Version CPT PV = $711,731   General Process to Calculate EAR on the TI BA II Plus FORMULA FOR PRESENT VALUE OF GROWING PERP… PV= C / R­G  Press 2nd 2.This selects the ICONV function on the TI BA II Plus. Hoffstein Corporation is expected to pay a dividend of $3 per You should see “NOM=” on your calculator screen.  share next year.  Investors anticipate that the annual dividend  Enter the interest rate you want to convert to the EAR, then press will rise by 6% per year forever.  The required rate of return ENTER  is 11%.  What is the price of the stock today? Press the ↓ button twice. You should see “C/Y=” on your calculator C1 screen. On this screen you input the number of times per year your PV  rg interest is compounded. Enter the interest rate, then press ENTER. Finally, press the ↑ once. You should see “EFF=” on your calculator $3.00  screen, which stands for the effective annual rate. Press the CPT key 0.11  0.06 and the EAR will be displayed on the calculator display.  $60.00 Applying these steps to Timmy’s problem: 8% compounded daily Press 2nd 2. Make sure the screen says “NOM=” Press 8, then ENTER Press the ↓ arrow twice, then type in 365 followed by ENTER Press the ↑ once, then CPT The EAR should equal 8.33% 8.25% compounded quarterly Press 2nd 2. Make sure the screen says “NOM=” Input 8.25, then ENTER Press the ↓ arrow twice, then type in 4 followed by ENTER Press the ↑ once, then CPT The EAR should equal 8.51%