# MGM230H5 Lecture Notes - Lecture 1: Corporate Finance, Capital Budgeting, Investment

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Published on 23 Apr 2017

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MGM230 January 4, 2017

Chapter 5

• Finance – science that describes the management, creation, and study of

money, banking, credit, investments, assets & liabilities

• Finance manager goal: to value assets/analyze decisions based on their risk

level and expected rate of return in order to maximize shareholder value

Revolves around 6 main principles

1. Time value of money

2. Risk vs. reward

3. Diversification

4. Efficient financial markets

5. Management vs. owner

6. Greed

Important questions using finance:

1. Capital budgeting – what long term investments should we invest in or avoid?

2. Capital structure – how do we pay for our assets?

3. Working capital management – how do we manage daily finances?

• Time value of money – a dollar today is worth more than a dollar in the future

o Risk vs. reward:

o Risk - the greater uncertainty of receiving dollar at a later date vs.

receiving it right away

o Reward - could reinvest the dollar today to earn interest earlier vs. waiting

to reinvest that dollar later

• Recall – to value assets/analyze decisions based on their risk level and their

expected rate of return in order to maximize shareholder value

o Ex. What are they worth in today’s time period?

• Present value (PV) - current value of future sum of money or stream of cash

flows given (FC) –measures the future sum of value that a given sum of money is

“worth” at a specified time in the future assuming a certain interest later

• Interest rate (r) - exchange rate between earlier money and later money

• Term (t) – number of periods

2 Methods of Which Interest Can Be Earned

• Simple interest – earn interest (return) on principal only

Suppose you invest 1000 for one year at 5% per year. What is the future value in 1

year?

Interest: 1000(0.5) = 50

FV in 1 year = principal + interest = 1000 + 50 = 1050

Suppose you invest 1000 for 2 years at 5% per year. What is the FV with simple interest

after 2 years?

Interest: 1000(0.5) = 50 + 1000(0.5) = 50

FV in 2 years = principal + interest = 1050 + 1050 =

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## Document Summary

Revolves around 6 main principles: time value of money, risk vs. reward, diversification, efficient financial markets, management vs. owner, greed. Worth at a specified time in the future assuming a certain interest later. Interest rate (r) - exchange rate between earlier money and later money: term (t) number of periods. 2 methods of which interest can be earned: simple interest earn interest (return) on principal only. Suppose you invest 1000 for one year at 5% per year. Fv in 1 year = principal + interest = 1000 + 50 = 1050. Interest: 1000(0. 5) = 50 + 1000(0. 5) = 50. Fv in 2 years = principal + interest = 1050 + 1050 = January 4, 2017: compounded interest earn interest on principal and reinvested interest. Suppose you invest 1000 for 2 years at 5% per year. The extra 2. 50 comes from interest from the interest of (0. 5)50. Loan payments for an automobile, mortgage, earnings from lottery winnings, etc.