FIN 201 Lecture Notes - Lecture 5: Cash Flow, Interest Rate

37 views2 pages

erincamel819

13 Oct 2016

School

Quinnipiac University

Department

Finance

Course

FIN 201

Professor

Benjamin Abugri

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

Time value of money: future value, present value, finding i and n, annuities, rates of return, amortization. Time value of money- a dollar today is not equal to the value of a dollar tomorrow. Why people like to be paid back as soon as possible so that they can start collecting interest from the bank and make more money. Line that gives the opportunity to look at potential financial expectations for a certain section. Tick marks occur at the end of periods: zero means the current period, now, today, the month or the year, one means one period ahead, 2 days ahead, 2 months ahead, 2 years ahead, cf- cash flow. Cf1 cash flow expected at the next period. Can be positive or negative : negative means it is an outflow, positive means it is an inflow. Annuity due- the constant payments are coming at the beginning of the period.

Related Questions

1.Which one of the following is NOT involved in the process of issuing new finanial securities?

a) Securities and Exchange Commission(SEC)

b) Investos in the secondary markets

c) underwriting investment bank or syndicate

d) The firm

2. Which of the following statement is FALSE?

a) Bank requires the possibility of atleast one outcome less favorable than the expected value

b) probability distribution is described by a list of favorable and unfavorable events and their likelihood

c) Preferred stocks are less risky than common stocks because prefferes dividends are generally fixed

d) Standard deviation is a measure of market risk and, therefore is useful in evaluating the risk of a portofolio

3. Which one of the following statements is FALSE?

a) future value of an investment increases as the number of compund periods per year increases.

b) if you only earned interest on your initial investment, and not onpreviously earned interest, it would be called simple interest

c) present value of a future cash flow increases as the rate of return increases

d) time value of money is the opportunity cost of passing up he earning potential of a dollar today

4. Which of the following is NOT an example of an annuity?

a) interest received on a bond

b) monthly payments paid on a car loan

c) mortgage payments on a fixed-rate mortgage

d) dividend on a commo stock

5. All of the following are financial assets EXCEPT___________

a) Bankerâs acceptance

b) Preferred stock

c) Mortgage back security

d) Brand name

6. Which of the following statements is FALSE?

a) The value of a firm depends o the cash flows is expected to generate in the future

b) Current cash is more valuable than cash in the future

c) All else equal, certain cash flows are preferred to uncertain cash flows

d) The primay goal of a publicly-owed corporation is to maaximize dividend payments.

7. All of the following are the primary tools of the Federal Reserve âmonetary policyâ EXCEPT

a) The income tax rate

b) Open market operations

c) The required reserves

d) The short-term interest rate

8.Which of the following is NOT an advantage of going public or an initial public offering(IPO)?

a) Establish value for firm

b) Possible loss of control

c) Ease of raising funds later

d) Diversification for owners

9. All of the following ae an example of a financial intermediary,EXCEPT____________

a) Associated Credit Union of Texas

b) Canada Pension Plan(CPP)

c) Morgan Stanley investment bank

d)American Funds New Perspective Fund

ceriselizard402

Short Story:
What We Hope to Accomplish

Charlie Munger, Berkshireâs Vice Chairman and my partner, and I expect Berkshireâs normalized earning power per share to increase every year. Actual earnings, of course, will sometimes decline because of periodic weakness in the U.S. economy. In addition, insurance mega-catastrophes or other industry-specific events may occasionally reduce earnings at Berkshire, even when most American businesses are doing well. Itâs our job, though, to over time deliver significant growth, bumpy or not.

After all, as stewards of your capital, Berkshire directors have opted to retain all earnings. Indeed, in both 2015 and 2016 Berkshire ranked first among American businesses in the dollar volume of earnings retained, in each year reinvesting many billions of dollars more than did the runner-up. Those reinvested dollars must earn their keep.

Some years, the gains in underlying earning power we achieve will be minor; very occasionally, the cash register will ring loud. Charlie and I have no magic plan to add earnings except to dream big and to be prepared mentally and financially to act fast when opportunities present themselves.Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, itâs imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.

That wreck was followed by three key happenings â two positive, one negative â that set us firmly on our present course. At the beginning of 1996, we acquired the half of GEICO we didnât already own, a cash transaction that changed our holding from a portfolio investment into a wholly-owned operating business. GEICO. Unfortunately, I followed the GEICO purchase by foolishly using Berkshire stock â a boatload of stock â to buy General Reinsurance in late 1998.

After some early problems, General Re has become a fine insurance operation that we prize. It was, nevertheless, a terrible mistake on my part to issue 272,200 shares of Berkshire in buying General Re, an act that increased our outstanding shares by a whopping 21.8%. Early in 2000, I atoned for that folly by buying 76% (since grown to 90%) of MidAmerican Energy. The MidAmerican cash purchase â I was learning â firmly launched us on our present course of (1) continuing to build our insurance operation; (2) energetically acquiring large and diversified non-insurance businesses and (3) largely making our deals from internally-generated cash. (Today, I would rather prep for a colonoscopy than issue Berkshire shares.)

Our portfolio of bonds and stocks, de-emphasized though it is, has continued in the post-1998 period to grow and to deliver us hefty capital gains, interest, and dividends. Those portfolio earnings have provided us major help in financing the purchase of businesses. Though unconventional, Berkshireâs two-pronged approach to capital allocation gives us a real edge.

Our expectation is that investment gains will continue to be substantial â though totally random as to timing â and that these will supply significant funds for business purchases. Concurrently, Berkshireâs superb corps of operating CEOs will focus on increasing earnings at the individual businesses they manage, sometimes helping them to grow by making bolt-on acquisitions. By our avoiding the issuance of Berkshire stock, any improvement in earnings will translate into equivalent per-share gains.

Our efforts to materially increase the normalized earnings of Berkshire will be aided â as they have been throughout our managerial tenure â by Americaâs economic dynamism. One word sums up our countryâs achievements: miraculous. From a standing start 240 years ago â a span of time less than triple my days on earth â Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers

Question:
Explain what Buffett means by ânormalized earnings.â

azuremanatee374

Short Story

You need not be an economist to understand how well our system has worked. Just look around you. See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it â they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.

Itâs true, of course, that American owners of homes, autos and other assets have often borrowed heavily to finance their purchases. If an owner defaults, however, his or her asset does not disappear or lose its usefulness. Rather, ownership customarily passes to an American lending institution that then disposes of it to an American buyer. Our nationâs wealth remains intact. As Gertrude Stein put it, âMoney is always there, but the pockets change.â

Above all, itâs our market system â an economic traffic cop ably directing capital, brains and labor â that has created Americaâs abundance. This system has also been the primary factor in allocating rewards. Governmental redirection, through federal, state and local taxation, has in addition determined the distribution of a significant portion of the bounty.

America has, for example, decided that those citizens in their productive years should help both the old and the young. Such forms of aid â sometimes enshrined as âentitlementsâ â are generally thought of as applying to the aged. But donât forget that four million American babies are born each year with an entitlement to a public education. That societal commitment, largely financed at the local level, costs about $150,000 per baby. The annual cost totals more than $600 billion, which is about 31â2% of GDP.

However our wealth may be divided, the mind-boggling amounts you see around you belong almost exclusively to Americans. Foreigners, of course, own or have claims on a modest portion of our wealth. Those holdings, however, are of little importance to our national balance sheet: Our citizens own assets abroad that are roughly comparable in value.

Early Americans, we should emphasize, were neither smarter nor more hard working than those people who toiled century after century before them. But those venturesome pioneers crafted a system that unleashed human potential, and their successors built upon it.

This economic creation will deliver increasing wealth to our progeny far into the future. Yes, the build-up of wealth will be interrupted for short periods from time to time. It will not, however, be stopped. Iâll repeat what Iâve both said in the past and expect to say in future years: Babies born in America today are the luckiest crop in history.

Americaâs economic achievements have led to staggering profits for stockholders. During the 20th century the Dow-Jones Industrials advanced from 66 to 11,497, a 17,320% capital gain that was materially boosted by steadily increasing dividends. The trend continues: By yearend 2016, the index had advanced a further 72%, to 19,763.

American business â and consequently a basket of stocks â is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.

Question:
Describe Buffettâs reasons for optimism about America and its economy.

bluemallard552

FIN 201 Lecture Notes - Lecture 5: Cash Flow, Interest Rate

Document Summary

Get access

Related Documents

ACCT 001A Lecture Notes - Lecture 6: Real Interest Rate, Cash Flow, Opportunity Cost

FIN 311 Lecture Notes - Lecture 5: Cash Flow, Capital Budgeting, Sign Convention

BUS 330 Lecture Notes - Lecture 6: Cash Flow, Compound Interest, Opportunity Cost

Related Questions