COMMERCE 2FA3- Final Exam Guide - Comprehensive Notes for the exam ( 95 pages long!)
29 Mar 2018
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The interest rate (cid:449)as used to (cid:858)dis(cid:272)ount(cid:859) (cid:894)(cid:271)a(cid:272)k(cid:895) a future (cid:272)ashflo(cid:449) Basically, a term for interest rate used to determine the present value of future cashflows. Discount rate used for cashflows of a risky stock is often termed required return on equity. Capital budgeting purposes discount rate called cost of capital. Allows you to compare future sums of cash (at different points in time) with present sums of cash. You must know the discount rate that is appropriate for discounting the future sum back to present. If period have different lengths then discount rate should be effective rate over the length of time. V0 = the present value of a cashflow paid or received at a future date. Vt = the cashflow at that certain future date. V0 = vt / (1 + k) ^t. Just like calculating pv, rearrange vt = v0 (1+k) ^t or v0 * fvif (k; t)
