Professional Documents
Culture Documents
MANAGEMENT II
Kharul Azhar Bin Ramli
Room : 022 (COB Main Building)
1
OBJECTIVES :
Upon completion of the course, students are
expected to :
understand the foundation of key concepts
FM I
Introductory course to
financial management, it
focuses on short term
financial management.
Financial Statement
Forecasting & Planning
Risk & return
Time value of money
Short term financing
Management of cash ,
AR & inventory
FM II
Follow-up course of FM1,
focuses on investment
decision making process
& long term financing.
Time value of money review
Bond & stock valuation
Cost of capital
Capital Budgeting
Techniques
Cash Flows in Cap
Budgeting
Leverage & Cap Structure
Dividend policy
3
RM1
or invested.
Simple interest
is computed on the principal amount only. It is the return on the principal
for one period.
Compound interest is computed on principal and on any interest earned
that has not been paid or withdrawn. Compounding computes interest not
only on the principal but also on the interest earned to date on that
principal, assuming the interest is left on deposit.
Future
?
Translate $1 in the future into its
Future
Steps in solving a
problems:
Read the question carefully.
Underline clue words.
What did you need to do?
What facts are you given?
What do you need to find out?
or
FV = PV
PV Present value
i - interest rate
n - number of compounding period
10
11
PV = 1000
= ??
FV
12
PV = 1000
= ??
FV
FV = PV (1+ i)5n
= 1000 (1+ .08)5
= 1469.33
13
14
or
PV = FV
FV Future value
i - interest rate
n - number of compounding period
15
16
PV = ??
1000
FV =
17
PV = ??
1000
FV =
PV = FV / (1+ i)n
= 1000 / (1+ .1)2
= 826.45
18
19
Rule of thumb:
20
21
22
Example 1:
If you sold land for $11,933 that you
bought 5 years ago for $5,000, what
is your annual rate of return?
PV = 5000
FV = 11,933
5
i= ?
23
Mathematical Solution:
PV = FV (PVIF i, n )
5,000 = 11,933 (PVIF
?, 5
PV = FV / (1 + i)n
5,000 = 11,933 / (1+ i)5
i = [FV/PV] 1/n - 1
= [11,933/5000] 1/5 1
= (2.3866)1/5 1
i = .19 or 19%
24
Example 2:
Suppose you placed $100 in an
account that pays 9.6% interest,
compounded monthly. How long will
it take for your account to grow to
$500?
PV = 100
FV = 500
?
n= ?
25
Mathematical Solution:
PV = FV / (1 + i)n
100 = 500 / (1+ .008)n
5 = (1.008)n
ln 5 = ln (1.008)n
ln 5 = n ln (1.008)
1.60944 = .007968 n
n = 202 months
26
28
Annuities
Annuity: a sequence of equal cash
29
Examples of annuities:
If you buy a bond, you will
(1 + i)n - 1
i
i, n
1000
1000
1
1000
2
3
??
?
32
Solution
FVA = PMT (FVIFA i, n )
=1,000 (FVIFA .05, 3 )
=1,000 (3.1525) = $3152.5
FVA = PMT
(1 + i)n - 1
i
FVA =
33
1
1- (1 + i)n
i
i, n
2000
0
2000
2000
2
?
??
35
Solution
PVA = PMT (PVIFA i, n )
= 2,000 (PVIFA .06, 3 )
= 2,000 (2.673) = $ 5346 (use
PVIFA table)
PVA = PMT
PVA =
1
1 - (1 + i)n
36
Ordinary Annuity
Try this ..
1. What is the present value of an annuity of
38
Perpetuities
Suppose you will receive a fixed
goes on forever.
39
PV = PMT (PVIFA i, n )
40
Mathematically,
(PVIFA i, n ) =
41
1-
1
n
(1 + i)
i
42
43
PV = PMT
i
=
44
$1000
$1000
$1000
8
45
Ordinary Annuity
- annuity payments are made at the end
of each period
1000
1000
1000
1000
P
V
0
Annuity Due
F
4
V
P
0
V
F
4
V
46
1000
1
FORMULA:
1000
1000
)
47
Solution
FVAD = PV (FVIFA
i, n
)(1 + i)
= 1000 (FVIFA
.05, 4
)(1 + .05)
= 1000 (4.3101)(1.05)
= 4525.6 (use FVIFA table)
FVAD = PMT
(1 + i)n 1
I
(1 + i)
FVAD =
48
FORMULA:
PVAD
= PMT (PVIFA
(1 +i)1
PVAD = PMT
(1
i, n
1 - ( 1 + i)n
+i)
49
Solution
PVAD = PV (PVIFA
i, n
= 1000 (PVIFA
)(1 + i)
.09, 3
)(1 + .09)
= 1000 (2.5313)(1.09)
= 2759.12 (use PVIFA table)
1
1 - (1 + i)n
PVAD = PMT
(1 + i)
i
PVAD=
50
Annuity Due
Try this
1. How much money must you pay into an
$500
$800
$1500
$1000
8
52
2,000
4,000
6,000
3
Is this an annuity?
How do we find the PV of a
2,000
4,000
6,000
3
54
4,000
6,000
4,000
6,000
3
PV1 =
PV2 =
PV3 =
$
56
(1+
quoted rate
m
- 1
APY =
.0785
1+
4
- 1
59
Exercises - TVM
1. You have just borrowed $100,000 and you
300
200
400
500
500
500
500
7
500
500
PV1
PV2
PV3
PVA
6
PV3