Chapter 6: Discounted Cash Flow Valuation

Flashcards based on Discounted Cash Flow Valuation lecture notes to help students review key concepts for the exam.

What are the two ways to calculate future values for multiple cash flows?

Compounding the accumulated balance forward one year at a time; Calculating the future value of each cash flow first and then adding them up.

What are the two ways to determine the present value of a series of future cash flows?

Discount back one period at a time; Calculate the present values individually and add them up.

What is a perpetuity?

An investment that will pay a fixed amount at the end of every year forever.

What is a growing annuity?

Annuities commonly have payments that grow over time.

What are perpetuities or consols?

Annuities in which the cash flows continue forever

What is preferred stock (or preference stock)?

Fixed cash dividend every period (usually every quarter) forever and this dividend must be paid before any dividend can be paid to regular stockholders

What is the Effective Annual Rate (EAR)?

The rate you will actually earn.

To compare different investments or interest rates, what must you do?

Convert to effective rates

What is the difference between Annual Percentage Rate (APR) vs Annual Percentage Yield (APY)?

Annual percentage rate (APR) is the interest rate charged per period multiplied by the number of periods per year. Annual percentage yield (APY) is an EAR

What is a pure discount loan?

Borrower receives money today and repays a single lump sum at some time in the future.

What is an interest-only loan?

Borrower pays interest each period and repays the entire principal at some point in the future.

What is an amortized loan?

Has the borrower make a single, fixed payment every period to repay parts of the loan over time.

What is partial amortization or "bite the bullet"?

Borrower makes a payment every month of a fixed amount based on an amortization schedule, but after a set number of months, the borrower makes a single, much larger payment (balloon or bullet) to pay off the loan

List out the discount cash flow symbols and explain what the meaning is.

PV = Present value, what future cash flows are worth today. r = Interest rate, rate of return, or discount rate per period. t = Number of periods. C = Cash amount. FV = Future value, what cash flows are worth in the future.