Financial Management and Time Value of Money Vocabulary

Vocabulary flashcards covering financial formulas, time value of money concepts, financial ratios, and loan amortization.

Amortized loan

A loan repaid in regular payments that each cover interest and some principal, such as a mortgage or car loan.

Amortized loan payment formula

Payment $C = PV \frac{1}{\frac{1}{r} \times \big(1 - \frac{1}{(1+r)^n}\big)}$.

Amortization schedule

A table showing each period's beginning balance, payment, interest paid, principal paid, and ending balance.

Amortization schedule interest formula

Calculated for each period as $\text{Interest} = \text{beginning balance} \times r$.

Annual percentage rate (APR)

The periodic rate $\times$ the number of periods per year, which ignores compounding and is not equal to EAR.

Annuity

A stream of identical cash flows at regular intervals over a finite horizon.

Annuity due

An annuity whose payments come at the start of each period.

Annuity due value formula

Calculated as $\text{Value} = \text{ordinary annuity value} \times (1 + r)$, applicable to both PV and FV.

BGN mode

The mode used on the calculator for an annuity due.

Asset turnover

Calculated as $\text{Sales} \frac{1}{\text{Assets}}$, a measure of how efficiently assets generate sales.

Common-size statements

Statements expressed as percentages, where income statement items are a percentage of Sales and balance sheet items are a percentage of Total Assets.

Compound interest

Interest earned on the principal and on previously accumulated interest.

Compounding

Moving a cash flow forward in time using $FV = PV \times (1 + r)^t$.

Compounding with $m$ periods per year formula

Moving a cash flow forward in time using $FV = PV \times \big(1 + \frac{r}{m}\big)^{m \times t}$.

Continuous compounding EAR formula

The limit as compounding frequency goes to infinity, where $EAR = e^r - 1$.

Debt-to-equity ratio

Calculated as $\text{Total debt} \frac{1}{\text{Equity}}$, which equals the $\text{equity multiplier} - 1$.

Discount factor

Expressed as $\frac{1}{(1 + r)^t}$, the multiplier that converts a future dollar into today's dollars.

Discount rate

The rate $r$ used to convert future cash flows to present value.

Discounted cash flow (DCF) valuation

Finding what a future cash flow is worth today by discounting it to the present.

Discounting

Moving a cash flow back in time using $PV = \frac{FV}{(1 + r)^t}$.

DuPont decomposition

Calculated as $ROE = \text{Profit Margin} \times \text{Asset Turnover} \times \text{Equity Multiplier}$, splitting ROE into profitability, efficiency, and leverage.

Effective annual rate (EAR)

The annual rate that would give the same result as compounding $m$ times per year, given by $EAR = \big(1 + \frac{r}{m}\big)^m - 1$.

Equity multiplier

Calculated as $\text{Assets} \frac{1}{\text{Equity}} = 1 + D/E$, where more leverage raises it, which raises ROE.

Future value (FV)

The value of an investment after some time has passed, calculated as $FV = PV \times (1 + r)^t$.

Future value factor

Expressed as $(1 + r)^t$, the multiplier that compounds a present dollar forward.

Growing perpetuity

A perpetuity whose payments grow at a constant rate $g$, calculated as $PV = \frac{C_1}{r - g}$, which requires $r > g$.

Growing perpetuity first payment ($C_1$)

The first payment received one period from now in a growing perpetuity model.

Interest-only loan

A loan with periodic interest payments and the full principal returned at maturity.

Net profit margin

Calculated as $\text{Net Income} \frac{1}{\text{Sales}}$, serving as one DuPont component where higher margins raise ROE.

Ordinary annuity

An annuity whose payments come at the end of each period.

Perpetuity

An infinite stream of constant payments at regular intervals, where $PV = \frac{C}{r}$.

Present value (PV)

What a future cash flow is worth today.

Pure discount loan

A loan repaid with a single lump sum of principal plus interest at maturity.

Return on equity (ROE)

Calculated as $\text{Net Income} \frac{1}{\text{Equity}}$.

Simple interest

Interest paid only on the original principal.

Uses of cash

Financial actions where assets go up, or liabilities or equity go down.

Sources of cash

Financial actions where assets go down, or liabilities or equity go up.

Time value of money

The principle that a dollar today is worth more than a dollar in the future, because it can be invested and earn interest in the meantime.

Total debt ratio

Calculated as $\text{Total Debt} \frac{1}{\text{Total Assets}}$.

Ordinary annuity present value formula

Calculated using $PV = \big(\frac{C}{r}\big) \times \big[1 - \frac{1}{(1+r)^n}\big]$.

Ordinary annuity future value formula

Calculated using $FV = \big(\frac{C}{r}\big) \times \big[(1+r)^n - 1\big]$.

Debt-to-equity calculation example

A $60\text{\%}$ total debt ratio gives $D/E = \frac{0.6}{0.4} = 1.5$.

DuPont decomposition components

Profitability (profit margin), efficiency (asset turnover), and leverage (equity multiplier).

Income statement common-size base

Income statement items expressed as a percentage of Sales.

Balance sheet common-size base

Balance sheet items expressed as a percentage of Total Assets.

Effect of compounding frequency on EAR

For a fixed APR, compounding more frequently leads to a higher effective annual rate.

Annual percentage rate (APR) accounting focus

Takes neither compounding nor discounting into account.

Perpetuity examples

Examples include stocks and some government bonds.

Value of a current dollar compared to a future dollar

The current dollar is worth more because it can be invested in the meantime.

Amortized loan payment interest and principal dynamics

Interest falls and principal rises over time while the payment stays constant.