FIN. 3403--Corporate Finance
INTRODUCTION
© R. DIGGLE, CFA
University of Central Florida
1999
COURSE OBJECTIVES: FIN 3403
• To learn to apply the 10 Axioms of Finance
in Ch. 1 of your text.
• To learn to APPLY time value of money and
the financial calculator in every day
problems.
• To understand the basics of Capital
Budgeting, Cost of Capital and Leverage.
• To develop an understanding of applied
financial performance and ratio analysis.
FIN 3403 COURSE OBJECTIVES:
CONTINUED
• To understand the concepts of risk and
return.
• To gain a basic understanding of key
financial instruments, markets and
institutions.
TOPICS
• WEEK 1-5
– TVM
– USING FINANCIAL CALCULATOR
– USING TABLES IN BACK OF TEXT
• WEEK 6-10
– COST OF CAPITAL
– LEVERAGE
– CAPITAL BUDGETING
TOPICS CONTD.
• WEEK 11-15
– FINANCIAL MARKETS, INSTRUMENTS
AND RISK/RETURN
– FINANCIAL PERFORMANCE (Financial
ratio analysis --team project)
– BOND AND STOCK VALUATION THEORY
FIN 3403: SYLLABUS
REVIEW
• OFFICE / HOURS
• GRADING
–
–
–
–
Drop lowest exam
Team project
Homework
Importance of taking
notes in class
• LECTURE NOTES
• FINANCIAL CALC.
• Do you need to brush
up on accounting?
• My job is to
SIMPLIFY concepts
in text and problems.
• Ask questions if you
are unclear on ANY
concept, problem or
definition.
WARNING
• This is a quantitative course.
• Homework and class lectures are designed
to help you understand the material. You
are encouraged to work in a study group to
master this material.
• Grades in this course tend to be a bi-modal
distribution.
GETTING ORGANIZED
•
•
•
•
•
CLASS ROSTER
ATTENDANCE POLICY
TEAM GRADE ON PROJECT
EXAMS AND MAKE UP POLICY
WALL STREET JOURNAL SIGN UP -optional but HIGHLY recommended --you may share
• QUESTIONS?
STUDY TIPS TO HELP YOU
GET AN “A” IN THIS COURSE
• Get into a study group with your team or
other classmates.
• Begin NOW by studying the calculator
manual.
• DO THE HOMEWORK PRIOR TO EACH
CLASS. Exam questions are taken from
this material.
• Write out definitions and terms. Do not just
use a highlighter. Definitions given in class
will be on exams.
STUDY TIPS contd.
• Use the Lecture Notes. They are on my Web
Site and were written to help you on exams
and to simplify note taking.
• See me during office hours if you are
confused or overwshelmed.
• Ask questions until a topic is clear.
• Pay close attention and participate in class.
Move to front if you cannot see.
DOWNLOAD LECTURE
NOTES AND FILES FROM
WEBSITE
• WEB SITE
ADDRESS IS IN
SYLLABUS
• DOWNLOAD
LECTURE NOTES
• DOWNLOAD
EXCEL PROBLEMS
• DOWNLOAD PPT
LECTURES FOR
REFERENCE
• IF YOU DO NOT
KNOW HOW TO
DOWNLOAD, GET
SOMEONE IN THE
COMPUTER LAB
TO HELP YOU.
• PRINT LECTURE
NOTES AND BRING
TO CLASS
My Qualifications
R. Diggle, Jr. CFA
• BBA, MBA UNIV. OF • CEO largest bank -MICHIGAN --finance
investment sub in the
and marketing
Intermountain West
• PhD coursework Ohio • Director of Research
State University -and member of the
honors --finance
management
committee --two
• 30 years of senior
regional brokers
management
• BEEN THERE-• Chartered Financial
DONE THAT!!
Analyst
TEAM COMPANY REPORT
• PLEASE SEE PAGES
5-7 OF LECTURE
NOTES DEALING
WITH PROJECT.
• PRINT THE STEPS
IN THIS PROJECT
FROM THE EXCEL
FILE I WILL GIVE
YOU IN CLASS
TODAY.
• I WILL MEET WITH
EACH TEAM.
• YOUR IMMEDIATE
JOB IS TO GET
ORGANIZED AND
PICK A COMPANY
TO ANALYZE.
• NOTE: SET A TIME
FOR REGULAR
TEAM MEETINGS.
TEAM PRESENTATION
USING EXCEL, COMPUSTAT AND POWERPOINT
• Sign up for a team
today. Get names and
phone number of
teammates
• Pick a time when you
ALL can meet to work
on your project. See
lecture notes for
details.
• Pick an INDUSTRIAL
company. Write for
original last annual
report ASAP (do not
use internet copies)
• I will give each team
an Excel disk to use to
analyze your company
TEAM REPORT CONTD.
• GO TO MY WEB
SITE
• CHECK OUT
POSSIBLE
COMPANIES ON
BIGCHARTS AND
NASDAQ
DATABASE.
• CHECK EDGAR -SEC DATABASE
• MUST HAVE AT
LEAST 5 YEARS OF
HISTORY (NO
RECENT IPOs) AND
SALES OF AT
LEAST $500
MILLION.
• MUST BE MAKING
A PROFIT
• I WILL HELP YOU.
OBJECTIVES OF THIS TEAM
REPORT (15% of grade)
• To become more comfortable making a
formal presentation before a group.
• To learn how to use Powerpoint effectively
• To function as a team. This is a skill you
will need throughout your career.
• Peer evaluations will be made. I know
many of you work. Set team meeting times
THIS IS MS POWERPOINT
• It is EASY to learn
• All you need to do is
outline your talk
• Pick your slide format
and type slides from
your outline. USE
LARGE FONTS
• You may add Clip art
to jazz up your talk
Be creative!!! It is fun
• You can change the
presentation designs.
Just make sure text is
easily visible in back
of room
• Be sure slide 1 lists the
names of team
members and your
topic, class & date
• USE Windows 95 or
Windows NT version
POWERPOINT IS POWERFUL
• When you have some
slides done you can
select the SLIDE
SORTER VIEW LIKE
THIS…….
• You can use the cut
icon to move slides
around
• You can insert
spreadsheets of photos
• Use the “notes” icon
2nd from right at bottom
to write your “script.”
• Click on the “podium”
icon at the lower right
when you are ready to
test a full page view
for your talk.
• Save on a floppy and
put on C drive before
TEAM MEETINGS --30 MIN
• EXCHANGE NAMES, PHONE
NUMBERS AND E MAIL ADDRESSES
AND GIVE INSTRUCTOR A COPY
• SET TIME FOR WEEKLY TEAM
MEETING AND STUDY GROUP
MEETING
• SELECT CANDIDATES FOR COMPANY
PRESENTATION
I will spend 5 minutes with each team
Axioms of Finance--TEXT CH 1
1 Balancing risk and reward
is a key role of a manager.
Some risk can be
diversified away. Some
cannot as we will see.
2 TVM -- our next lecture
topic. Money received
now is worth more than
money received in future.
3 Cash is king!.
4 Think incrementally!
5 Competition is a great
equalizer. Companies
with consistently high
margins are rare.
6 Capital markets are
“Efficient.” Efficiency is
created by free flow of
information and capital.
7 Owners and management
objectives may not
coincide.
8 Taxes affect ALL business
decisions.
9 Some risk can be
diversified away and some
can’t
10 Ethics are important.
GOAL OF THE CORPORATION
• In this course we will
focus on PUBLIC
CORPORATIONS
• Other forms of
organization are
discussed on pp 4-6 of
your text
• A Public Corporation
is responsible to its
owners
• The Board of
Directors are chosen
by the shareowners to
oversee management.
• In the U.S. there is no
National Corporation
Act. Corporations are
incorporated in a state.
What is the MOST IMPORTANT goal of
the Modern Public Corporation?
• See TEXT P. 2: IT IS NOT profit
maximization.
• The goal is “maximization of shareholder
wealth” by increasing the price of the
common stock over the long term.
There are many ways to accomplish this goal.
Let us list a few:
Wealth Maximization is the key!!
• Profit maximization is very important but is
only one way to increase shareholder value.
– Increasing profits should be an important goal
however.
– Wall Street focuses on Earnings per Share (not
net income) in measuring profits.
• Wealth maximization reflects ALL factors
that contribute to a higher stock price.
HOW DO WE MEASURE
WEALTH MAXIMIZATION?
• Return on Equity
(ROE)
– Net income / SH equity
OR ROA divided by
Total debt/ total assets
THIS IS CALLED THE
DUPONT MODEL
SEE TEXT P. 107
• Increasing ROE
–
–
–
–
> sales
> net income
> net margin
Make an acquisition
where margins are
improved
– Make a divestiture
where profits >
– Buy back stock
Ways to Maximize S/H Value
• Increasing sales
– Internal growth
– Acquisition
• Increasing profit
margins
– Decreasing costs
– Emphasizing profitable
lines or products
• Buying back stock
• Using “Financial
Leverage” (Debt) to
magnify return to
shareowners
• Reducing taxes
• Can you think of other
ways?
Maximizing Shareholder Value
By buying back stock
• RECAP
ROE = NET INCOME /
TOTAL COMMON EQUITY
• COMMON EQUITY = VALUE OF
COMMON STOCK ON BALANCE
SHEET
• USING CASH TO BUY BACK COMMON
STOCK REDUCES COMMON EQUITY
ACCOUNTING REVIEW
FIN 3403
Has it been more than 2 years
since you had basic accounting?
SUGGESTION
Please STUDY ch 3 p. 81-111 NOW
While this chapter is assigned later to study ratios, it
is important for you to review this material since
accounting knowledge is assumed in this course.
Ask questions if you are unclear on any concept in
this chapter. I am here to help.
Income statement review:
ACCOUNTING PROFIT
SALES (units x price)
less Cost Goods sold =
GROSS INCOME
less SG&A
less depreciation =
OPERATING INCOME
plus other income
less interest expense=
EBIT (Earnings before
interest and taxes)
EBIT less interest exp. =
PRETAX INCOME
less FIT paid =
Net Income
less Dividends paid to
Common shareholders=
Contribution to Retained
Earnings (PLOWBACK)
E.P.S. = Net income /
common shs outstanding
Why does Wall Street Focus on
E.P.S.?
• EPS measures the return to the shareowner.
Stock prices are usually measured in terms
of the PRICE / EARNINGS RATIO which
relates S/H value to earnings.
• Many things impact E.P.S. Some are
outside control of management such as tax
rate or mandated depreciation rules.
E.P.S. is impacted by many of the
same things as S/H Wealth
• Sales growth
– internal growth
– acquisitions
• Margins
– Raw material costs
– Product line emphasis
• Use of leverage (debt)
• Depreciation
• Taxes
• New product
development (R&D)
– Our system rewards
innovation with 14
year patent protection
– New products and
services tend to have
higher margins
• Share repurchase
• Other ideas?????
Income statement review contd:
CASH FLOW
Simple definition= net
income + depreciation
and other non cash
charges
SEE Axiom 3 & 4 in
text p. 16--cash flow
is the measure we use
not accounting
profits
The Efficient Markets
Hypothesis (axiom 6)
External or macroeconomic
factors impacting stock
prices:
1. Interest rates & inflation
2. Economic growth,
currency & tariffs
3. Competitive pressure
4. Investor confidence
Balance Sheet Review
ASSETS
• Cash + AR + Inv =
Current Assets
Current = less than 1 year
___________________
• Long term assets
– Plant & equipment
– “Goodwill”
• TOTAL ASSETS
LIABILITIES
AND S/H EQUITY
• Current Liabilities
______________________________________________________
• Long term liabilities
– LT debt + Pfd stock
• COMMON EQUITY=
CS + SURPLUS + RE
“Net worth” or equity capital
=
TA - TL
 TOTAL LIAB + S/H EQ.
The Historical cost concept
• Why do we use
historical cost?
– LIMITATIONS
– ADVANTAGES
• The Weyerhaeuser
Example
– ASSETS AT COST
LESS LIABILITIES =
S/H EQUITY
– BVPS = S/H EQUITY /
COMMON SHS OUT
• What about a company
that grew by
acquisition?
– What is “Goodwill?”
– When you buy a
company do you pay
book value or market?
– Companies are often
measured in terms of
stock price / BVPS or
Price/book. What is wrong
with this?
ASSIGNMENT
• SEE SYLLABUS FOR ASSIGNMENTS
• MEET WITH YOUR TEAM OUTSIDE
CLASS.
• CHECK OUT WEB SITE
• DOWNLOAD LECTURE NOTES AND
OTHER FILES
• READ CH. 1
• STUDY CALCULATOR MANUAL AND
GET FAMILIAR WITH KEYS
TVM AND THE USE OF THE
TI BA2+ FINANCIAL CALCULATOR
FIN 3403 UCF School of Business
R. DIGGLE, CFA
RECAP OF LAST LECTURE
• We learned about
Powerpoint and how
you will be using it.
• We examined the
concept of Wealth
Maximization
• We compared an
income statement and
a cash flow statement
• We reviewed the 10
axioms of finance
summarized on p. 26
of your text.
• If you are rusty on
accounting --STUDY
chapter 3 ASAP
• Are there questions
from last time???
TEAM ORGANIZATION
• ARE YOU SIGNED
UP WITH A TEAM?
• HAVE YOU PICKED
A COMPANY?
• DO YOU HAVE A
REGULAR TIME
SET FOR TEAM
MEETINGS THAT IS
OK WITH ALL?
All teams will meet with
• HAVE YOU
CHECKED OUT MY
WEB SITE?
• DO YOU ALL HAVE
A TIBA2 +
CALCULATOR?
• HAVE YOU
STUDIED
CALC.MANUAL?
me at end of this class
Company Ratio Analysis Project
• Read instructions in Lecture Notes.
• Copy ALL Excel spreadsheets on disk onto
blank disks for each team member. Return
original disk to instructor. Do NOT write
on my disk.
• Print instructions for each team member.
Work on assigning tasks for everyone.
• Make a list of questions for instructor.
TVM
• IN ALL TOPICS WE WILL PROCEED AS
FOLLOWS:
–
–
–
–
–
THEORY
APPLICATIONS
TEXT PROBLEMS
ADDITIONAL PRACTICAL PROBLEMS
QUESTIONS AND REVIEW
• WE WILL REFER TO LECTURE NOTES
FIRST AND THEN TO TEXT.
TIME VALUE OF MONEY
see lecture notes p. 8-10
CONCEPT I: The “PRESENT VALUE” of one dollar
received in the FUTURE is worth less than a dollar
received today.
CONCEPT 2: The further out in the future money is
received the less is its “NET PRESENT VALUE”
CONCEPT 3: When we compound money (as in a
savings account) the FUTURE VALUE is increased
in direct proportion to the rate of interest and the
number of compounding periods.
THE FINANCIAL CALCULATOR AND TVM
TABLES HELP YOU MEASURE PV AND FV
PRACTICAL THINGS YOU
WILL LEARN IN THIS PART
OF THE COURSE
• Determining how much money you must
save for retirement.
• Computing a mortgage payment.
• Determining a lease payment on a car.
• Figuring how much you need to save to put
a child through college.
• Measuring return on investment
QUESTION 1:
• ALBERT EINSTEIN WAS ASKED WHAT
THE MOST IMPORTANT INVENTION
OF MANKIND WAS? WHAT WAS HIS
REPLY?
• HINT: HE DID NOT SAY E = MC2
HOW MANY OF YOU
BELIEVE YOU WILL BE A
MILLIONAIRE?
• RAISE YOUR HANDS IF YOU FIRMLY
BELIEVE YOU CAN DO THIS.
• WHAT IS YOUR ACTION PLAN?
CAN YOU SAVE $300 PER
MONTH?
• ASSUME YOU ARE OUT OF UCF AND
WORKING.
• UCF FINANCE/ACCTG. MAJORS
SHOULD START AT $35K
• RAISE YOU HAND IF YOU THINK YOU
CAN SAVE $300 PER MONTH
You can be a Millionaire. I will
show you how! Can you Save $300 per month
YEAR
N=P/Y
FV
I/Y = 10%
X YEARS P/Y =12
PMT = -300
FV
I/Y = 15%
P/Y =12
PMT = -300
1 $
3,801 $
3,906
5 $ 23,425 $
26,904
10 $ 61,966 $
83,597
20 $ 229,709 $ 454,786
30 $ 683,798 $ 2,102,946
ANNUALLY AT 10% AND 15%
RULE OF 72 = 72 / I/Y
NUMBER OF YRS FOR A SUM TO DOUBLE
72/10= 7.2 yrs
72/15=4.8 YRS
SEE LECTURE NOTES PP. 8-14
• Turn to page 9 NOW
• You may wish to either take notes on
Lecture notes or incorporate class notes in
with lecture notes.
• All material in the next slides is also
discussed in lecture notes.
• THIS MATERIAL IS THE MOST
IMPORTANT MATERIAL IN THE
FV CONCEPTS
• An INCREASE in I/Y
> FV
• AS N increases FV >
• The more frequent the
compounding (P/Y)
the more FV >.
• FVn= PV (1+r)n
Learn this formula. See lecture
notes. Formulas will be
provided in exam
NPV CONCEPTS
• As the interest rate I/Y >
the < PV
• The longer the time period
N, the more PV <.
• The more frequent the
compounding P/Y the
more PV <.
• PV = FV n lump sum
(1+r)n
Annuity
•
PVA = FV + FV + FV
(1+R) (1+R)2
(1+R)n
(See lec notes p 9)
?
HISTORICAL INVESTMENT
RETURNS
Ibbotson Data 1928 to present
NOMINAL
COMMON STOCKS
13%
LONG TERM BONDS
8%
SAVINGS ACCOUNTS
AND T BILLS
3%
REAL
COMMON STOCKS
10%
LONG TERM BONDS
5%
SAVINGS ACCOUNTS
AND T-BILLS
0%
Value of $5000 INVESTED
ONCE at different rates of return
SET BGN, P/Y =1, PV = -5000
RATE:
YRS =N
5
10
15
20
25
30
35
$
$
$
$
$
$
$
3%
FV
5,796 $
6,720 $
7,790 $
9,031 $
10,469 $
12,136 $
14,069 $
5%
FV
6,381 $
8,144 $
10,395 $
13,266 $
16,932 $
21,610 $
27,580 $
8%
12%
FV
FV
7,347 $
8,812
10,795 $ 15,529
15,861 $ 27,368
23,305 $ 48,231
34,242 $ 85,000
50,313 $ 149,800
73,927 $ 263,998
Value of $300 PER MONTH at
different rates of return
SET BGN , P/Y =12 PMT = -300
RATE (I/Y):
YEARS N
5
60
10 120
15 180
20 240
25 300
30 360
35 420
$
$
$
$
$
$
$
5%
FV
20,402
46,585
80,187
123,310
178,653
249,678
340,828
$
$
$
$
$
$
$
8%
FV
22,043
54,884
103,811
176,706
285,308
447,108
688,165
12%
FV
$
24,501
$
69,012
$ 149,874
$ 296,777
$ 563,654
$ 1,048,489
$ 1,929,288
USING THE TVM TABLES IN
THE BACK OF YOUR TEXT
• BACK FLYLEAF
• TEXT PP. 883 TO 890
--more detail
– B = FV of A Lump
sum. A lump sum is
• B = pp. 883 to884
one payment or receipt.
• C = pp. 885 to 886
– D = FV of an “annuity”
• D = pp. 887 to 888
An annuity is a
repetitive payment or
• E = pp. 889 to 890
income.
NOTE: TABLES ARE
– C = PV of a lump sum
– E = PV of an annuity
FOR ANNUAL
PERIODS ONLY
TABLES APPLICATION
• NOTE: Tables will be provided in Exam 1
• STEPS:
Must determine WHICH TABLE you must use
– COLUMN = interest rate ROW = years
– TABLES ARE ANNUAL ONLY
• What is the value of $10,000 compounded
at 5% for 15 years?
– TABLE B p. 883 value = 2.079
– Multiply table value times PV of $10000
– Answer is $20,790
TABLES VS. FINANCIAL
CALCULATOR
• We will begin using
the tables in the back
of your text. The
tables are ANNUAL.
This will help you
understand basic
concepts.
• You will have
problems using
tables in EXAM 1.
• We will move from
the tables to your
Financial Calculator.
Bring the calculator to
each class and exam.
The new calculators are easy to
use and prompt you for an
answer. Data can be monthly,
daily or any other time frame.
Using your Financial Calculator
to solve TVM problems
• The calculator provides more
accurate answers than tables
• 5 TVM VARIABLES (excluding P/Y)
THE THIRD ROW OF KEYS ON YOUR CALCULATOR
P/Y = Compounding periods per year
I/Y = Annual interest rate
N = (p/y x # of years)
PMT
FV
PV
• You can enter data in any order.
• YOU CAN SOLVE FOR ANY OF THE VARIABLES
CALCULATOR SET UP
• Set 4 decimal point accuracy as follows:
– 2nd format
– DEC = 4
• Set BGN or END as follows:
– 2nd BGN (above PMT key)
– To toggle press 2nd ENTER to
change from BGN to END
If BGN is set it appears in upper right of display
• Clear REGISTERS
– 2nd CLR TVM, 2nd CLR WORK, 2nd QUIT
ACCURACY
• In Finance we DO NOT ROUND TO WHOLE NUMBERS
• Because we are dealing with large numbers,
use calculator to 4 decimal points. Show 2
decimals in answer asking for dollars or pct.
• If you purchase 750 shares of stock at 33
and 5/8 what is your cost?
– 750 x 33.625 = $25,218.75
– IN AN EXAM DOUBLE UNDERLINE YOUR
ANSWER. Do not circle it or draw arrows to it.
SHOW $ OR % CLEARLY
THE 6 TVM KEYS -3rd row
• P/Y (2nd P/Y = number of compounding
periods per year)
• N = number of time periods = P/Y times
number of years
• I/Y = annual interest rate (8.5% entered 8.5)
• PV = Present value (outflows are entered
by entering number and pressing MINUS
key in lower right)
• PMT = annuity payment (inflow or outflow)
• FV = Future value
USING YOUR TI BA II + FINANCIAL
CALCULATOR TO DO TVM PROBLEMS
• See lecture notes p.11
• FOLLOW THESE STEPS
– READ QUESTION
– Clear all registers
– Set BGN or End
– Set P/Y--2nd P/Y-enter number --press
ENTER
– Determine what you
are solving for
– WRITE INPUTS
NEATLY
• STEPS CONTD
– Enter 4 TVM inputs on
calculator. I suggest
you do it in same
order each time.
– Enter data with
outflows negative
– enter CPT and TVM
key for solution
– Check inputs
– Is solution logical?
What do the KEYS mean?
• P/Y must be reset for
each problem. P/Y =
number of compounding
periods per year
• N = years times P/Y.
In a 20 year mortgage
with monthly
payments N = 240.
• I/Y is the stated rate.
• PMT = Regular
repetitive payments
such as a mortgage or
car payment. Enter
outflows as a negative
number.
• PV = Present value
• FV = Future value
Enter data in any order
Calculator keys contd.
• BGN vs END
– Set BGN unless
otherwise specified in
problem.
– BGN means interest
accrues from day 1.
– END means interest
accrues at end of
period.
– ALL EXAM QUESTIONS
WILL SPECIFY BGN OR
END
• If BGN is set, the
letters BGN appear in
upper right of your
calculator window.
• CLEARING
REGISTERS. There
are multiple memory
registers in the TI BA
II +. Clear them ALL.
SELF TEST PROBLEMS
• ANSWERS TO ALL ST PROBLEMS ARE
AT END OF CHAPTER.
• PROBLEMS ARE ON P. 193. ANSWERS
ARE ON PP. 204-5.
• I recommend you do ST problems FIRST in
each chapter to learn how to approach
problems. ST problems are NOT in
homework assignments.
ST PROBLEMS CH 5 P. 193
• ST1 This is the FV of
a lump sum--Table A
• This is a 2 step
problem:
– A. 8% column, 3 year
line. FACTOR =
1.2597= $31500
– B. 10% column, 3
year line. FACTOR =
1.3310
– answer = $41926
• ST1 on financial
calculator:
• Set BGN P/Y = 1
• n=3
• i/y = 8
• pv = -25000 (OUTFLOW)
• FV (PART A) =
$31492--Note that this
differs slightly from
table amount
SIMPLE TVM PROBLEMS
1. LUMP SUM FV
You inherit $50,000
now. You invest this
money at 8% interest.
What is this worth in 5
years?
2. ANNUITY FV
You save $500 per
month at 10% return.
What is this worth in
20 years?
3. LUMP SUM PV
You inherit $50000 in
10 years. Assuming
an 8% return, what is
this worth today?
4. ANNUITY PV
You win the lottery.
You are paid $1000
per month over 30
years. At an 8%
return, what is this
worth today?
SIMPLE TVM PROBLEMS
CALCULATOR SOLUTIONS
• PROBLEM 1
–
–
–
–
–
–
–
SET BGN
P/Y = 1 SET ENTER
CLEAR REGISTERS
N=5
I/Y = 8
PV = - 50000
SOLVE FOR FV
– FV =$73466
• PROBLEM 2
–
–
–
–
–
–
–
SET BGN
P/Y = 12 SET ENTER
CLEAR REGISTERS
N = 20 X 12 = 240
I/Y = 10
PMT = -500
SOLVE FOR FV
– FV = $382848
SIMPLE TVM PROBLEMS
CALCULATOR SOLUTIONS
•
•
•
•
•
•
•
•
PROBLEM 3
SET BGN
P/Y = 1 SET ENTER
CLEAR REGISTERS
N = 10
I/y = 8
FV = 50000
SOLVE FOR PV
• PV = -$23160
•
•
•
•
•
•
•
•
PROBLEM 4
SET BGN
P/Y = 12 SET ENTER
CLEAR REGISTERS
N = 360 (30 X 12)
I/Y = 8
PMT = 1000
SOLVE FOR PV
• PV = -$137192
ASSIGNMENT
• COMPLETE SIMPLE TVM PROBLEMS
AT END OF CH. 5. DO THIS WITH
YOUR STUDY GROUP. Print your name,
date, course and section and problem ch 1
on page one of your assignment. STAPLE.
• I am providing solutions. They are also on
web site
• Begin work on PROBLEM HANDOUT IN
YOUR STUDY GROUP.
• LIST ANY QUESTIONS YOU MAY ENCOUNTER IN
USING YOUR CALCULATOR OR TABLES.
TEAM MEETINGS
• Is there anyone not signed up on a team?
• Do you have a meeting time set?
• Pick a company for team analysis project
ONE EXCEL DISK GIVEN TO EACH TEAM
FOR NEXT TIME COPY DISK FOR EACH
TEAM MEMBER AND RETURN
ORIGINAL TO INSTRUCTOR
Do homework problems assigned. Homework
must be STAPLED and have name, assignment Fin
3403, section and date on p. 1
LEC 3 FIN 3403: TVM
PROBLEMS AND QUESTIONS
• IN THIS CLASS WE WILL:
– REVIEW USE OF YOUR TIBA2+
CALCULATOR
– REVIEW THE STEPS IN SOLVING ALL
TVM PROBLEMS
– DO THE HOMEWORK IN CH. 5
– EXAMINE TIBA2+ OTHER APPLICATIONS
– TIME PERMITTING--START ON PROBLEM
HANDOUT
REVIEW: STEPS IN SOLVING TVM
PROBLEMS ON AN EXAM
• See lecture notes p.11
• FOLLOW THESE
STEPS
– READ QUESTION
– Clear all registers
– Set BGN or End
– Set P/Y--2nd P/Y-enter number --press
ENTER
– Determine what you
are solving for
– List inputs on TIBA2+
• STEPS CONTD
– Enter 4 TVM inputs on
calculator. I suggest
you do it in same
order each time.
– Enter data with
outflows negative
– enter CPT and TVM
key for solution
– Check inputs
– Is solution logical?
COMMON EXAM MISTAKES
• Failure to clear
registers between
EACH problem
• Failure to reset P/Y
– Default value is 12
since things like a
mortgage or car
payment are made
monthly
• Failure to set BGN or
END--given for each problem
• setting N = yrs x P/Y
– YRS 2nd N
– Press N again
• MOST IMPORTANT:
– FAILURE TO
NEATLY LIST
INPUTS:
– I WILL GIVE PARTIAL
CREDIT IF YOU DO THIS
• Failure to check inputs
twice. Is answer logical?
HOW TO GET AN “A’ ON EXAM 1
• EXAM 1 WILL
FOCUS ON TVM.
• WORK PROBLEMS
Be sure you
understand each step.
Work with classmates.
• ASK QUESTIONS!!!
This is confusing at
first but you will get
the hang of it.
• Read the problem over
carefully before
starting!
• Always follow the
steps I just outlined
and draw a time line.
• Write down inputs.
• Go through handouts.
Solve them on your
calculator.
CH 5 HOMEWORK
• SET A: 5-1 TO 5-15, 5-19 TO 5-21
– SOLUTIONS PROVIDED THROUGH 5-6 A
– PARTIAL SOLUTIONS PROVIDED FOR
OTHER PROBLEMS
– TABLE SOLUTIONS PROVIDED TO
ANNUAL PROBLEMS ONLY 5-1A TO 5-7A
– TIBA2+ SOLUTIONS PROVIDED --answers
in italics
THE TI BA II + FINANCIAL
CALCULATOR: ADVANCED FUNCTIONS
• SPREADSHEET
REGISTERS
– During the term we
will use several built in
worksheets. Become
familiar with them and
read how to use them
in the TI manual
• Use the right spreadsheet
to check work on TVM
keys
• Days between dates
– 2nd 1 solve for DBD
– DAYS BETWEEN DATES
• Delta % (CHANGE)
– 2nd 5
• Cash Flow worksheet
– 2nd CF
– use in 2nd part of course
• Bond worksheet
– 2nd and 9
– use in last 3rd. of course
OTHER TVM PROBLEMS
• You want to buy a
home. You decide on
a 30 year mortgage
with an interest rate of
6.75%. The home
costs $100,000 and
you put 20% down.
How much is your
monthly payment for
P&I (principal &
interest)? SET END.
• LIST INPUTS
–
–
–
–
–
–
–
SET END
P/Y = 12
N = 360
I/Y = 6.75
PV = - 80000 (MTG)
FV = 0
SOLVE FOR PMT
– PMT = 518.87
OTHER TVM PROBLEMS
• You want to retire at
age 60. You are 25.
• You figure you need
$1 million to retire
comfortably.
• You can save $300 per
month.
• What return do you
need to achieve your
goal?
• SET END --THIS WILL
ALWAYS BE GIVEN
•
•
•
•
•
•
P/Y = 12
n = 420 (35*12)
PV = 0
PMT = -300
FV 1000000
SOLVE FOR I/Y
• I/Y = 9.49%
OTHER TVM PROBLEMS
• You LEASE a car.
• The cost is $20,000 +
6% tax and $300
dealer prep.
• The dealer is offering
0.99% financing.
• The term is 3 years.
• The residual is $10000
• What is the payment?
•
•
•
•
•
•
•
Set BGN.
P/Y = 12
n = 36
I/Y = 0.99
PV = - 21500
FV = 10000
SOLVE FOR PMT
• PMT = 332.31
TVM PROBLEMS: HANDOUT
 TVM
will be 70-80% of Exam 1
 Practice using your calculator to solve
problems in text, workbook and handouts
 Let us go through a series of real world
applications of TVM that you will use in
your own personal finance. PLEASE
INTERRUPT AT ANY TIME WITH
QUESTIONS. DON’T BE SHY!
RULE OF 72
• WHAT IS IT?
NUMBER OF
YEARS FOR A SUM
TO DOUBLE
• 72 / STATED
INTEREST RATE =
YRS TO DOUBLE
• At 10% money
doubles in 7.2 years:
– 72/ 10 = 7.2
• At 15% money
doubles in 4.8 years:
– 72/15 = 4.8
• At 5% money takes
14.4 years to double.
CH 1 HOMEWORK TVM
• 5-1A AND 5-2A P.
193
• 5-3A - 5-9A P. 194
• 5-10A -5-15A P. 195
• 5-19A - 5-21A P. 196
• SOLUTION ON
DISK + handout
(1 per team please)
• DO PROBLEMS IN
YOUR TEAM
• Which table?
• Determine table value.
• List calculator inputs
• Solutions page shows
answer in bold italics.
• If unclear, write down
questions for class.