Discounted Cash Flow: The Money that Makes Money
Ahmed A Morsy
Davenport University Working in a market driven by loans, bailouts and investments, it is essential for a company to understand the various methods employed in operating a loan. It is not necessarily for the sole purpose of acquiring a loan, but it is also helpful in understanding how investments will turn out whether by lending others or inputting cash in businesses as forms of investment. There are various elements than need to be considered in the cash flow process that can help identify the benefits of a certain investment or decide against investing in a certain firm. Future value, compounding periods, present value, loan amortization and rate of return of an investment (Ross, Westerfield and Jaffe, 2013). By understanding and employing the above elements, a firm or person can maximize their investments and minimize their losses.
Many individuals who have saved a decent amount of money prefer to invest their moneys in one way or another. Some like to invest in a bank’s savings account where a fixed interest rate is added onto the amount. Others like to invest
…show more content…
The start-up company and Ben already are at an agreement that a 10% interest rate will be implemented in the investment which in this case will be considered a loan. The start-up company, will need to understand that this loan will go through amortization as the payment process proceeds. It is expected that the $10,000 will be paid over the following five years wherein a set amount of the principle amount will be paid with a decreasing amount that accounts for the interest. To make things simpler, amortization of Ben’s loan will be $2000 per year is paid from the principle + 10% interest rate over the remaining principle. The breakdown would then
These ratios can be used to determine the most desirable company to grant a loan to between Wendy’s and Bob Evans. Wendy’s has a debt to assets ratio of 34.93% while Bob Evans is 43.68%. When it comes to debt to asset ratios, the company with the lower percentage has the lowest risk. Therefore, Wendy’s is more desirable than Bob Evans. In the area of debt to equity ratios, Wendy’s comes in at 84.31% while Bob Evans comes in at 118.71%. Like debt to assets, a low debt to equity ratio indicates less risk in a company. Again, Wendy’s is the less risky company. Finally, Wendy’s has a times interest earned ratio of 4.86 while Bob Evans owns a 3.78. Unlike the previous two ratios, times interest earned ratio is measured on a scale of 1 to 5. The closer the ratio is to 5, the less risky a company is. From the view of a banker, any ratio over 2.5 is an acceptable risk. Both companies are an acceptable risk, however, Wendy’s is once again more desirable. Based on these findings, Wendy’s is the better choice for banks to loan money to because of the lower level of
Finally, I will do a financial forecast in order to figure out firms’ ability to repay its loans. I will use simple percentages-of-sales forecasting technique. I will use existing trends in my forecast to show the implications of current policies before making my own recommendations. During my forecast I will use New Era Partners loan to find out the interest rates. I will make the short-term debt as my plug.
Costco Wholesale Corporation was an uncommon type of retailers called wholesale clubs. These clubs differentiated themselves from other retailer by requiring annual membership purchase. Especially in case of Costco, their target market is wealthier clientele of small business owners and middle class shoppers. They are now known as a low cost or discount retailer where they sell products in bulk with limited brands and their own brand. The company is competing with stores like Wal-Mart, SAM’s, BJ’s, and Sears. The case begins with an individual shareholder, Margarita Torres, who first purchased shares in 1997 and who is trying to evaluate the operational performance of the business in order to make a decision rather or not purchase more shares
Financial ratios are "just a convenient way to summarize large quantities of financial data and to compare firms' performance" (Brealey & Myer & Marcus, 2003, p. 450). Financial ratios are very useful tools in order to determine the health of a company, help managers to make decision, and help to compare companies that belong to the same industry in order to know about their performance.
Please note all financial figures are from the source provided by the case study. The total investments that I recommend is $1,050,000,000 for the Financial sector and Florida Pipeline projects (Case Study). I suggest we sell the following assets - Packaging arm of the company for $1,200,000,000, the paperboard operations for $600,000,000, and the timber for $300,000,000 (Case Study). The total assets sold would be $2,100,000,000 but 40% required to go to the debt holders (Case Study). Therefore $840,000,000 would go to the debt holders and $1,260,000,000 would be used for investments (Case Study). I do not recommend the Exploration and Production assets be invested in nor sold at
The postal savings system focused on providing an accessible means of saving money for all people including those who are lower-class citizens that might not have regular access to an alternate means of saving, utilizing a government operated financial institution to reinvest local deposits back into the local communities, and existing as a financial institution that would appeal to the small saver, but not compete with the banks or the saving and loan industry. Funds from depositors in the system were meant to be divided. 5% of all deposits were meant to be held in reserves, so that the postal service could meet all withdrawal demands. The other 95% was meant to be reinvested into local banking institutions. Banks who took the deposits paid out the 2% interest to depositors while the additional interest yield was utilized by the government to cover overhead of operating the Postal Savings
There are many different ways to save money and there are different things to save for. A savings plan for an immediate want is apparently different than a savings strategy for retirement. One may choose to select stocks, bonds, or mutual funds for a savings strategy, however, my personal choice is to invest in bonds first, then mutual funds.
Analyse the relationship between the product life cycle and cash flow. The product life cycle is split into 5 stages. * Research and development * Introduction * Growth * Maturity / Saturation * Decline The product life cycle is the model that represents a sales pattern.
Thesis: Businesses deem financing necessary when they are just beginning, expanding, or recovering; Debt financing and equity financing have many advantages and disadvantages but also change the entire accounting method that is to be considered while running the business. Debt financing has both advantages and disadvantages. Debt financing is a business’ way to start up, expand, or recover by borrowing money from a person or company. The money borrowed has to be paid back along with the interest that was accrued during the length of time the loan was carried out. This option is great for company’s that do not want investors.
You would not buy a home, car or other large purchases without researching what product offered you the most for your money. The same is true when investing in a company. Investors do avid research on multiple companies to find what company matches the investors' criteria. In this paper Team C will research both AT&T and Verizon's financial documents. Team C will compare selected ratios, cash flow and make recommendations how both companies can manage cash flow for the future.
One of the key areas of long-term decision-making that firms must tackle is that of investment - the need to commit funds by purchasing land, buildings, machinery, etc., in anticipation of being able to earn an income greater than the funds committed. In order to handle these decisions, firms have to make an assessment of the size of the outflows and inflows of funds, the lifespan of the investment, the degree of risk attached and the cost of obtaining funds.
Obviously, this case aims to evaluate Joanna’s analysis. Throughout the analysis, we will estimate the cost of debt, cost of equity, and cost of capital through different financial analysis models.
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.
Today financial corporate managers are continually asking, “What will today’s investment look like for the future health of the company? Should financial decisions be put on hold until the markets become stronger? Is it more profitable to act now to better position the company’s market share?” These are all questions that could be clearly answered if the managers had a magical financial crystal ball. In lieu of the crystal ball, managers have a way of calculating the financial risks with some certainty to better predict positive financial investment outcomes through the discounted cash flow valuation (DCF). DCF valuation is a realistic approach, a tool used, to “determine the future and present value of
In order to understand how to deal with money the important idea to know is the time value of money. Time Value of Money (TVM) is the simple concept that a dollar that someone has now is worth more than the dollar that person will receive in the future, this is because the money that the person holds today is worth more because it can be invested and earn interest (Web Finance, Inc., 2007). The following paper will explain how annuities affect TVM problems and investment outcomes. The issues that impact TCM will also be discussed: Interest rates and compounding (with two problems), present value, future value, opportunity cost, annuities and the rule of '72.