The historical validity of the return is calculated by subtracting the return in the market from the risk-free rate of return. The discounted cash flow method, or DCF, "uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment," (Investopedia, 2007). A good opportunity exists when the potential for investment is greater than the current cost. The DCF method is used to account for the time value of money, this means the value of a dollar today has a lesser value in the future, all else being equal. The following chart shows how the two methods are calculated and what drawbacks may exist.
Question 1 1. Annual Real GDP growth rate An increase in the market value of goods and services produced in an economy over time is defined as economic growth. Economic growth is usually measured as the percent rate increase in real gross domestic product, or real GDP (http://en.wikipedia.org/wiki/Economic growth). To know what is happening in economic activities if prices are changing over time, growth is calculated in real terms. Meaning that inflation has to be adjusted to eradicate the effect of inflation on the price of goods produced.
The diagram below shows what is likely to happen. AS shifts outwards and a new macroeconomic equilibrium will be established. The price level has fallen and real national output (in equilibrium) has increased to Y2. Aggregate supply would shift inwards if there is a rise in the unit costs of production in the economy. For example there might be a rise in unit wage costs perhaps caused by higher wages not compensated for by higher labour productivity.
Time Value of Money The time value of money serves as the foundation for all other notions in finance. It affects business finance, consumer finance and government finance. Time value of money results from the concept of interest. The idea is that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.
It is superior to just looking at a P/E since it extracts three factors into consideration: the price, earnings, and earnings growth rates. To calculate the PEG ratio, divide the Forward P/E by the presumed earnings growth rate. 21.93 = 8.00 2.74 ------- 4. Return on Invested Capital (ROIC) assessment approach calculates how much money the company formulates each year per dollar of invested capital. Invested capital is the aggregated money invested in the organization by both stockholders and debtors.
The natural interest rate is the interest rate at which the demand for loan capital and supply of savings exactly agree, and which more or less corresponds to the expected yield on the newly created capital, will then be the normal or natural real rate consistent with a stable money supply and stable prices. On the other hand, market interest rate is the money prevailing in the loan market. It is the interest rate charged by banks or lenders. It depends upon the demand and supply of money. According to Wicksell (1898, 1907, 1958), the natural interest rate is essentially variable.
Given a fixed exchange rate, the relationship between the demand and supply of nominal money is a crucial determinants trade balance. Disequilibrium in trade balance can be manifested through money market disequilibrium. This approach assumes that for any nation over a long run, the demand for money as a stock is stable and linearly depends on real income. That
The real risk-free rate of interest would only exist if there was no inflation expected. This determinant still has to be part of the equation to figure out the interest rate. The real rate changes over time based on economic conditions. The company's rate of return and the person's preference of when the money will be spent establishes how much money will be given and at what interest rate. The higher a risk that someone is the higher their interest rate will be.
Cash flow metrics explained and illustrated in this encyclopedia include: • Net cash Flow The net of incoming and outgoing cash flows, usually expressed as net cash flow per period (e.g., net per year or net per month). • Cumulative cash flow For a series of cash flow events, the cumulative value of all cash flows through the end of the current period. • Future value/Compound Interest The value at some time in the future of money that will be received or paid at the future time. For instance, funds deposited in the bank today and earning interest until a future time bring a future value (initial deposit plus earned interest) greater than the initial deposit. • Present value (Discounted Cash Flow DCF, Net Present Value) the value today of money that will not be received or paid
Since transactions are fixed, the end results must be an increase in price level. Notice that aggregate-supply and aggregate-demand curves are describing what happens in the market for goods and services, not in the market for money balances. If there is a disturbance in the money market, that disturbance is transmitted to the goods-and-services market via the aggregate-demand curve. The quantity theory encourages us to see a purchase of goods as a sale of money, and a sale of goods as a purchase of money. Changes in the resource market are transferred to the goods-and-services market via the aggregate supply curve.