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Present and Future Value Techniques

Can you help get me started on these questions? I am having a hard time grasping the concept. Thanks!

1. How would you use the present and future value techniques in preparing a financial plan for retirement?

How would required rates of return affect your decision? Explain your reasoning.

2. What is a loan amortization schedule?

How would you use it to determine your loan interest rate?

What factors would impact your choice between two loans?

3. What are the three key inputs to the valuation model?

How would you determine the valuation of an asset?

How would the intrinsic value differ from the market value?

4. Describe the free cash flow valuation model and explain how it differs from the dividend valuation models. What is the appeal of this model? Give an example of how you would use this model.

5. What is the impact of international assets on a portfolio?

Is there more or less risk?

6. What are two types of risk involved in a portfolio or a security? Give an example.

7. Explain the term Beta in determining risks in a portfolio or security.

8. What is the CAPM? When would you use it?

9. What is the SML? When would you use it?

What is the relationship between the CAPM and the SML?

Solution Preview

The response addresses the queries posted in 1369 words with references.

//As per the directions, we will write about the use of present and future value techniques in preparing financial plan for retirement. It will assist in analyzing the risk free return on an investment and the expected rate of return. Along with this, we will also discuss about the impact of the required rate of return on the decisions.//

Present and Future Value Techniques


Present value of a future cash flow is the amount of current cash that is of equivalent value to the decision maker. Discounting is the process of determining present values of a series of future cash flows (Van Horne, Wachowicz & Bhaduri, 2005). An individual should estimate the total amount which he will require at the time of retirement. Estimation is also needed as for how many years' funds will be required after the retirement.

For making financial plan for retirement, it is necessary to identify the savings required. This can be determined with the help of present value technique and present value for annuity payments is determined. Similarly, a future value technique is used for the retirement financial plan. In the future value approach, money invested, now appreciates in value because compound interest is added.

The risk free rate compensates for time, while risk premium compensates for risk. The required rate of return may also be called the opportunity cost of capital of comparable risk (Van Horne, Wachowicz & Bhaduri, 2005). It is called so because the investor could invest his money in assets or securities of equivalent risk. Like individuals, firms also have required rates of return and use them in evaluating desirability of alternative financial decisions. The interest rates account for the time value of money, irrespective of an individual's preference and attitudes.

Required rate of return permits the individual or the firm to convert different cash flows occurring at different times to amounts of equivalent value in the present, that is, a common point of reference.

Let us assume that an individual with a required interest rate of 10%. If she is offered $ 115.5 one year from now, in exchange for $ 100 which she should give up today, should she accept the offer? The answer in this particular case is that she should accept the offer. When her interest rate is 10%, this implies that she is indifferent between any amount today and 110% of that amount offered one year from now; but if the amount offered one year from now were less than 110% of the immediate payment, she should retain the immediate payment. She would accept $ 115.5 after a year since it is more than 110% of $100, which she is required to sacrifice today.

//Now, we will write about the loan amortization schedule. The factors that affect the ...

Solution Summary

This response addresses the queries posed in 1369 Words, APA References