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# Valuation - Present and Future Value

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We examined two important topics in finance this week: (a) present and future values and (b) security valuation.

What is the importance of present and future values. What factors must be considered when calculating present and future values? What other qualitative factors play into present and future value decisions? Perhaps you have opportunities in your professional life to use present and future values. What are some real or potential applications of these concepts?

Why do bond values go down when interest rates go up? Is this true in the opposite direction?

#### Solution Preview

Present and future values make sure that appropriate treatment is given to future cash flows. A dollar now is worth more than a dollar a year from now. Present and future value concepts ensure that both dollars are treated appropriately.

Factors that must be considered while calculating present and future values include:
1. Future Cash Flows
2. Discount Rate

Both the inputs above however are based on certain assumptions (or qualitative factors). Some of them are listed below:
1. In order to determine cash flows you need to make certain assumptions pertaining ...

#### Solution Summary

This solution explains the present value and future value concepts and the factors that impact those values. The solution further explains some practical applications of these tools. Finally, the solution explains bond prices and how they fluctuate based on interest rates.

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## Present/future values, valuation models, amortization schedules and more!

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?

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