Financial management
Financial management is a field that focuses on the strategic planning, organizing, directing,
and controlling of an organization's financial resources. Its primary objective is to maximize a
company's value for its shareholders. This involves making informed decisions about
investments, financing, and dividends.
Time Value of Money
The time value of money is a core financial principle stating that a sum of money available
today is worth more than the same sum in the future. Time can enhance the value of money
and time can erode the value of money.This is because money available now can be
invested and grow over time due to its potential to earn interest.
Why Time is an Important Element of Finance
● Risk and uncertainty
● Inflation
● Investment opportunities
● Preference for current consumption to future consumption
● Compare different financial products, like loans and mortgages, to determine their
true cost.
● Assess a firm's value by discounting its expected future earnings.
Techniques of Time Value of Money
● Compounding: This calculates the future value of a present amount. It involves
earning interest on both the initial principal and the accumulated interest from
previous periods.future value of money refers to the translation of present value into
their future worth of compounding.
FV= PV(1+r)❑n❑ where; PV= present value,r= rate, n=number of years, (1+r)=
compounding factor
Semi annual compounding; the rate is divided by 2, quarterly compounding; the rate
is divided by 4.
Continuous compounding : FV= PV.ert where e=2.718,r= rate, t= time/ years
● Discounting: This determines the present value of a future sum of money. It
involves calculating what a future cash flow is worth in today's terms by using a
discount rate, which reflects the opportunity cost of capital.
Annuity
Annuities are a type of financial product, typically offered by insurance companies, that
provide a steady stream of payments over a specified period or for the rest of your life.
Individuals often use annuities as a way to supplement their retirement income and to
protect against the risk of outliving their savings. You can fund an annuity with a single lump-
sum payment or through a series of payments over time.
Forms of Annuities
, Annuities can be categorized in several ways, primarily based on how they grow and when
payments begin.
By Payout Structure
● Ordinary Annuity: This type refers to a series of payments made at the end of each
period. e.g. installment on loans, rent, insurance premium.
● Annuity due: This refers to a series of payments at the beginning of each period.
E.g. rent, insurance premium, subscription
● Perpetual Annuity: This type refers to a series of payments that don't have a
maturity date .e.g. rent, food, investment in irredeemable shares, perpetual bonds.
Present value( PV)= cashflow/ rate of return, Ct/ r
In most cases, investments don't generate uniform cash flows and the determination
of their present value of future cash flows is given by this expression;
n
PV= ∑ ❑ct /(1+r )❑n❑
t =0
Example: wyatt investment acquired equipment which is expected to improve its
operating efficiency. It is expected to generate the following net cashflowsfor the next
5years.
years cashflows
1 130000000
2 136000000
3 142000000
4 148000000
5 191000000
Determine the present value of Wyatt's future cash flows if its required rate of return
is at 15%
Years (n) cashflows ( 1/(1+ r )❑n ) Present value
1 130000000 1/(1+0.15)1 113048000
=0.8696
2 136000000 1/(1+0.15)2 102843200
=0.7562
3 142000000 1/( 1+0.15)3 ❑ 93365000
=0.6575
4 148000000 1/ (1+ 0.15)4 84626400
Financial management is a field that focuses on the strategic planning, organizing, directing,
and controlling of an organization's financial resources. Its primary objective is to maximize a
company's value for its shareholders. This involves making informed decisions about
investments, financing, and dividends.
Time Value of Money
The time value of money is a core financial principle stating that a sum of money available
today is worth more than the same sum in the future. Time can enhance the value of money
and time can erode the value of money.This is because money available now can be
invested and grow over time due to its potential to earn interest.
Why Time is an Important Element of Finance
● Risk and uncertainty
● Inflation
● Investment opportunities
● Preference for current consumption to future consumption
● Compare different financial products, like loans and mortgages, to determine their
true cost.
● Assess a firm's value by discounting its expected future earnings.
Techniques of Time Value of Money
● Compounding: This calculates the future value of a present amount. It involves
earning interest on both the initial principal and the accumulated interest from
previous periods.future value of money refers to the translation of present value into
their future worth of compounding.
FV= PV(1+r)❑n❑ where; PV= present value,r= rate, n=number of years, (1+r)=
compounding factor
Semi annual compounding; the rate is divided by 2, quarterly compounding; the rate
is divided by 4.
Continuous compounding : FV= PV.ert where e=2.718,r= rate, t= time/ years
● Discounting: This determines the present value of a future sum of money. It
involves calculating what a future cash flow is worth in today's terms by using a
discount rate, which reflects the opportunity cost of capital.
Annuity
Annuities are a type of financial product, typically offered by insurance companies, that
provide a steady stream of payments over a specified period or for the rest of your life.
Individuals often use annuities as a way to supplement their retirement income and to
protect against the risk of outliving their savings. You can fund an annuity with a single lump-
sum payment or through a series of payments over time.
Forms of Annuities
, Annuities can be categorized in several ways, primarily based on how they grow and when
payments begin.
By Payout Structure
● Ordinary Annuity: This type refers to a series of payments made at the end of each
period. e.g. installment on loans, rent, insurance premium.
● Annuity due: This refers to a series of payments at the beginning of each period.
E.g. rent, insurance premium, subscription
● Perpetual Annuity: This type refers to a series of payments that don't have a
maturity date .e.g. rent, food, investment in irredeemable shares, perpetual bonds.
Present value( PV)= cashflow/ rate of return, Ct/ r
In most cases, investments don't generate uniform cash flows and the determination
of their present value of future cash flows is given by this expression;
n
PV= ∑ ❑ct /(1+r )❑n❑
t =0
Example: wyatt investment acquired equipment which is expected to improve its
operating efficiency. It is expected to generate the following net cashflowsfor the next
5years.
years cashflows
1 130000000
2 136000000
3 142000000
4 148000000
5 191000000
Determine the present value of Wyatt's future cash flows if its required rate of return
is at 15%
Years (n) cashflows ( 1/(1+ r )❑n ) Present value
1 130000000 1/(1+0.15)1 113048000
=0.8696
2 136000000 1/(1+0.15)2 102843200
=0.7562
3 142000000 1/( 1+0.15)3 ❑ 93365000
=0.6575
4 148000000 1/ (1+ 0.15)4 84626400
