SOLUTION MANUAL FOR FUNDAMENTALS OF CORPORATE FINANCE
CHAPTER 5
Time value of money - CORRECT ANSWERS-The idea that money has a time value and is
worth more today than in the future due to the opportunity cost of forgoing consumption today.
Discount rate - CORRECT ANSWERS-The compound interest rate used to determine the
present value of future cash flows.
Rule of 72 - CORRECT ANSWERS-A rule of thumb to determine how fast an investment can
double, where the time to double the money is approximately equal to 72 divided by the interest rate.
Future value - CORRECT ANSWERS-The sum to which an investment will grow after earning
interest.
Present value - CORRECT ANSWERS-The value today of a future cash flow, obtained by
discounting future cash flows back to the present at an appropriate discount rate.
Compounding - CORRECT ANSWERS-The process of converting an initial amount into a future
value by earning interest on the initial investment and reinvesting the interest.
Growth rate - CORRECT ANSWERS-The rate at which a value or investment grows over time.
Time line - CORRECT ANSWERS-A horizontal line that shows cash flows as they occur over
time, used to analyze cash flows over certain time periods.
Discounting - CORRECT ANSWERS-The process of converting future cash flows to their
present value by adjusting the cash flows for the time value of money.
Principal amount - CORRECT ANSWERS-The initial amount of an investment.
Simple interest - CORRECT ANSWERS-The interest paid on the original investment, which
remains constant from period to period.
CHAPTER 5
Time value of money - CORRECT ANSWERS-The idea that money has a time value and is
worth more today than in the future due to the opportunity cost of forgoing consumption today.
Discount rate - CORRECT ANSWERS-The compound interest rate used to determine the
present value of future cash flows.
Rule of 72 - CORRECT ANSWERS-A rule of thumb to determine how fast an investment can
double, where the time to double the money is approximately equal to 72 divided by the interest rate.
Future value - CORRECT ANSWERS-The sum to which an investment will grow after earning
interest.
Present value - CORRECT ANSWERS-The value today of a future cash flow, obtained by
discounting future cash flows back to the present at an appropriate discount rate.
Compounding - CORRECT ANSWERS-The process of converting an initial amount into a future
value by earning interest on the initial investment and reinvesting the interest.
Growth rate - CORRECT ANSWERS-The rate at which a value or investment grows over time.
Time line - CORRECT ANSWERS-A horizontal line that shows cash flows as they occur over
time, used to analyze cash flows over certain time periods.
Discounting - CORRECT ANSWERS-The process of converting future cash flows to their
present value by adjusting the cash flows for the time value of money.
Principal amount - CORRECT ANSWERS-The initial amount of an investment.
Simple interest - CORRECT ANSWERS-The interest paid on the original investment, which
remains constant from period to period.
