Question

CHAPTER 4 QUESTIONS 1. What does application of time value of money (TVM) concepts entail? Why is it necessary to apply TVM concepts when making financial decisions? 2. What cash flow patterns are normally observed in business? Describe the characteristics of each. 3. What is interest compounding? Explain. Everything else the same, would you rather have a savings account that pays interest that is compounded semiannually or one that pays interest with daily compounding? Explain. 4. If a firm's earnings per share grew from $1 to $2 over a 10- year period, the total growth would be 100 percent, but the annual growth rate would be less than 10 percent. True or false? Explain.

Answer 1

Q 1; Answer : TIME VALUE OF MONEY: Its a most worthy concept in financing decisions. The concept with its name, depicts the theory behind it. Its an old proverb that One is hand is better than two in bush. It means time itself has a value. While we talks about money, present time is better than future time due to inflation, risk factors, contingencies etc. Present availability of Funds will give us more opportunities to earn more in the time to come towards interest or other investments returns like value addition in assets etc.

Its necessary for all Finance People's to understand the theory of Time Value of Money because it affects corporation's future. One have several opportunities with the present available funds and whatever investment decisions can be taken with the present funds will affect the growth & future of ones. Present Value, Future Value, Net Present Value, are different values, which one have to keep in mind. In Nutshell, all finance decisions must be keeping in mind the value of money in present in comparison to future.

Q.2: Answer: Cash Flow Systems: Based on business to business & entity to entity, different systems are being prevailing to look & control after one's cash flow activities and to decide about Cash Budgets for future.

A business house or an Organisation may have 3 types of activities mainly. Core Business: the main activities of the Company is known as Core business activities. Whatever Cash flow from these activitiies are prepared are known as Cash Flow from Operations.

Investment Activities: Besides core business activities, parts of the funds are sometimes used in Investment activities by businesses also. Whatever cash flow from these activities are known as cash flow from Investment activities.

Financing Activities: Some business do financing activities also besides Core and Investment activities. Seperate Cash flows are prepared for these activities.

Q. 3. Answer: Interest Compounding: The name itslef suggests that there will be compunding (adding) of interest of Initail Principla amount at frequent interval of time, and further it will become principal amount with addition of interest in the principal amount.

One that pays daily compunding of interest, I would like to prefer this facility than that of any other of semiannual compunding as everyday interest earned will become principal amount next day & I will earn interest on interest too, besides on my principal amount invested/deposited.

Q.4.: Answer: Annual Growth will definitely be lower than that of 10% because , from the first year when we start with EPs of $ 1, first year growth will be added in it. if we take 10% than its $ 1.10, for next year the growth if taken  10%, than EPS must be increased by $0.11 for 10% growth, which is not so, as 10% flat rate is there in 10 yrs of difference. Same calculations will go for 10 years, than there will be growth near to 80%. Hence the submission is wrong to say 100% growth.