ECO218: PRINCIPLES OF FINANCE Course Introduction

ECO218: PRINCIPLES OF FINANCE Course Introduction Firms are required to keep detailed financial records so that organized reports can be distributed to managers, shareholders, and government regulators. Principles of Finance focus on what these managers, investors, and government agencies do with this information. It ca also be label as "corporate finance" or "financial management".

ECO218: PRINCIPLES OF FINANCE Course Introduction Finance is a broad term; you will find that both managers that compile the financial reports and stockbrokers working on the Stock Exchange Markets will claim that they work in finance.

ECO218: PRINCIPLES OF FINANCE Course Introduction So what exactly is finance?

ECO218: PRINCIPLES OF FINANCE Course Introduction Finance is the science of fund management. It is distinct from accounting in that, whereas accounting aims at organizing and compiling past information, finance is geared towards deciding what to do with that information.

ECO218: PRINCIPLES OF FINANCE Course Introduction In Finance we learn how to determine which projects have the best potential payoff. How to manage investments. How to value stocks.

ECO218: PRINCIPLES OF FINANCE Course Introduction In the end, you will discover that all finance boils down to one concept: return. In essence, finance asks: "If I give you money today, how much money will I get back in the future?“

ECO218: PRINCIPLES OF FINANCE Course Introduction Financial concepts:- Time value of money Management financial statements Ratio analysis Capital budgeting

ECO218: PRINCIPLES OF FINANCE Course Introduction Financial concepts:- Capital structure cost of capital Bonds  Stocks

ECO218: PRINCIPLES OF FINANCE Course Introduction In summary Principles of Finance will show us how to use financial concepts such as the time value of money, financial statements, financial ratio analysis, capital budgeting analysis, capital structure, the cost of capital, bonds and stocks. It will also provide an understanding of cash flow and long term financing, and how to apply these concepts and skills in business decisions.

ECO218: PRINCIPLES OF FINANCE Time value of money;-  Introduction to Interest

ECO218: PRINCIPLES OF FINANCE Time value of money Suppose you have the option of receiving 100,000naira today vs. 200,000naira in five years. Which option would you choose? How would you determine which is the better deal? Some of us would rather have less money today vs. wait for more money tomorrow.

ECO218: PRINCIPLES OF FINANCE Time value of money However, sometimes it pays to wait. Time value of money explains how to determine the value of money today vs. tomorrow by using finance tools to determine present and future values. Also, Time value of money exposes the concept of interest rates and how to apply them when multiple periods are considered.

ECO218: PRINCIPLES OF FINANCE Time value of money Let take a look at the difference between present value and future value.  The concept called the "time value of money" assumes that individuals face either an increase in prices in the economy as time passes in the form of an inflation rate, such as a 4% annual inflation rate, or an opportunity to put their savings in an investment account offering an interest rate, such as 5% per year.  

ECO218: PRINCIPLES OF FINANCE Time value of money Therefore, under the "time value of money" concept, you can see that 1,000naira that you can receive in two years from today does not have the same value as 1,000naira today.   In fact, it will have a lesser value today.  

ECO218: PRINCIPLES OF FINANCE Time value of money Likewise, if you receive 1,000naira today and have the opportunity to put this money in an investment account earning 5% per year, in two years you will have more than 1,000naira.

ECO218: PRINCIPLES OF FINANCE Time value of money Assume: 10% risk free interest Now 1 year 2year 100,000 109,000 120,000 100,000 + 10,000 = 110,000 +11,000 = 121,000

ECO218: PRINCIPLES OF FINANCE Time value of money Future(FV) vs Present(PV) Value Assume: 10% risk free interest FV 1 year 2year 100,000 110,000 121,000

ECO218: PRINCIPLES OF FINANCE Time value of money Future(FV) vs Present(PV) Value Assume: 10% risk free interest What is the PV of 65,000 in one year let x be the PV this mean that 1x + 10%x = 65,000 1x + 0.10x = 65,000 1.10x = 65,000 x = 65,000 / 1.10 x = 59,090.90909

ECO218: PRINCIPLES OF FINANCE Time value of money Future(FV) vs Present(PV) Value Assume: 10% risk free interest The PV of 65,000 in one year will be 59,090.90909 It then mean that The FV of 59,090.90909 in one year will be 65,000

ECO218: PRINCIPLES OF FINANCE  Introduction to Interest

ECO218: PRINCIPLES OF FINANCE Introduction to Interest What is Interest?

ECO218: PRINCIPLES OF FINANCE Introduction to Interest Interest is what you Paid for keeping an Amount of Money over a Period of Time. It could also be regarded as Rent Paid for the Usage of Money over a specific Time Period.

ECO218: PRINCIPLES OF FINANCE Introduction to Interest Interest can either be a Simple or Compound Interest. In Reality Only Compound Interest are used in modern Economics But we shall start our discussion with a Simple Interest.

ECO218: PRINCIPLES OF FINANCE Introduction to Interest Simple Interest

ECO218: PRINCIPLES OF FINANCE Introduction to Interest Simple Interest Assume: 10% per Year risk free Simple interest Principal is 100,000naira How much do I Own at the end of Ten years from Today

ECO218: PRINCIPLES OF FINANCE Introduction to Interest Simple Interest Assume: 10% per Year risk free Simple interest Principal is 100,000naira Maturity Date is 10years let x be the Value I Own at the end of each Year Ti. this mean that at end of each Year:- T0: x = 100,000naira T1: x = 100,000 + (100,000)(0.10) = 100,000 + 10,000 = 110,000

ECO218: PRINCIPLES OF FINANCE Introduction to Interest Simple Interest Assume: 10% per Year risk free Simple interest Principal is 100,000naira Maturity Date is 10years T2: x = 100,000 + (100,000)(0.10)(2) = 100,000 + 20,000 = 120,000

ECO218: PRINCIPLES OF FINANCE Introduction to Interest Simple Interest Assume: 10% per Year risk free Simple interest Principal is 100,000naira Maturity Date is 10years T3: x = 100,000 + (100,000)(0.10)(3) = 100,000 + 30,000 = 130,000

ECO218: PRINCIPLES OF FINANCE Introduction to Interest Simple Interest Assume: 10% per Year risk free Simple interest Principal is 100,000naira Maturity Date is 10years T10: x = 100,000 + (100,000)(0.10)(10) = 100,000 + 100,000 = 200,000

ECO218: PRINCIPLES OF FINANCE Introduction to Interest Simple Interest In summary Assume: r% per Year risk free Simple interest P is the initial Principal Amount let x be the Value Owned at the end of each Year Ti. this mean that at end of each:- Ti: x = P + (P)(r)(i)

ECO218: PRINCIPLES OF FINANCE Introduction to Interest Simple Interest So if; r = 10% (Simple Interest rate) P = 100,000 (Initial Principal Amount) I = 10 (Years of Maturity) let x be the Value Owned at the end of Ti Years. this mean that at end of i years:- T10: x = 100,000 + (100,000)(0.10)(10) = 100,000 + 100,000 = 200,000