Microsoft Word - Money, Banking, and Int Finance(scribd).docx

Money, Banking, and International Finance

Table 7. Statement of Cash Flows

Cash flow from operating activities
Cash Received from customers $100,000
Payments for taxes (20,000)
Cash flow from investing activities
Cash paid for equipment purchase (20,000)
Cash flows from financing activities
Cash received from issuing stock 50,000
Cash paid for dividends (30,000)
Net increase in cash $80,000
Cash balance at beginning 2010 $30,000
Cash balance at end of 2010 $110,000

Single Investment

Financial analysts use the present value formula to price financial securities or calculate
mortgage payments. Present value formula places a value of future cash flows in terms of
money today. Therefore, the present value emphasizes the present because people want their
money now than wait for a future payment. Consequently, an interest rate rewards savers for
delaying payment. For example, if you deposit $100 into a bank at 5% interest rate, you earn
interest:

 After one year, you earn 0.05($100) = $5 in interest. Your ending balance becomes

$105.00.

 After two years, you earn 0.05($105.00) = $5.25. Your ending balance grows into $110.25.

We can use interest compounding to compute the ending balance in Equation 2.

$100( 1 + 0. 05 )( 1 + 0. 05 )=$100( 1 + 0. 05 )ଶ=$110. 25 ( 2 )

If you let the money earn interest after T years, then you build the sequence in Equation 3.
In this case, we multiply the beginning balance by the interest repeatedly. Moreover, the one
inside the parenthesis indicates the principal as $1 while the 0.05 reflects the interest.

$100( 1 + 0. 05 )( 1 + 0. 05 )⋯( 1 + 0. 05 )=$100( 1 + 0. 05 )் ( 3 )

For example, your $100 grows into $13,150.13 at 5% interest in one-hundred years. We
write the mathematical notation as:

 Future Value (FV) in dollars at Time T.