FINANCIAL

• The time value of money means that a sum of money is worth more now than the same sum of money in the future.
• FV=Future Value
• r=Rate of return
• n=Number of periods
• Present Value=(1+r)nFV
• Investors prefer to receive money today rather than the same amount of money in the future because a sum of money, once invested, grows over time.
• Money deposited into a savings account earns interest.
• Over time, the interest is added to the principal, earning more interest.
• Compound interest is when you earn interest on the money you’ve saved and on the interest you earn along the way.
• If money is not invested, the value of the money erodes over time.
• Inflation reduces the value of a single dollar, meaning you can't purchase as much as you were able to in the past.
• The most fundamental formula for the time value of money takes into account the future value of money, the present value of money, the interest rate, the number of compounding periods per year, and the number of years.
• Future value (FV) is the value of a current asset at a future date based on an assumed rate of growth.
• Present value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of return.
• The future value formula assumes a constant rate of growth and a single up-front payment left untouched for the duration of the investment.
• If an investment earns simple interest that is compounded annually, then the FV formula is: FV=I×(1+(R×T) where: I=Investment amount, R=Interest rate, T=Number of years.
• Present value is calculated by taking the future cash flows expected from an investment and discounting them back to the present day.
• To do so, the investor needs three key data points: the expected cash flows, the number of years in which the cash flows will be paid, and their discount rate.
• The discount rate is a very important factor in influencing the present value, with higher discount rates leading to a lower present value, and vice-versa.
• Using these variables, investors can calculate the present value using the formula: Present Value Formula and Calculation.
• Operating leverage is an indication of how a company's costs are structured.
• The metric is used to determine a company's breakeven point, which is when revenue from sales covers both the fixed and variable costs of production.
• Financial leverage refers to the amount of debt used to finance the operations of a company.
• Operating leverage measures the extent to which a company or specific project requires some aggregate of both fixed and variable costs.
• Fixed costs are those costs or expenses that do not fluctuate regardless of the number of sales generated by a company.
• Operating leverage is a metric that shows how much a company relies on fixed costs to generate revenue.
• When revenues or profits are pressured or falling, the debt and interest expense must still be paid and can become problematic if there is not enough revenue to meet debt and operational obligations.
• Variable costs are expenses that vary in a direct relationship to a company’s production.
• Variable costs rise when production increases and fall when production decreases.
• There is a cost associated with leverage in the form of interest expense.
• Investors look at a company's leverage because it is an indicator of the solvency of the company.
• Debt can help magnify earnings and earnings per share.
• When a company's revenues and profits are on the rise, leverage works well for a company and investors.
• Financial leverage is a metric that shows how much a company uses debt to finance its operations.
• A company with a high level of leverage needs profits and revenue that are high enough to compensate for the additional debt it shows on its balance sheet.