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Foundations Of Financial Management
Found in: Page 279
Foundations Of Financial Management

Foundations Of Financial Management

Book edition 16th
Author(s) Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Pages 768 pages
ISBN 9781259277160

Short Answer

Why does money have a time value?

The money possesses a time value because of its interest-earning capacity. This is why the opportunity cost of money also increases with time.

See the step by step solution

Step by Step Solution

Step 1: Meaning of time value of money

The time value of money states that the dollar amount received today is worth more than a similar dollar amount received in the future.

Step 2: Reason for money having time value

The money has the quality of fetching real return as well as the compensation for inflation prevailing in an economy. This is why the value of money increases with the passage of time. The return so generated by money are called as the time value. For instance, an investment of $1,000 providing $150 after an year indicates a time value of $150 that consists of cost of using the money, compensation for various risks such as inflation risk, etc.

Most popular questions for Business-studies Textbooks

Question: Beasley Ball Bearings paid a $4 dividend last year. The dividend is expected to grow at a constant rate of 2 percent over the next four years. The required rate of return is 15 percent (this will also serve as the discount rate in this problem). Round all values to three places to the right of the decimal point where appropriate.

a. Compute the anticipated value of the dividends for the next four years. That is, compute D1, D2, D3, and D4; for example, D1 is $4.08 ($4 3 1.02).

b. Discount each of these dividends back to present at a discount rate of 15 percent and then sum them.

c. Compute the price of the stock at the end of the fourth year (P4). P4 5 D5 ______ Ke 2 g (D5 is equal to D4 times 1.02.)

d. After you have computed P4, discount it back to the present at a discount rate of 15 percent for four years.

e. Add together the answers in part b and part d to get P0, the current value of the stock. This answer represents the present value of the four periods ofdividends, plus the present value of the price of the stock after four periods (which in turn represents the value of all future dividends).

f. Use Formula 10-8 to show that it will provide approximately the same answer as part e. P0 5 D1 ______ Ke 2 g For Formula 10-8, use D1 5 $4.08, Ke 5 15 percent, and g 5 2 percent. (The slight difference between the answers to part e and part f is due to rounding.)

g. If current EPS were equal to $4.98 and the P/E ratio is 1.2 times higher than the industry average of 6, what would the stock price be?

h. By what dollar amount is the stock price in part g different from the stock price in part f?

i. In regard to the stock price in part f, indicate which direction it would move if (1) D1 increases, (2) Ke increases, and (3) g increases


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