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Unit 2 Review

Unit 2 Review. Investment Growth Over Time. 10-1 Reasons for Saving and Investing. Formulas. FV = PV (1+i) N Amt Invested x Interest Rate x # of days/365 = interest earned. Example 1.

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Unit 2 Review

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  1. Unit 2 Review

  2. Investment Growth Over Time 10-1 Reasons for Saving and Investing Slide 2

  3. Formulas • FV = PV (1+i)N • Amt Invested x Interest Rate x # of days/365 = interest earned

  4. Example 1 You invested $6,000 for one year at 12 percent annual interest compounded quarterly. How much is the investment worth at the end of one year (4 quarters)? Slide 4

  5. Answer • Answer: • N: 4 • I: 3 • PV: $6,000 • FV: ? • FV: $6,753.05 Slide 5

  6. Example 2 Stan Musial LLC is looking to invest some of their retained earnings in low risk bonds. They decide to invest $20,000 in a one year 8% bond that is compound quarterly. At the end of the year, Stan Musial LLC. Wants to take their investment and purchase a Stan Musial truck. The truck costs $25,000. Will Stan Musial LLC have enough money to purchase the truck at the end of the year? How much is their investment worth? Slide 6

  7. Answer • Answer: • N: 4 • I: 2 • PV: $20,000 • FV: ? • FV: $21,648.64 • No they will not have enough money to purchase the truck. Slide 7

  8. Example 3 Nelson and Miguel both bought investments at the same time. Each investment cost $500. Nelson’s investment yielded $18 in dividends for the year while Miguel’s investment was held from March 1 to October 1 and yielded a $25 return. Which one had the higher rate of return? Which one had the higher ANNUAL return on investment (ROI)? Show the rate of return and annual return on investment for both. Slide 8

  9. Return on Investment 10-2 Principles of Saving and Investing Slide 9

  10. Example 4 • You invested $10,000 in a certificate of deposit (CD). The terms of the CD are that you received 10% annual interest over a term of 10 years. If the money is withdrawn before 10 years, the penalty imposed will equal 365 days’ interest, whether earned or not. You decide to withdraw the money after 100 days. Calculate the interest earned, the early withdrawal penalty, and the amount you receive at the early withdrawal. Slide 10

  11. Early Withdrawal Penalty 11-1 Low-Risk Choices Slide 11

  12. Example 5 • You are thinking of investing in Cardinals Baseball LLC. You have only the following information on the firm at year-end 2012: Revenue = $500,000, total expenses = $300,000, current stock price = $10, earnings per share = $1. Calculate the net income, profit margin, and P/E ratio. Slide 12

  13. Answer • Net Income • Revenue – Expenses • $500,000 – $300,000 = $200,000 • Profit Margin • Net Income/Revenue • $200,000/$500,000 = 40% • P/E Ratio • Stock Price/EPS • 10/1 = 10 Slide 13

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