大三下合作課

1、Chapter 2Financial planning skillsPowerPoint presentation byFariba Ahmadi-Pirshahid 2014 John Wiley & Sons Australia, LtdLearning objectivesAfter studying this chapter you should be able to:prepare personal financial statementsunderstand the purpose of analysing financial statements using ratio anal

2、ysis describe the importance of financial mathematics skills for financial plannersexplain the concept of time value of money and the benefits of compound interestunderstand the difference between nominal and effective interest ratesunderstand the concept of net present valueapply the time value of

3、money concept to different investment choicesexplain the effect of taxation and inflation on the rate of return.IntroductionFinancial planning requires specialist knowledge across diverse areasTechnical skills are required in a number of business disciplines particularly in the area of investmentsIt

4、 is important that investments are considered in terms of the time value of money, the effect of inflation and taxation, timing of cash flows and compounding frequencyPreparing personal financial statementsPersonal financial statements can be prepared in two parts:Personal cash flow budget/statement

5、 includes:Anticipated e from all sourcesItems of spending or expenditurePersonal balance sheet includes:Personal assetsPersonal liabilitiesPersonal cash flow budget e includes money received from salary, wages, interest, profits, bonuses, fees charged, dividends, distributions, social security pensi

6、ons or allowances, and any other earningsExpenditure includes payments for food, clothing, gas, electricity, rent, interest on loans, rates, and any other expensesNet Savings where e ExpenditureNegative Savings where Expenditure ePersonal cash flow budget continuedPersonal cash flow budget example:P

7、ersonal cash flow budget continuedProjected cash flow budget example:Personal balance sheet Demonstrates financial well beingAssets are things of value we own such as bank deposits, property, managed funds, etc.Liabilities are amounts of money we owe to other people or organisations such as credit c

8、ard debt, loans and mortgage.Net worth is the difference between assets and liabilitiesPersonal balance sheetcontinuedPersonal balance sheet example:Using financial ratios as a planning toolThe personal financial statements can be used to calculate the following useful financial ratios to analyse th

9、e familys financial position:Equity or net worth ratioLiquidity ratioSavings ratio andDebt service ratioUsing financial ratios as a planning tool continued1. Net Worth Ratio= Net worth x 100 Total assets= $673 000 x 100 $957 000= 70.3%This means that the Wong family owns 70.3% of the assets that the

10、y have acquired and other people, institutions own 29.7%Using financial ratios as a planning tool continued2.Liquidity Ratio= Liquid assets x 100 Current debt= $12 000 x 100 $22 000 (assumed)= 54.5% This shows the percentage of assets available to cover current debt.Using financial ratios as a plann

11、ing tool continued3. Savings Ratio= Savings x 100 Net e= $7 000 x 100 $123 000= 5.7%It is likely that the savings ratio will be low or negative for a young couple with small children and also for an elderly coupleUsing financial ratios as a planning tool continued4. Debt Service Ratio (Monthly)= Ann

12、ual debt commitments/12 mths x 100 Annual net e/12 mths= $22 000/12 x 100 $123 000/12= $1 833.3 x 100 $10 250 = 17.9%This ratio can be used to indicate the financial effect of undertaking a particular course of actionFinancial mathematics skills applied in financial planningFinancial planners requir

13、e strong working knowledge of fundamental mathematical concepts that relate to investment and retirement planning.These include a basic understanding of:The nature of compound interestThe time value of moneyCompound interest and the time value of moneyMost financial decisions involve benefits and co

14、sts spread over time.A dollar in the hand today is worth more than a dollar to be received in the future.People prefer cash now rather than later because:Risk or uncertainty of future collectionOpportunity costPostponement of present consumptionCompound interest and the time value of money continued

15、Future Value Example$1000 invested at 8% for 4 yearsInterest in year 1 = 8% x $1000 = $ 80.00Interest in year 2 = 8% x ($1000+$80) = $ 86.40Interest in year 3 = 8% x ($1000+$ 80+$86.40) = $ 93.31Interest in year 4 = 8% x ($1000+$ 80+$86.40+$93.31) = $100.78Total $1 360.49Compound interest and the ti

16、me value of money continuedFuture Value Formula: FV = PV(1 + i)nwhereFV = future value of an amount invested todayPV = amount of present sum of money i = interest rate per periodn = number of periodsUsing the formula for the example, we get FV = $1 000(1 + 0.08)4 = $1 360.49Compound interest and the

17、 time value of money continuedPresent Value ExampleHow much do we need to invest now at 8% to accumulate $1 360.49 in 4 years time?Present Value FormulaPV = FV(1 + i)nPV = $1 360.49(1 + 0.08)4= $1 000Compound interest and the time value of money continuedAnnuity Example (FV) How much will we have at

18、 the end of 5 years if we invest $500 at the end of each year at 7%?Annuity Formula (FV)FV = PMT(1 + i)n 1 iFV = $500(1 + 0.07)5 1 0.07= $2 875.37Compound interest and the time value of money continuedAnnuity Example (PV)What is the present value of an annuity of $500 for 5 years at 7%?Annuity Formu

19、la (PV) PV = PMT 1 (1 + i)n iPV = $5001 (1 + 0.07) 5 0.7 = $2 050.10Nominal and effective interest ratesA nominal interest rate is the stated interest rate that a bank might quote.However, the value of the investment is affected by the frequency at which the interest rate is determined.The effective

20、 interest rate is the real rate after adjusting for frequency of compounding.Nominal and effective interest rates continuedSince the time value of money formula assumes annual compounding, to obtain the periodic interest rate (i) an adjustment must be made:The number of years (n) is multiplied by th

21、e number of compounding periods (m).The annual interest rate (j) is divided by the number of compounding periods (m).Periodic interest rate formula is:i = j/mNominal and effective interest rates continuedExampleWe can illustrate the importance of understanding the difference between nominal and effe

22、ctive interest rates by considering the following interest rates quoted by three banks:Bank A: 15%, compounded dailyBank B: 15.5%, compounded quarterlyBank C: 16%, compounded annuallyThe effective interest rates for these three banks are as follows:Credit cardsCredit card lending has grown over the

23、past two decadesInterest rates on credit cards are generally quoted as effective interest ratesFor example a credit card which charges 1.6% per month, the effective annual rate will be:(1 + 1.6%)12 1 = 20.98%Net present value (NPV)NPV = PV (Future cash flows) Investment todayNPV can also be expresse

24、d in a formula as:whereNPV= net present value of the projectCF0= the initial outlay of the investmentCFi= the future cash flows over the period ir= the discount rate or cost of capitali= number of periodsn= the number of the last year of the projectNet present value continuedNPV is effectively a mea

25、sure of the net change in the value or wealth of the client from undertaking an investmentNPV Rule if the NPV of an investment is: 0 then the investment is generally regarded as financially acceptableNet present value continuedAdvantages of NPVThe NPV technique:always ensures the selection of projec

26、ts that maximise the wealth of shareholderstakes into account the time value of moneyconsiders all cash flows expected to be generated by the project this can also be thought as a weakness of the technique because it requires extensive forecasting which may not be accurate Net present value continue

27、dNPV Example:If an investment costs $300 today and is expected to return $100 at the end of each of the next 4 years with an interest rate of 10% p.a. then we can see the NPV as follows:NPV = 300 + 100/(1 +0.1)1 + 100/(1 + 0.1)2 + 100/(1 + 0.1)3 + 100/(1 + 0.1)4Net present value continuedWe can see

28、the result in the following table:NPV = -300 + 90.91 + 82.64 + 75.13 + 68.31 = 16.99Thus as NPV is positive the investment is acceptableYear01234Cashflow-300100100100100Discount factor10.90910.82640.75130.6831Discounted cash flow-30090.9082.6475.1368.31Internal rate of return (IRR)The IRR is the dis

29、count rate that equates the PV of a projects cash inflows with the PV of its cash outflows In other words, the IRR is the discount rate at which the NPV of a project is equal to zeroInternal rate of return continuedSteps for calculating IRR:Apply an estimated discount rate, say 10%Calculate NPV usin

30、g this discount rate ($16.99 from the previous NPV example)Estimate a second discount rate that will produce a negative result, say 15%Calculate NPV for the second discount rateSee table next slideCalculate the IRR using the formula (previous slide)Internal rate of return continuedWe can see the res

31、ult in the following table:NPV = -300 + 86.96 + 75.61 + 65.75 + 57.18 = -14.5If the result is not negative you need to calculate using another rate Year01234Cashflow-300100100100100Discount factor10.86960.75610.65750.5718Discounted cash flow-30086.9675.6165.7557.18Internal rate of return continuedCa

32、lculate the IRR:IRR = 10 + (10 15) x 16.99 / (-14.5 16.99)= 10 + (-5 x 16.99 / -31.49)= 10 + 2.7= 12.7% Internal rate of return continuedAn investment is attractive when the investments IRR has a positive NPV and its return is higher than the discount rate.IRR decision rule if the IRR of an investme

33、nt is: r then the investment should be financially acceptableFixed-interest securitiesThe price of fixed-interest securities has an inverse relationship to movements in interest ratesConsider the following example:Howard buys an investment for $1,000 that pays 12% p.a. interest every 6 months (6% each half year)Fixed-interest securities continuedA few days later interest rates drop from 12% p.a. to 8% p.a. or 4% every 6 monthsHoward also need to sell his investment to fund emergency expenses for his homeWhen he sell