SUMMARY OF EQUATIONS (BUSINESS FINANCE)

MANAGEMENT OF SHORT TERM LIABILITIES

 SIMPLE INTEREST RATE OF A LOAN
iCB = Interest Paid
Proceeds of the loan
x 12
Number of months
that the borrower may use that the
firm has use of the proceeds

Example: The borrower obtains a $1,000 loan for a year and pays $60 in interest when the loan is
repaid. In that case the rate of interest is:
iCB = $60 x 12
$1,000 12

 EFFECTIVE INTEREST RATE ON A LOAN

Cash x % x 12
Cash – (Cash x %) 12

 AMOUNT OF LOAN

The amount of the loan = Funds needed

1.0 - The origination fee
(in decimal

 SIMPLE INTEREST RATE OF A LOAN

Cash x % x 12
Cash – (Cash x %) 12

 COST OF TRADE CREDIT

iTC = Percentage discount x 360
100% minus payment period minus
percentage discount discount period

Example: For 2/10, n/30, the cost of trade credit is:

iTC = 0.02 x 360
1 - 0.02 30 – 10 = 36.7%

Note: 2/10, n/30 means 2%, amount due paid 10 days and amount full due is in 30 days.

Note:
TIME VALUE OF MONEY P = Present Value
FVIF = Future value interest
 FUTURE VALUE OF A DOLLAR
PVIF = Present Value
P0 x FVIF (PercentI,yearN) = Pn interest
rate (look in interest table)
I = Percentage or interest
rate)
N = number of time
 THE PRESENT VALUE OF A DOLLAR
periods/ year

Pn x PVIF (I,N) = P0

DISCOUNTING: P0 = Pn

(1 + i)

Future Value of Annuity Due

FVAD = PMT (1+i)1 + PMT (1+i)2 + ...+ PMT (1+i)n

Future Value of Ordinary Annuity

FVOA = PMT (1+i)0 + PMT (1+i)1 + ...+ PMT (1+i)n-1

THE FUTURE VALUE OF AN ANNUITY OF A DOLLAR

PMT x FVAIF (I,N) = FVA
FUTURE VALUE ANNUITY DUE
Example: An employer offers to start a pension plan for a 45-year old employee. The plan is to
place $1,000 at the end of each year in an account that earns 6% annually. The employee wants
to know how much will be in the account by retirement at age 65. What is the future value of
annuity?
PMT x FVAIF (I, N) = FVA
FVA (1+i) = Annuity Due

Answer:
$1000 x 36.786 = $36,786
$36,786 (1+.06) = $38.9932
$1000 x 38.9932 = $38,993.20

THE PRESENT VALUE OF AN ANNUITY OF A DOLLAR

PMT x PVAIF (I,N) = PV
PMT = annuity payment
PVAIF (I,N) = interest factor for the present value of an ordinary annuity at I percent and N
time periods
PV = present value of the annuity

PRESENT VALUE ANNUITY DUE

PV (1+i) = Annuity Due