Corporate

Entrepreneurship:
Entrepreneurial Accounting
and Finance

Lectured by Mr Ncemane
Index
1. Recap of Week Four
2. Individual Assignment Implications for Late Submission
3. Week Four Academic Programme – Lecture Content
4. Group Assignment Presentations
Recap of Four
In week four we looked at:
• Financial Modelling
• Focus was on the following:
• Cost of Capital
• Working Capital
• Capital Structures
Individual Assignment
• Due on 21 February 2022 as provided for in the Study Guide
• Late submissions will have a 5% penalty for each day the assignment is not submitted.
Time Value of Money

Chapter 2
Time Value of Money
Chapter 2

• Role of Time Value of Money (TVM) in finance

• Concepts of TVM
• Formulas
• Calculation of annual effective rate
• Nominal vs Real interest rates
• Term structure of interest rates
Time Value of Money - Terminology
• n - represents period
• r - represents the rate of interest or financing
• pmt - represents applicable instalments
• PV – represents the Present Value an outflow
• FV – represents the Future Value
• Residual refer to future values that can be recouped and need to be deducted

• See Table A on pageT-2 for when working without a calculator compounding

exercises.
Time Value of Money – Future Value
A value that an investment or series of investments will grow to over a stated time period at a
specified interest rate.

Formula:
FV = PV * (1+r)

Single amount and single period:

R100 is invested for one year at 12% per annum (p.a). What is the future value of this
investment at the end of the year?

FV = R100 *(1+0.12)
FV = R100 * 1.12
FV = R112
Therefore, growth in one year is R12.
Time Value of Money – Future Value
Single amount, multiple periods, annual interest compounding:

What is meant by compounding?

When the interest earned in not withdrawn but used to along with the capital (as new capital)
to grow the investment.
R100 is invested for two year at 12% per annum (p.a). What is the future value of this
investment at the end of the year?

FV = PV * (1+r)^n
FV = R100 *(1+0.12)^2
FV = R100 * 1.12^2
FV = R100*1.2544
FV = R125.44
Therefore, growth in one year is R25.44
Time Value of Money – Present Value
A principal amount, the cash outflow use for investment.

Formula:
PV = FV/(1+r)^n

You have a goal in sight you’d like to invest for. You wish for your return to be R125 000 and
are hoping to earn prime plus 2% on the investment. What is the amount of money you must
invest to get R125 000 in 7 years? Prime is currently 7.5%

What we know is that the PV we need to calculate will have compounded growth over 7 years
PV = ?
FV = R125 000
n = 7 years
r = 9.5% (7.5%+2%)
Time Value of Money – Present Value
Therefore:
PV = FV/(1+r)^n
PV = R125 000/(1+0.095)^7
PV = R125 000/1.887552
PV = R66 223.35

Things to note.
• We are working in reverse
• 9.5% is not provided for in Table A, use the next closes rate to it being 10% only if you
do not use a calculator or excel.
Time Value of Money – Number of Periods
The period of an investment

Formula:
(1+r)^n = FV/PV

Important things to know is:

• The rate – r
• FV
• PV

Example 2.4 on page 2-5/6

Time Value of Money – Interest Rate
The interest rate of an investment

Formula:
r = (FV/PV)^(1/n) - 1

Important things to know is:

• The period - n
• FV
• PV

Example 2.4 on page 2-6

TVM– Single Amount, Multiple Periods,
Non-Annual Compounding
Multiple periods require that we adjust r and n by the periods stipulated:
Quarterly means that r is divided by the 4 and n multiplied by 4.
Semi-annually means that r is divided by 2 and n multiplied by 2.
Monthly means that r is divided by 12 and n multiplied by 12
Daily means that r is divided by 365 and n multiplied by 365

Formula:
FV = PV * (1+r/m)^mn

m represents multiple periods within a single year

TVM– Annual Effective Rate
Useful for converting quoted or nominal interest rate into effective rate interest to
compare investment alternatives with different compounding periods.

Brings about parity.

The effective annual rate of interest is the annual rate that if compounded once a year,
would give the same results as interest per period compounded several times per year.

Formula:
re = (1+(rn/m))^m - 1
Where re is the effective rate and rn the nominal rate
m represents multiple periods within a single year

Example 2.7
TVM– Annuities
Refers to a continuous investment of funds.
Introduces PMT which represents payment.
In determining future and present values, PMT replaces PV and/or FV.

The formular in determining FV of an annuity assuming investments are made at the end
of the year is:
FVA = PMT *[((1+r)^n) – 1/r]

The formular in determining FV of an annuity assuming investments are made at the start
of the year is:
FVAdue = PMT *[((1+r)^n+1) – 1/r] – 1

Do the reverser for PVAdue as per the PV formula

Risk and Return

Risk
Chapter 3
Risk and Return - Introduction
Financial management is about making investment and financial decisions

Decisions have risks. As you have it. High risk = High returns and the inverse is true.

Risk and uncertainty are used interchangeably.

Risk may be positive, as it may yield higher for your investment. Think of hedge funds,
forex trading etc.
Risk and Return – Business Risk
Inherent in the business and may be linked to the industry the business is part of.

Business risk is measured by the changes and impact on earnings before interest and
taxes (EBIT).

We need to understand how the following is calculated:

• Sales (selling price * units)
• Variable Costs (variable costs * units)
• Fixed Costs (fixed across periods)
Risk and Return – Business Risk
Inherent in the business and may be linked to the industry the business is part of.

Business risk is measured by the changes and impact on earnings before interest and
taxes (EBIT).

We need to understand how the following is calculated:

• Sales (selling price * units)
• Variable Costs (variable costs * units)
• Fixed Costs (fixed across periods)

These are used to calculate profitability, break-even, degree of operational leverage

(DOL)
Risk and Return – Break-even
Break-even is that point when the business neither makes a profit or loss.

Can be calculated in units.

Break-even unit = fixed costs/contribution per unit

Contribution is Selling price per unit minus variable costs per unit.

Any additional units sold post the breakeven point represent profit
Risk and Return – Degree of Operational
Leverage (DOL)
DOL = Contribution / EBIT

Measures the impact of a change in any of the factors of sales and variable costs as it
affects EBIT

Remember fixed costs, remain fixed across periods.

Risk and Return – Financial Risk
Financial risk results from the practice of financing a part of the firm’s assets with
interest-bearing debt.

Interest must be paid regardless of the performance of the firm.

This is the first exposure to financial risk.

Financial risk allows for the calculation of what is known as a degree of financial leverage
(DFL).

DFL = EBIT/(EBIT – I), where I represents the total interest on all debt
Risk and Return – Total Company Risk
Operating and degree of financial leverage gives us a degree of combined leverage (DCL)
calculating:

DCL = (S – VC)/(S-VC-F-I)

Also stated as

DCL = Contribution/Net Income before Taxation

Alternatively:

DCL = DOL * DFL

Capital Structure

Read Chapter 14 per

the study guide as it
puts the past lectures
into perspective.
Things to remember:
Individual Assignment is due on the Monday the 21st
February 2022 until 23H59:59.
The assumption is that you all have a text book and follow the
contents of the lectures. Asking private question after class
doesn’t help the broader development of others.
Kindly ask all your questions in class.
Next class there will involve presentation from the various
group for the Group Assignment to introduce the problem to
be solved.
Thank You