Question

examine the concept of time value of money in relation to corporate managers. Propose two (2) methods in which time value of money can help corporate managers in general.

Answer 1

– Direct measure of money contribution to stockholders. The Net Present

Value is a great method to determine if an investment is worthy or not. The decision tool is easy

for corporate managers to understand and customize if there will be a gain or loss for the

investment in question. Corporate managers can do a side by side comparison of investments to

determine which has the highest Net Present Value.

Internal Rate of Return

– Shows the return on the original money invested. The Internal Rate

of Return method recognizes time value of money and utilizes cash flow. The method is

transparent and clear to understand. The highest Internal Rate of Return is the winning

investment. These two methods can help corporate managers in general for capital budgeting.

Examine the pros and cons of a sinking fund from the viewpoint of both a firm and its

bondholders.

Sinking Funds Firm View Point:

Pros:



Pro-active in addressing debt



Long-term debt management



Reduce costs & debt



Established business that will not close their doors a week later



Raise Capital

Cons:



Lose expected returns



Reinvest money elsewhere at a lower price

Sinking Funds Bondholder View Point:

Pros:

