FIN 600 – Lecture 3 Discounted Cash Flow Valuation Chapter Outline Time Value of Money Valuation: The One-Period Case The Multiperiod Case Compounding Periods Simplifications What Is a Firm Worth? Time Value of Money A dollar received today is worth more than a dollar received in the future. Interest - is the return you receive for investing your money. The interest rate is the basis for a test that any proposed investment must pass. Example: Putting
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considering a project which costs $123‚900 to undertake. The project will yield cash flows of $4‚894.35 monthly for 30 months. What is the rate of return on this project? 7. Your insurance agent is trying to sell you an annuity that costs $100‚000 today. By buying this annuity‚ your agent promises that you will receive payments of $384.40 a month for the next 40 years. What is the rate of
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investment‚ our group will answer three questions below: Question 1: What is time value of money? How is it important? Question 2: Motivation and formula of calculation of future values and present values of a simple (single) cash flow‚ an annuity‚ and a perpetuity? Question 3: Implications in financing and investment? Alternating theories is illustrations and examples that allow people to image them in practice. CONTENT QUESTION 1: WHAT IS TIME VALUE OF MONEY? HOW IS IT IMPORTANT? Any rational
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Interest Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money‚ or money earned by deposited funds. When money is borrowed‚ interest is typically paid to the lender as a percentage of the principal‚ the amount owed to the lender. The percentage of the principal that is paid as a fee over a certain period of time (typically one month or year) is called the interest rate. A
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Topic 1: Financial Markets 1. You are among the OTC market makers in the stock of Bio-Engineering‚ Inc. and quote a bid of 102 1/4 and an ask of 102 1/2. Suppose that you have a zero inventory. (a) On Day 1 you receive market buy orders for 10‚000 shares and market sell orders for 4‚000 shares. How much do you earn on the 4‚000 shares that you bought and sold? What is the value of your inventory at the end of the day? (Hints: It is possible to have negative inventory. Further‚ there is more than
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Chapter One Basic Areas of Finance: 1. Corporate Finance = Business Finance 2. Investments a. Work with financial assets such as stocks and bonds. b. Value of financial assets‚ risk verses return and asset allocation. c. Job opportunities. 3. Financial Institutions a. Companies that specialize in financial matters. i. Banks – Credit unions‚ savings‚ and loans. ii. Insurance Companies iii. Brokerage Firms b. Job Opportunities. 4. International Finance a. An area of specialization within each of the
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Compound Interest; Annuities vs. Simple Compounding and Discounting; Future Value of an Ordinary Annuity and Annuity Due Concepts in Valuation: (Continued) Present value of an ordinary annuity and annuity due; Amortization and perpetuity; Concept of nominal rate of interest and effective rate of interest; Problem solving Valuation of Long-term Securities: Bonds; types of bonds; characteristics of bonds; Zero coupon bond vs. non-zero coupon bond; Perpetual bond; Perpetuity vs. Perpetual bonds
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Week 2 Sources of Finance 1) Introduction It was explained in week 1 that this week’s lectures will focus primarily on institutions that provide finance. Finance has been defined by Chadwick and Kirkby (1995‚ p 38) in their book Financial Management (first edition‚ publisher Routledge) as a “system of costs and risks”. As we will see throughout the course‚ the notion of risk from an investor’s point of view is related to whether there is the accrual of the financial returns that are anticipated
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finding in part (a) to discuss the effect of more frequent deposits and compounding of interest on the future value of the annuity. a. (1)Annual (2)Semiannual FVA10 = $4‚346.10 FVA10 = $4‚466.70 (3) Quarterly FVA10 =
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= -1‚548 + 138/.09 = -14.67 (cost today plus the present value of the perpetuity) 7. PV = 4/(.14-.04) = $40 8. a. PV = 1/.10 = $10 b. Since the perpetuity will be worth $10 in year 7‚ and since that is roughly double the present value‚ the approximate PV equals $5. PV = (1 / .10)/(1.10)7 = 10/2= $5 (approximately) c. A perpetuity paying $1 starting now would be worth $10‚ whereas a perpetuity starting in year 8 would be worth roughly $5. The difference between these
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