study material on finance 47

May 14th, 2015
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Compounding Intervals Simple interest does not reinvest each interest payment whereas Compound interest reinvests each interest payment, earning more interest in subsequent periods

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Corporate FinanceRainier KraakmanClass OutlineSpring 2001Part I: Fundamental Concepts in Valuation1. Discounting and Net Present Value1.1 Present Value, Future Value, and Net Present ValueKey:r = rate of return available for similar investment on the capital market (market rate of interest)Cx = expected cash flow at period x (when x = 0, Cx is the initial cash outlay)Present Value (PV): PV = C1/(1+r).Future Value (FV): FV(x) = x(1+r).Net Present Value (NPV): NPV = C0 + C1/(1+r).Project Rate of Return (y): y = (C0+C1)/-C0.Two criteria for measuring the value of a project: The value of a project can be measured byeither NPV or y. NPV is the better measure because it gives you an answer in absolute dollars.[Example: Project 1 gives a $100 payoff for an initial investment of $10. Project 2 givesyou a $2000 payoff for an initial investment of $2000. Project 2 is more valuable indollars because you earn more of them, even Project 1 has a higher y.]Rule for Corporate Investing: A corporation should invest in projects with the highest NPVs(never < 0), regardless of individual shareholders wealth and tastes, because shareholders canborrow against their stakes in the corporation if they need cash immediately.1.2 Extending Net Present Value to Multiple PeriodsKey:rx = market rate of return x-period investmentsCx = expected cash flow at period xNPV For Multiple-Period Cash Flow: For a project that pays off in cash flows over n periods,NPV = C0 +

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