CORPORATE FINANCE OUTLINE

CORPORATE FINANCE OUTLINE - 1 CORPORATE FINANCE VALUATION...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1 CORPORATE FINANCE VALUATION Assignment 1 I. Time Value of Money: A. Inflation: widdles at the value of money. 1. You should invest to keep up with inflation. 2. To get around time value of money people charge interest. B. How interest rates are set: Factors to look at. 1. You want to cover the inflation ate. 2. Take account of opportunity costs. 3. Look at default risk. II. Nominal v. Real Return: A. Nominal return includes inflation and real return does not, it is what is actually interest charge. B. GNP will be talked about in nominal terms or real GNP which wont take account of price raises in economy. III. Federal Reserve: A. Controls interest rates. B. Discount Rate: Interest rate that the Federal Reserve charges banks on loans generally to cover there reserve requirements. 1. Currently 1.25% (Very low, economy should turn around disregarding externalities like WTC). 2. Can raise and lower to cool or stimulate the economy. a. Raising makes money more expensive, and curbs borrowing because it may cut into profit of project. C. Federal Funds Rate: What banks charge other banks for overnight loans. 1. Currently 1.75% 2. Borrowing from other banks is easier then the fed. D. Prime Rate: Rate large banks charge their most creditworthy corporate customers. 1. Currently 4.75% IV. Present value and Future Value: A. Future Value: What a certain amount of money today will be worth in the future. 1. Need to Know: a. Current sum of money. b. Point in future you are looking at. c. Rate of return of interest you will earn on that sum from now till then. 2. Example: a. Sum= 100. b. Time= 1 year. c. Rate= 8% d. Answer: 108 www.swapnotes.com 2 1) 100*.08 = $8 100 + 8 = 108 3. Formula: a. FV n = X(1+k) n 1) n = period of time. 2) X = sum of money. 3) K = interest rate 4) X(1 + k) n = future value factor b. Future Value Factor Table on Page: 162 1) Look at table for 20 years, interest 7%, you get 3.8697, and multiply it by investment. 4. Example: a. 5000 Now. b. 7% Return. c. 20 years. d. FV n = 5000 (1 + .07) 20 1) 5000 (3.8697) 2) = 19,348.50 B. Compounding and Future Value: Interest earned on interest. 1. Example with 100. After year 1, we had 108, and then you earn interest on 108 not 100 and so on. 2. Compounding: The more frequent the compounding the higher the future value. a. Annual: 1 b. Semi-annual: 2 c. Monthly: 12 d. Quarterly: 4. e. Daily 3. Formula: #2 4. Example: #2 C. Present Value: What is sum of money in future worth to us today. 1. Formula: #3 2. Interest rate used for PV formula is called a discount rate. 3. Table for present value factors: Pg. 165 4. Example: #3 www.swapnotes.com 3 D. Present Value and Compounding: 1. The more frequently you compound the lower your PV....
View Full Document

Page1 / 63

CORPORATE FINANCE OUTLINE - 1 CORPORATE FINANCE VALUATION...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online