Corporate Finance - Mukerjee

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Amitab Mukerjee A. V ALUATION I. D ISCOUNTING F UTURE b P RESENT (What’s \$10 in 2050 worth now?) - Reasoning : Discounting future returns to present value is the method to determine the value of X amount paid at some point in the future, in today’s value . That is, X’s value now is what would be needed to put into an investment account with a standard interest rate to achieve the value X at that future point. So, remember, this mnemonic: “the future is less than today”. o Method#1 - Calculation : p= A/(1+R) t , where P is present value, A is amount, R is the amount of interest per \$1, and t is the number of years deferred. s Example : If \$50 bucks is to be given to you in 5 years, and we assume a 6 percent interest rate, then what is it worth now? Answer: P=50/(1 + 0.06) 5 = \$37.36 now is the same as \$50 in 5 years o Method#2 – Table : Simply look at the Present Value Table, find the multiplier and calculate. s Example : If \$50 bucks is to be given to you in 5 years, and we assume a 6 percent interest rate, then what is it worth now? Answer: Table gives 0.747 as the (X), so 50 x 0.747= \$37.36 II. D ETERMINING P RESENT b F UTURE (What \$10 now worth in 2050?) - Reasoning : The reasons why are obvious and need no explanation o Method#1 – Calculation : p(1+R) t , where p is present value, R is amount of interest for 1\$, and t is number of years deferred. s Example : If \$50 bucks is to be given to you now, and we assume a 6 percent interest rate, then what is it worth in 5 years? Answer : A= p(1+0.06) 5 = 50(1.338225)= \$66.90 in 5 years from the 50 now. o Method#2 – Table : Simply look at the Present Value Table, find the multiplier and calculate. s Example: If \$50 bucks is to be given to you now, and we assume a 6 percent interest rate, then what is it worth in 5 years? Answer: Table gives 1.34 as the (X), so 50 x 1.34= \$66.90 III. P RESENT C APITAL V ALUE FOR S ERIES OF F UTURE A MOUNT (What is annuity/stock that pays \$10 a year for 20 years worth now?) - Reasoning : We often engage in buying stocks and bonds whose purposes is to kick us back some money at regular intervals with interest. If we are to shell out money now for such regular, future payments, we need to know how much those payments altogether and including interest, are worth. o Method/More Explanation : Essentially, what this calculation does is determine each of the future values of the present amount at each interval and add them together. In short, with \$1.83 today you can buy the right to receive a dollar in one year, and another dollar in two years. How? You could either calculate the present value of \$1 one year from now, (0.943 cents) and then find out the present value of a dollar two years from now (0.890 cents), then add them to get \$1.83 cents. Or you could simply use an annuity table, which does the same. s

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## This note was uploaded on 02/14/2008 for the course LAW 7060 taught by Professor Haas during the Spring '07 term at Yeshiva.

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Corporate Finance - Mukerjee - www.swapnotes.com Schroeder...

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