Lecture02

Lecture02 - Corporate Finance Theory ECON 360-0-30 Zhiguo...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Corporate Finance Theory ECON 360-0-30 Zhiguo He E-mail: he-zhiguo@kellogg.northwestern.edu Office hours: Thursday 5:00-6:00 pm Room 404, Kellogg Finance Dept 4 th Floor, Andersen Hall Course website: Blackboard http://courses.northwestern.edu/webapps/login
Background image of page 1

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

View Full DocumentRight Arrow Icon
2 “Just to Remind You” Quiz Last Time: What is a corporation? What decisions are financial managers responsible for? Financial market and intermediaries. Cash flow…………. .
Background image of page 2
3 A Stream of Cash Flows Any investment project: … or financial instrument: How to find the value of a given stream of cash flows ? -60 -40 -20 0 20 40 60 0 1 2 3 4 5 time cash flow -60 -40 -20 0 20 40 60 80 0 1 2 3 4 5 time
Background image of page 3

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

View Full DocumentRight Arrow Icon
4 What is value? By value we mean market value or price You bought a car for $20,000. Now you can sell it for $18,000. What is the value of the car? The value of the car is $18,000! Value additivity : the value of a pool of assets equals the sum of individual values of these assets You bought two new cars at a discount for a total of $35,000. Now you can sell each of them for $18,000. The total value of your cars is $36,000 Likewise, the value of a stream of cash flows equals the sum of individual values of each of these cash flows
Background image of page 4
5 Future Value and Present Value Time Value of Money : a dollar today is worth more than a dollar tomorrow. The annual wage is $100, and you can be paid in full in Jan. But your boss says that paying you $100 in Dec. is better because the company helps you save. Will you be stupid enough to take this offer? Why is a dollar today worth more than a dollar tomorrow? Suppose the interest rate is 2% per year If you put $100 in Jan into a saving account for a year then next Jan. you get $102. Here, $102 in the next year is the future value of $100 today. To get $100 next year, you could put $98.04 into the bank this Jan. $100 delivered in a year from today is worth $98.04 today: so $98.04 is the present value of $100 in the future.
Background image of page 5

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

View Full DocumentRight Arrow Icon
6 Building Blocks for Cash Flow Valuation Future Value (FV) of a single cash flow C 0 received now: Present Value (PV) of a single cash flow C t to be received t periods from now: t r ) 1 ( C PV t + = t r ) 1 ( C FV 0 + =
Background image of page 6
7 Building Blocks for Cash Flow Valuation Present Value of a stream of n cash flows C 1 , C 2 , … , C n assuming constant interest rate r : Present Value of a stream of n cash flows C 1 , C 2 , … , C n assuming variable interest rates r 1 , r 2 , … , r n : = + = n 1 t t ) 1 ( C PV t r = + = n 1 t t ) 1 ( C PV t t r
Background image of page 7

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

View Full DocumentRight Arrow Icon
8 Future Value The future value of a single cash flow is what it will be worth in the future
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

This document was uploaded on 10/08/2008.

Page1 / 31

Lecture02 - Corporate Finance Theory ECON 360-0-30 Zhiguo...

This preview shows document pages 1 - 9. Sign up to view the full document.

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