Finance 1A Cheat Sheet.docx - TVM TVM continued Calculating the repayment amount in a fully amortising loan Comparing best deal example Value of a

# Finance 1A Cheat Sheet.docx - TVM TVM continued Calculating...

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Mixed (supernormal) growth dividend model continued Dividend Discount Model Bond yields continued Bond Value (Annual Coupons) Bonds Capital market efficiency Comparing best deal example TVM continued Calculating the repayment amount in a fully amortising loan TVM Assumptions: - The dividend steam is regarded as infinite at any point in time the value of the share is the present value of dividends expected after that point in time. And that dividends have constant growth, g Drawbacks : If the company's dividend growth rate exceeds the expected return rate, you cannot calculate a value because you get a negative denominator in the formula. Stocks can’t be negative. Constant DDM not possible if g > R or g = R Effective annual yield (EAY) differs to the quoted YTM for bonds where m 1 1. Elements for valuation : Face value : e.g \$1000 Maturity in: 5 years Coupon payments : annual coupon x face value e.g 6.375% x 1000 = \$63.75 Yield wanted (return): e.g. 8% 3. Timeline If markets are efficient, investors and financial managers will be priced at their true values Overall efficiency = depends on the operational and informational efficiency Operational efficiency focuses on bringing buyers and sellers together at lowest possible cost Efficient market hypothesis: Weak Form (Inside) : all information about a security contained in its past price s is held in its current price but there is current public and private information that is not. Wants to deposit for 5 years in Q Annually = mxn = 5 Quarterly = 5x4 Monthly = 5 x 12 Daily = 5 x 365 Value of a growing perpetuity g = cash flow increase i = discount rate Realised yield - The return earned on a bond given the cash flows received by the investor. - The interest rate at which the present value of actual cash flows generated by the investment equals bonds price (at purchase). FV of an ordinary annuity (payments made at the end of period) PV equation 3. Value the bond PV when discounting e.g. how much is needed to be set aside today Q E.g ABC company just paid a dividend of \$3.20 and expects that to grow indefinitely at 8% p.a. If the required rate of return is 18%, what is the value of ABC shares? Mixed (supernormal) growth dividend model Share valuation: DDM with constant growth - Used during the early part of very successful business that experience a supernormal rate of growth in earnings. E.g ABC company will pay a dividend next year of \$3.20 and expects that to grow indefinitely at 8% p.a. If the required rate of return is 18%, what is the value of ABC shares? If the Q gives D 0 rather than D 1 PV of an ordinary annuity (payments made at the end of period) = (1+6%) 2years Shares Semi-strong Form (Middle) : all public information about a security is held in its price Strong form (Outside): all information about a security is held in its price.

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