# LN_6 - Last Class Discounted Cash Flow Valuation Be able to...

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1 Last Class 0T Prof. Q. Ma HADM 2222: DCF Valuation 1 FV = PV (1+r) T Time Line PV FV Discounted Cash Flow Valuation ± Be able to compute ² The FV (PV) of multiple cash flows ² FV, PV, r, C, and T of level cash flows ² APR, EAR Prof. Q. Ma HADM 2222: DCF Valuation 2 ² Loan payments ± Understand ² How loans are amortized or paid off ² How interest rates are quoted ± Use time line and financial calculator Multiple Cash Flows – FV T1 T Time Line CF 1 FV=? CF 2 CF 3 T2 T3 Prof. Q. Ma HADM 2222: DCF Valuation 3 FV 1 = CF 1 (1+r) T-T1 FV 3 FV 2 FV 1 FV 2 = CF 2 (1+r) T-T2 FV 3 = CF 3 (1+r) T-T3 FV= FV 1 + FV 2 + FV 3 Example – FV You will be able to deposit \$4,000 at the end of each of the next three years in a bank account paying 8 percent interest. You currently have \$7,000 in the account. How much will you have in four years? Prof. Q. Ma HADM 2222: DCF Valuation 4 ± How much will you have in four years? Example – FV 04 Time Line \$7,000 FV=? 12 3 \$4,000 \$4,000 \$4,000 Prof. Q. Ma HADM 2222: DCF Valuation 5 FV 3 =4,000 (1.08) 2 FV 2 =4,000 (1.08) 3 FV 1 =7,000 (1.08) 4 FV= FV 1 + FV 2 + FV 3 + FV 4 = \$ 23,547.87 FV 4 =4,000 (1.08) 1 General Approach ± Analysis ² Time line with relevant time points ² Cash flow stream ± Execution Fl & i l l t Prof. Q. Ma HADM 2222: DCF Valuation 6 ² Formula & generic calculator ± Summation of all cash flows’ FV ² Financial calculator ² Spreadsheet

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2 Multiple Cash Flows – PV T T 3 PV=? CF 3 CF 1 CF 2 Time Line T 1 T 2 Prof. Q. Ma HADM 2222: DCF Valuation 7 PV= PV 1 + PV 2 + PV 3 PV 1 =CF 1 /(1+r) T1-T PV 2 =CF 2 /(1+r) T2-T PV 3 =CF 3 /(1+r) T3-T General Approach ± Analysis ² Time line with relevant time points ² Cash flow stream ± Execution Prof. Q. Ma HADM 2222: DCF Valuation 8 ² Formula & generic calculator ± Summation of all cash flows’ PV ² Financial calculator ² Spreadsheet Applications of DCF ± FV of multiple cash flows (EQ 1,2) ± PV of multiple cash flows (EQ 3,4) ± Simple investment decisions (EQ 5) Prof. Q. Ma HADM 2222: DCF Valuation 9 ² Concept of net present value (NPV) ± Saving for retirement (EQ 6) ± PV and FV “hybrid” (EQ 7) A Note on Cash Flow Timing ± Cash flow of period t means cash flow at the end of period t ² Example: you earn \$1,000 every month on your part-time job. Cash flows are paid at the Prof. Q. Ma HADM 2222: DCF Valuation 10 end of each month. ² How about your monthly rent? ± The end of period t = beginning of period t+1? Level Cash Flows – Perpetuity ± Perpetuity – infinite series of equal payments ± Cash flow pattern Prof. Q. Ma HADM 2222: DCF Valuation 11 ± PV = C / r ± Example (Preferred stocks) Perpetuity – Example ± Suppose your company wants to sell preferred stock at \$100 per share. A very similar issue of preferred stock already outstanding has a price of \$40 per share and offers a dividend of \$1 every quarter. What dividend will your company have to offer if the preferred stock is Prof. Q. Ma HADM 2222: DCF Valuation 12 company have to offer if the preferred stock is going to sell?
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## This note was uploaded on 10/09/2009 for the course H ADM 222 at Cornell University (Engineering School).

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LN_6 - Last Class Discounted Cash Flow Valuation Be able to...

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