1.5 Week 2 Lect 2 TVM - Part 3 Other types of TVM

# 1.5 Week 2 Lect 2 TVM - Part 3 Other types of TVM -...

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TVM – Pt 3 Other Types  of TVM Problems Week 2 Lecture 2

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Time Value of Money The most important concept in finance A Dollar now (PV) is worth more than a  Dollar a year from now (FV) TVM used in nearly every financial  decision Business decisions Personal finance decisions
Time Value of Money – already  mastered Present Value  Future Value Perpetuities Annuities

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Other Types of TVM Problems-today Growing Perpetuities and  Annuities –  not in book Time necessary to accumulate  funds  Compounding Periods
Growing Perpetuity A growing stream of cash flows that lasts forever. 0 1 Pmt 2 Pmt ×(1+ g ) 3 The formula for the present value of a growing perpetuity is: 2 2 3 (1 ) (1 ) (1 ) (1 ) (1 ) Pmt Pmt g Pmt g PV I I I × + × + = + + + + + + L Pmt PV I g = -

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Growing Perpetuity: Example The expected dividend next year is \$1.30 and dividends are expected to  grow at 5% forever.  If the discount rate is 10%, what is the value of this promised dividend  stream?
Growing Annuity A growing stream of cash flows with a fixed maturity. The formula for the present value of a growing annuity: 1 2 (1 ) (1 ) (1 ) (1 ) (1 ) N N P P g P g PV I I I - × + × + = + + + + + + L 1 1 1 N P g PV I g I + = - - + 0 1 P L 2 P ×(1+ g ) 3 T

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Growing Annuity The formula for the present value of a growing annuity:
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1.5 Week 2 Lect 2 TVM - Part 3 Other types of TVM -...

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