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Section3 - Discounted Cash Flow Valuation Discussion...

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Discounted Cash Flow Valuation Discussion Section 3 (01-29-2010)
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Outline Time value of money Present/Future values Perpetuity/ Growing Perpetuity Annuity/ Growing Annuity
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Time value of money (1) Why would a firm be willing to borrow an amount of money (say $500) in exchange for a promise to repay 20 times that amount ($10,000) in the future (say in 30 years)?
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Time value of money (2) Would you be willing to pay $500 to the firm, in exchange of $10,000 in 30 years? What would be the key considerations o answer yes or no? Would your answer depend on who is making the promise to repay?
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Present/Future Values As you increase the time, what happens to future and present values? PV=FV/(1+r) t
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Present/Future Values Interamerican Inc. has an unfunded pension liability of $800 million that must be paid in 20 years. To assess the value of the firm’s stock, analysts want to discount this liability back to the present. If the relevant discount is 9.5% what is the present value of this liability?
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