# Chapter_5-2 - Last Class Chapter 1 Different forms of...

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1 Last Class Chapter 1 Different forms of business organizations in the US Goal of the corporation: maximize shareholders’ wealth

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2 Last Class Can do so by making “good” investment, long-term and short-term financing decisions. Existence of agency costs Financial markets and firms’ cash flows
3 Last Class Chapter 5 PV – value at time 0, FV – Value at time 1 FV = PV(1 + r) t Simple versus compound interest rate > 1

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5 Calculator Keys Texas Instruments BA-II Plus Professional FV = future value PV = present value I/Y = period interest rate Interest is entered as number of percent, not a decimal N = number of periods PMT = regular payments

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Chapter 5 Chapter 5 Calculators Calculators Introduction to Introduction to Valuation: The Time Valuation: The Time Value of Money Value of Money
7 Time Line CF 0 CF 5 0 5 PV FV I = 5% \$1,000 ? Suppose you invest the \$1,000 from the previous example for 5 years. How much would you have?

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8 Solving for FV: The calculator method FV = 1,000(1.05) 5 = 1,276.28 INPUTS OUTPUT N I/Y PMT PV FV 5 5 0 1,276.28 -1,000
9 Benefit of Compounding Compound Interest, FV = 1,276.28 Simple Interest Principle: Annual Interest: Over 5 Years: FV: \$1,000 \$50 0.05*\$1,000 \$250 \$1,250

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10 10 Benefit of Compounding Compound Interest, FV = 1,276.28 Simple Interest, FV = \$1,250 Difference = \$26.28 The effect of compounding is small for a small number of periods, but increases as the number of periods increases.
11 11 Benefit of Compounding Years Compound Simple Difference 1 1,050 1,050 0 5 1,276.28 1,250 26.28 10 1,628.89 1,500 128.89 25 3,386.35 2,250 1,136.35 50 11,467.40 3,500 7,967.40

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12 12 Future Value as a General Growth Formula Suppose your company expects to increase unit sales of widgets by 15% per year for the next 5 years. If you sell 3 million widgets in the current year, how many widgets do you expect to sell in the fifth year? INPUTS OUTPUT N I/Y PMT PV FV 5 15 0 6.03 -3
13 13 Problem Suppose you have \$500 to invest and you believe that you can earn 8% per year over the next 15 years. How much would you have at the end of 15 years using compound interest? How much would you have using simple interest?

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14 14 Solving for FV: The calculator method FV = 500(1.08) 15 = 1,586.08 INPUTS OUTPUT N I/YR PMT PV FV 15 8 0 -500 Simple Interest: 500 + 15*(0.08)*(500) = \$1,100 1,586.08
15 15 Future Value – Important Relationship I For a given interest rate – the longer the time

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## Chapter_5-2 - Last Class Chapter 1 Different forms of...

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