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MGMT 235
Dr. Sharp
Review Fundamentals of Valuation
These class notes review this material and also provide some help for a financial
calculator. It also has some selftest questions and problems.
Class notes are necessarily
brief.
See any principles of finance book for a more extensive explanation.
Eugene F. Brigham, Joel F. Houston
Fundamentals of financial management
HG 4026 B6693 1998
Ross, Stephen A, Westerfield, and Jordan
Fundamentals of corporate finance
HG 4026 .R677 1995
PART I
:
Single Sum.
Time Value of Money: Know this terminology and notation
FV
Future Value
(1+i)
t
Future Value Interest Factor [FVIF]
PV
Present Value
1/(1+i)
t
Present Value Interest Factor
[PVIF]
i
Rate per period
t
# of time periods
Question: Why are (1+i) and (1+i)
t
called interest factors?
Answer: 1. Start with simple arithmetic problem on interest:
How much will $10,000 placed in a bank account paying 5% per year be worth
compounded annually?
Answer:
Principal
+ Interest
$10,000 + $10,000 x .05 = $10,500
2. Factor
out the $10,000.
10,000 x (1.05) = $10,500
3. This leaves (1.05) as the factor
.
1.
Find the value of $10,000 earning 5% interest per year after
two
years.
Start with the amount after one year and multiply by the factor for each year.
[
Amount after one year
]
x
(1.05)
=
[
$10,000
x
(1.05)
]
x
(1.05)
=
$10,000 x (1.05)
2
=
$11,025.
.
© 2004
So (1+i)
t
= (1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)… ·(1+i) for “t” times
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View Full Document Class Notes
A.
Future Value
Find the value of $10,000 in 10 years. The investment earns 5% per year.
FV = $10,000
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
FV = $10,000
·
(1.05)
·
(1.05)
·
(1.05)
·
(1.05)
·
(1.05)
·
(1.05)
·
(1.05)
·
(1.05)
·
(1.05)
·
(1.05)
FV = $10,000 x (1.05)
10
=
$10,000 x 1.62889
= $16,289
Find the value of $10,000 in 10 years.
The investment earns 8% for four years and
then earns 4% for the remaining six years.
FV = $10,000
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
FV = $10,000
·
(1.08)
·
(1.08)
·
(1.08)
·
(1.08)
·
(1.04)
·
(1.04)
·
(1.04)
·
(1.04)
·
(1.04)
·
(1.04)
FV = $10,000 x (1.08)
4
x (1.04)
6
FV = $17,214.53
B.
Present Value
:
Same idea, but begin at the end. Rearrange the Future value equation to look
like this:
PV = FV÷ [(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)
·
(1+i)]
PV = FV ÷ (1+i)
t
[2]
Example: How much do I need to invest at 8% per year, in order to have $10,000 in__.
a.
One year:
PV =10,000 ÷ (1.08) =
$9,259.26
b.
Two years:
PV = $10,000 ÷ (1.08) ÷ (1.08)
OR
$10,000 ÷ (1.08)
2
= $8,573
c.
Ten years
PV = $10,000 ÷ (1.08)
10
=
$10,000 ÷ 2.1589 =
$4,632
C.
Rate of Return
START WITH SAME RELATIONHSIP:
FV = PV x (1+i)
t
Solve for i.
(1+i)
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This note was uploaded on 01/13/2011 for the course BUS A202 taught by Professor Tindall during the Spring '10 term at IUPUI.
 Spring '10
 TINDALL
 Time Value Of Money, Valuation

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