298 Final Equations Stock Value P o = D 1 + D 2 + (D 3 +D 4/(r-g) ) (1+r) (1+r) 2 (1+r) 3 P o price today D 1 future dividend D 4 + constant growth dividend r period interest rate g growth rate Rate of Return r = D 1 + [E(P 1 ) - P0 ] P0 r rate of return P o price today D 1 any dividends received E(P 1 ) – P0 change in price Realized Rate of Return(ROR) FV = PV(1+ROR) n FV future value PV present value ROR realized rate n number of periods Net Present Value NPV = initial cost + PV of future cash flows If >0, accept. If <0 reject. If near 0, justify. Internal Rate of Return 0 = C0 + C 1 + C 2 +… (1+IRR) (1+IRR) 2 C = future cash flow IRR = internal rate of return r = cost of capital Rate that creates an NPV = 0. If IRR>r, accept. Easy to understand. Beware non-conventional cash flows. Profitability Index PV of future revenues PV of future costs If >1.00, accept. Good for capital rationing with limited cash.
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