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Class 4 - o Use Excel GoalSeek tool • Valuing preferred...

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Ch. 5/ 6: Time Value of Money Making interest rates comparable: o Annual Percentage Rate ignores compounding o Effective Annual Rate accounts for compounding Loan more attractive to borrower w/ lower EAR Continuous compounding: Time intervals infinitely small Ordinary annuities: o Fixed payments deposited or received o If periods are expressed in terms of “monthly”, interest rate must be “monthly” Perpetuity: o Annuity that continues forever o Level perpetuity vs. growing perpetuity: NPV: o Net addition to wealth Internal Rate of Return: o Yield o Rate, r, that makes NPV = 0
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Unformatted text preview: o Use Excel GoalSeek tool • Valuing preferred shares; o Claim on perpetual stream of dividends o This cash flow represents perpetuity o Level perpetuity • Valuing common stock: o Price of stock is present value of its cash flows o Growing perpetuity o Non-constant growth: 2 stage method o P/E ratio: What are people willing to pay for $1 of earning? o Price target: P/E multiple x annual EPS forecast • Bond price: o PV (interest payments & face value) • IRR: o A bond’s yield to maturity...
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