Chap 4_Discounted Cash-flow Valuation

Chap 4_Discounted Cash-flow Valuation - Discounted...

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Chapter 4, RWJ M G M T 50 5, F all 20 Click to edit Master subtitle style MGMT Discounted Cash-Flow Valuation
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Chapter 4, RWJ M G M T 50 5, F all 20 Assumptions till Chapter 14 Markets are “Efficient”. Traded price = Current value of asset No irrational pricing. Expect to get a return appropriate for the risk taken. Higher risk, higher expected return. Frictionless markets No transactions Costs No Taxes No information asymmetry No regulation
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Chapter 4, RWJ M G M T 50 5, F all 20 About the assumptions In this course, we mostly focus on what should happen if the frictionless markets assumptions hold (null hypothesis) Violations of these assumptions is what makes finance and other business courses important We will start discussing these when we discuss Capital Structure. We will emphasize value and price in this course. Decisions that do not affect value/price are unimportant.
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Chapter 4, RWJ M G M T 50 5, F all 20 What is Time Value of Money? A dollar today is worth more than a dollar tomorrow. Investors require to be compensated for postponing consumption and lending the money. Higher the expected inflation and higher the uncertainty associated with the lending the higher will be the compensation. This is very intuitive, but we often misjudge the strength of compounding.
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Chapter 4, RWJ M G M T 50 5, F all 20 Suppose you place $100 in a savings account that pays a 5% interest per year (annual compounding). What will be your balance at the end of Year 1? Year 2? …Year 10? Future Value of a Lumpsum
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Chapter 4, RWJ M G M T 50 5, F all 20 Year Beg. Value Interest Ending Value 1 $100 100x 0.05=5 100 + 100 x 0.05 =100 (1+0.05)=105 2 105 105 x 0.05=5.25 105 + 105 x 0.05 =100(1+0.05)2=110.25 3 110.25 110.25 x 0.05 =5.5125 110.25 +110.25 x 0.05 =100(1+0.05)3=115.7625 . . 10 155.133 155.13 x 0.05=7.76 100(1+0.05)10=162.89
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Chapter 4, RWJ M G M T 50 5, F all 20 Future Value of a Lumpsum In general, your balance in the future (called Future Value or FV ), n periods from now, on your investment today (called Present Value or PV ) is given by FVn = PV0 (1+i)n ------ (a) where ‘i’ is the periodic interest rate.
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Chapter 4, RWJ M G M T 50 5, F all 20 Input in Calculator Before you start, Make sure you set p/y to 1 Make sure you do not see BGN on your screen Press 2nd and CLR TVM. HP: clear all. Type 100 and then press PV
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Chap 4_Discounted Cash-flow Valuation - Discounted...

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