lecture3-819

lecture3-819 - Valuation of Common Stocks and Bonds How to...

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FIN 819: lecture 3 1 Valuation of Common Stocks and Bonds How to apply the PV concept
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FIN 819: lecture 3 2 Today’s plan Review what we have learned in the last lecture Valuing stocks Some terms about stocks Valuing stocks using dividends Valuing stocks using earnings Valuing stocks using free cash flows
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FIN 819: lecture 3 3 Today’s plan (Continue) Bond valuation and the term-structure of interest rates Terminology about bonds The valuation of bonds The term structure of interest rates Use duration to measure the volatility of the bond price
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FIN 819: lecture 3 4 What have we learned in the last lecture? Payback rule Shortcomings IRR rule Shortcomings Free-cash flow calculation
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FIN 819: lecture 3 5 Some specific questions in the calculation of cash flows Include all incidental effects Do not forget working capital requirements Forget sunk costs Include opportunity costs Be careful about inflation Depreciation Financing
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FIN 819: lecture 3 6 Free cash flows calculation Free cash flows = cash flows from operations + cash flows from the change in working capital + cash flows from capital investment and disposal
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FIN 819: lecture 4 7 Calculating cash flows from operations Method 1 Cash flows from operations =revenue –cost (cash expenses) – tax payment Methods 2 Cash flows from operations = accounting profit + depreciation Method 3 Cash flows from operations =(revenue – cost)*(1-tax rate) + depreciation *tax rate
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FIN 819: lecture 4 8 A summary example 2 Now we can apply what we have learned about how to calculate cash flows to the (in the textbook), whose information is given in the following slide.
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FIN 819: lecture 4 9 Revised projections ($1000s) reflecting inflation
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FIN 819: lecture 4 10 Cash flow analysis ($1000s)
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FIN 819: lecture 4 11 NPV using nominal cash flows ( 29 ( 29 ( 29 ( 29 ( 29 ( 29 $3,519,000 or 519 , 3 20 . 1 444 , 3 20 . 1 110 , 6 20 . 1 136 , 10 20 . 1 685 , 10 20 . 1 205 , 6 20 . 1 381 , 2 20 . 1 630 , 1 600 , 12 7 6 5 4 3 2 = + + + + + + - - = NPV
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FIN 819: lecture 4 12 New formula In chapter 4, it is argued that FCF=earnings –net investment Net investment = total investment - depreciation Do you agree with this formula? Why?
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FIN 819: lecture 4 13 Example A project costs $2,000 and is expected to last 2 years, producing cash income of $1,500 and $500 respectively. The cost of the project can be depreciated at $1,000 per year. If the tax rate is 50%, what are the free cash flows?
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FIN 819: lecture 4 14 One more question Mr. Pool is now 40 years old and plans to invest some fraction of his current annual income of $40,000 in an account with an annual real interest rate of 5%, starting next year until he retires at the age of 70 to accumulate $500,000 in real terms. If the real growth rate of his income is 2%, what fraction of his income must be invested?
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This note was uploaded on 10/05/2011 for the course FIN 819 taught by Professor Staff during the Spring '11 term at S.F. State.

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lecture3-819 - Valuation of Common Stocks and Bonds How to...

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