321Class03-Review-Governance%20%26%20Time%20Value0

321Class03-Review-Governance%20%26%20Time%20Value0 - +-t n...

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Corporate Governance Direction and Control Decision-making
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Governing Principles Shareholder equity Equal treatment Legality Management can be held responsible Effects on firm’s value
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Stakeholders Shareholders Board of Directors Management Employees Regulators
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External Controls Government regulations Lawsuits Shareholder pressure/proposals Financial pressures Takeovers market competition Labor Debt covenants
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Internal Controls Governing charter Financial situation Personnel Strengths & Weaknesses
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The Time Value of Money Present Value Future Value A Dollar today is worth more than a Dollar tomorrow.
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Discount Factor The multiplier to achieve equity between the future and present values FV x = PV Discount Factor = where r is the rate of return PV (1+r) = FV r + 1 1 r + 1 1
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Present Value Equation PV (1+ it ) n = FV PV = n t i FV ) 1 ( +
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Annuity Equation FVA = Pmt x PVA = Pmt x - + t n t i i 1 ) 1 (
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Unformatted text preview: +-t n t i i ) 1 ( 1 1 Rate of Return Compound Interest vs. Simple Interest Nominal Interest Discounted Cash Flows PV= + + + . Net Present Value = -CF0 + CF1 + CF2 ++ CF NPV= C0 + PV(DCF)t = C0 + ) 1 ( 1 1 r CF + ) 1 ( 2 2 2 r CF + ) 1 ( 3 3 3 r CF + + t t t r C ) 1 ( Net Present Value The NPV rule Accept a project if the NPV is greater than zero Reject a project if. Payback Period Simple method Choose a period of time to make back 100% of cash outlay Rule states: Accept project if pays back within that period. Reject project if it does not pay back Payback period problems 1. Timing of payback Does not account for timing of cash flows 2. Payments after payback period Year Project A Project B Project C 1-100-100-100 2 20 40 50 3 50 30 40 4 30 30 10...
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This note was uploaded on 10/28/2011 for the course FIN 321 taught by Professor Smith during the Fall '08 term at University of Illinois at Urbana–Champaign.

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321Class03-Review-Governance%20%26%20Time%20Value0 - +-t n...

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