Lecture2 - The Time Value of Money and Capital Budgeting TO...

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Unformatted text preview: The Time Value of Money and Capital Budgeting TO DO BEFORE TODAY'S CLASS: • Skim over these lecture notes and Chapter 2: Time Value of Money. You do not need to do any of the problems. • Bring to class a calculator. 07/10/11 11:43 References Corporate Finance: An Introduction (Welch, 2009, Prentice Hall) Chapter 2 2 Perfect Markets • To gain a basic understanding of finance, we will live in a world with perfect markets. There are four key assumptions : 1. Everyone has the same opinion. – This does not mean there is no uncertainty about the future. However, everyone has the same opinion about the different things that could happen in the future. 2. No taxes or government involvement. 3. No transaction costs. – For example, if you want to buy a stock, you do not have to pay any fees to a stock broker. 4. No big sellers/buyers. – Basically, there are no monopolies. Also, one person cannot cause the price of a stock to change dramatically by buying or selling it. 2-1 3 Notation • Time Convention: – 0 = Today, Right Now. – 1 = Next period (e.g., day, year, etc.) – t = some time period (in the future). – T = often to denote a final time period. • C or CF = cash amount, often called cash flow • C t = amount of cash received at time t . • D t = a dividend payment received at time t • r 0,1 = rate of return from time 0 to time 1 2-3 4 Rates of Return IMPORTANT: The rate of return from investing C o and getting C 1 at time 1 is This could be called the main formula of finance. With dividends D paid at the end of the period the formula becomes: Using aforementioned abbreviations, • The dividend yield is D 1 / C 0 . • The capital gain is C 1 – C ....
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This document was uploaded on 11/04/2011 for the course FINANCE 0901 at Brown College.

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Lecture2 - The Time Value of Money and Capital Budgeting TO...

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