Finance lecture - Feb 2002

Finance lecture - Feb 2002 - University of Provence Earle...

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University of Provence Earle Traynham Professor and Dean College of Business Administration University of North Florida Jacksonville, Florida USA February 2002
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University of Provence I. First Principles of Valuation Future Value of Compounding Present Value and Discounting PV and FV of Multiple Cash Flows Valuing Level Cash Flows: Annuities and Perpetuities
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University of Provence II. Valuing Stocks and Bonds Bonds and Bond Valuation Common Stock Valuation Net Present Value and Other Investment Criteria Opportunity Cost
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University of Provence III. Capital Budgeting Cash – The Majestic Mulch and Compost Company IV. Acquisitions and Divestitures
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Future Value of Compounding Investing in a single period FV = P(1+r) 1 Where P = Principal invested, and r = the interest rate on the investment What is value of $500 invested for 1 year at 10% FV = $500(1+.10) 1 = $500(1.1) 1 = $500(1.10) = $550
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Future Value and Compounding Investing for More Than One Period FV = P(1+r) t Where t = the number of periods in the future What is the FV of $500 invested for 2 years at 10% FV = $500(1+.10) 2 = $500(1.21) = $605
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Present Value and Discounting PV = FV/(1+r) t , Where r is the discount rate for t periods in the future PV for Single Period of Time PV = $70,000/(1+0.12) 1 = $62,500 PV for Multiple Periods of Time PV = $100,000/(1+.075) 8 = $100,000/1.7835) = $56,070
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The Rule of 72 Approximate time (in years) required to double an investment FV/PV = 2.0, take 72/r Example How long will it take a $10,000 investment to reach $20,000 at 8%? 72/8 = 9 years (actual = 9.006 years)
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The Present and Future Value of Multiple Cash Flows Future Value – compound the accumulated value period by period, or calculate FV of each cash flow and sum them Example: assume you deposit $2000 today, $1000 in one year, and $3000 in 2 years; all @ 8%. Calculate FV
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The Future Value of Multiple Cash Flows Calculate FV of each cash flow and sum FV = ($2000)(1.08) 3 + ($1000)(1.08) 2 + ($3000)(1.08) 1 = $2519.42 + $1166.40 + $3240 = $6925.82
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FV - compound the accumulated value period by period Time period 0: $2000 Time period 1: ($2000)(1.08) + $1000 = $3160 Time period 2: ($3160)(1.08) +$3000 = $6412.80 Time period 3: $6925.82
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The Present Value of Multiple Cash Flows Discount each amount to time period 0, and sum them Discount back one period at a time, summing as you go Example: What is present value of $1000 per year (at end of year) for 5 years, at 6%?
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This note was uploaded on 11/16/2011 for the course ECO 2023 taught by Professor Rush during the Spring '08 term at University of Florida.

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Finance lecture - Feb 2002 - University of Provence Earle...

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