Slide 5 PV

Slide 5 PV - Lecture 5 Present Value and The Time Value of...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Lecture 5 Present Value and The Time Value of Money By Diep Duong
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chapter Outline Future Value and Compounding Present Value and Discounting Learn by examples
Background image of page 2
Example: The case of Imclone Systems Takeover offer from Bristol-Myers Squibb, and subsequent bidding showdown On September 23, 2008, Bristol-Myers Squibb upped its offer to take over ImClone to $62 a share. In addition, Bristol threatened to take the offer to the share holders for a proxy battle with the intention of replacing the current Board of Directors headed by Carl Icahn On October 6, 2008, ImClone agreed to be acquired by Eli Lilly for $6.5 billion ($70/share). Bristol-Myers Squibb failed to take over Imclone System Question ? Why was Eli Lilly willing to pay 2008’s Present Amount of 70$/ share, much higher than $62 of Bristol-Myers Squibb ? This must be a subjective point of view from Eli Lilly for some future amount that it will get from Imclone Systems Is there a link between the Present Amount and Future Amount in this case ? This is Present Value-Future Value relationship: It’s similar to your personal banking activity.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Present and Future Value Present Value Future Value Single Future Cash Flow in this lecture. Next lecture, multiple Future Cash Flows Future Value > Present Value ? By how much ? Interest and Interest Rate: The link between the two: Discount rate Cost of capital Opportunity cost of capital Required return
Background image of page 4
Future Value – One period Suppose you deposit present value of $1,000 in your saving account for one year at 5% interest rate per year. What is the future value in one year? You collect after 1 year: Interest = 1,000(.05) = 50 Principal or Present Value = 1000 Future Value (FV) = 1,000 +1000 (.05) = 1,050 Note that: Future Value = Principal + Interest Payments
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Future Value – Two and More Periods Suppose you leave the money in for another year . How much will you have two years from now? After first year you receive $1050 Principal of $ $1000 Interest of $50 After second year you receive 1000+1050(.05) Principal of $1000 Interest of 1050*(.05) =1000 (.05)+50(.05) 50(.05) is interest on interest FV = 1000*(1+.05)(1+.05) = PV(1+interest rate)^2 C-6
Background image of page 6
Future Values: General Formula C-7 periods of Number - T rate discount - period one per rate Interest - r invest you Amount flow Cash Future or Value Future ) 1 )...( 1 )( 1 ( ) 1 ( formula flow cash single is This Yes. ? example this generalize Can we - - + + + = + = PV FV where r r r PV r PV FV T
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/29/2012 for the course 322 394 taught by Professor H during the Summer '11 term at Rutgers.

Page1 / 33

Slide 5 PV - Lecture 5 Present Value and The Time Value of...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online