Revision - Fundamentals of Corporate Finance 2/e Robert...

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Fundamentals of Corporate Finance, 2/e Robert Parrino, Ph.D. David S. Kidwell, Ph.D. Thomas w. bates, ph.d.
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TVM: PV & FV of single cash flows o Future Value versus Present Value Cash-flows are evaluated based on future value  or present value Future value measures what cash-flows are  worth after a certain amount of time has passed Present value measures what future cash-flows  are worth before a certain amount of time has  passed
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TVM: PV & FV of single cash flows o Future Value Equation The general equation to find a future value where: FVn = future value of investment at end of period n PV = original principle (P0) or present value i = the rate of interest per period (5.1) i) (1 x PV FV n n + =
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TVM: PV & FV of single cash flows o Present Value Equation General equation to find present value o Time and the discount rate affect present value The greater the amount of time before a cash flow is to occur, the smaller the present value of the cash-flow. The higher the discount rate, the smaller the present value of a future cash-flow. (5.4) i) (1 FV PV n n + =
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TVM: PV & FV of single cash flows
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TVM: PV & FV of multiple cash flows o Level cash flows Annuity A series of equally-spaced and level cash flows extending over a finite number of periods Perpetuity A series of equally-spaced and level cash flows that continue forever
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TVM: PV & FV of multiple cash flows o Level cash flows Annuity Perpetuity ) 1 . 6 ( ) 1 ( 1 1 0 + - × = i i CF PVA n (6.2) i 1 i) (1 CF FVA n n - + × = ) . ( i CF PVP 3 6 0 =
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TVM: PV & FV of multiple cash flows o Constant growth cash flows Growing Annuity equally-spaced cash flows that increase in size at a constant rate for a finite number of periods Growing Perpetuity equally-spaced cash flows that increase in size at a constant rate forever 20
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