Interest payment on c0 r1c0r capital at t1 c1c0r1

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Unformatted text preview: terest payment on C0: R1=C0r Capital at t=1 C1=C0+R1 C1=C0+C0r C1=(1+r)C0 Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 8 How much is C0 worth at t=2? Interest payment on C1 (at t=2) R2=C1r=(1+r)C0r Capital at t=2 (money you own at t=1 plus interest) C2= C1 + R2 C2= (1+r)C0+(1+r)C0r C2= (1+r)C0(1+r) C2= (1+r)²C0 Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 9 At t=T, the amount C0 plus interests is worth CT= (1+r)TC0 Remark If the (one-period) interest rate is floating, then CT= (1+r1)(1+r2) (1+rT)C0 where rt is the one period interest rate from t-1 to t. Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 10 Discounting Receive C at t=1. At t=0 this amount is worth C0 C (1 r ) . An amount C at t=T is worth C0 C (1 r ) T at t=0 Terminology C0 is called the present value of the amount C generated at t=T: Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 11 Comparison and Valuation of Cash Flow Streams An asset typically generates cash flows (payments) in several periods. Definition (CF stream) A cash flow stream is a sequence of payments: (C1, C2,…., CT). Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 12 Example 1 CA=(CA1, CA2, CA3)=(1,3,6) CB=(CB1, CB2, CB3)=(4,2,3) In other words, Asset A generates $1 at t=1, $3 at t=2, and $6 at t=3. Corporate Finance, Tri Vi Dang, C...
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