FINC19011 – BUSINESS FINANCE-Wk02-2

FINC19011 – BUSINESS FINANCE-Wk02-2 - MODULE2(&Abridged...

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MODULE 2 (Wiley Resource - Chapter 6 – Customized  & Abridged) Dr. Tasadduq Imam
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Chapter 6 Discounted cash flows and valuation Prepared by Alex Proimos & Chee Jin Yap
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Basics
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Multiple cash flows Future value of multiple cash flows Solving future value problems with multiple cash flows: 1. Draw timeline to ascertain each cash flow is placed in correct time period 2. Calculate future value of each cash flow for its time period 3. Add up the future values
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Future value of three cash flows
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Multiple cash flows Present value of multiple cash flows Many business situations call for computing present value of a series of expected future cash flows determining market value of security deciding whether to make capital investment Process similar to determining future value of multiple cash flows
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Multiple cash flows Present value of multiple cash flows First, prepare timeline to identify magnitude and timing of cash flows Next, calculate present value of each cash flow Finally, add up all present values. Sum of present values of stream of future cash flows is their current market price, or value
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Present value of three cash flows
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A Math Kronya Ltd is expecting cash flows of $13 000, $11 500,  $12 750, and $9635 over the next 4 years. What is the  present value of these cash flows if the appropriate  discount rate is 8 per cent?   Solution :  
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Another Math Your grandfather has agreed to deposit a certain amount of  money each year into an account paying 7.25 per cent  annually to help you go to university. Starting next year, and  for the following 4 years, he plans to deposit $2250, $8150,  $7675, $6125, and      $12 345 into the account. How much  will you have at the end of the 5 years?   Solution :  
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Annuity, Perpetuity
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Level cash flows: annuities and perpetuities Present value of an annuity Many situations exist where businesses and individuals would face either receiving or paying constant amount for length of period Annuity – stream of cash flows when company faces stream of constant payments on a bank loan for a period of time Individual investors may make constant payments on home or car loans, or invest fixed amount year after year saving for retirement
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Level cash flows: annuities and perpetuities Annuities and perpetuities Annuity: any financial contract calling for equally spaced level cash flows over finite number of periods Ordinary annuity: constant cash flows occurring at end of each period Annuity due: constant cash flows occurring at beginning of each period Perpetuity: contract calling for cash flow payments to continue forever
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Annuity Present Value of Ordinary Annuity CF is the series of equal cash flows per year i is the rate of interest per annum m is the number of compounding per year n is the number of years x 1 1 (1 ) ( / ) m n n i / m PVA CF m i / m - + = ×
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