Fundamentals of Corporate Finance

Chapter 4

Introduction to Valuation: The Time Value of Money

Overview of Lecture

Corporate Finance in the News

Insert a current news story here to frame the material you will cover in the lecture.

Intuition

Assume that today is January 1, 2011. You have £10,000

Assume you will receive £10,000 when you graduate in 2015.What is worth more? £10,000 in

2011 or £10,000 in 2015?

Future Value and Compounding

Investing for a Single Period

Investing for a Single Period

In general:

1 0 (1 )V V r Where Vt is the value at time t;r is the interest rate

Some Terminology

Some Terminology

Example 4.1Interest on Interest

Investing for More than One Period

Investing for More than One Period

Investing for More than One Period

Investing for More than One Period

Table 4.1Future Value of £100 at 10%

Figure 4.1Future Value, Simple Interest and Compound Interest

Figure 4.2Future Value of £1 for Different Periods and Rates

Table 4.2Future Value Interest Factors

Example 4.2Compound Interest

Example 4.2Compound Interest

Example 4.3How Much for that Island?

Example 4.3How Much for that Island?

Example 4.4Dividend Growth

Example 4.4Dividend Growth

Present Value and Discounting

Assume that today is January 1, 2011. You have £10,000

Assume you will receive £10,000 when you graduate in 2015.What is worth more? £10,000 in

2011 or £10,000 in 2015?

Present Value: The Single Period Case

Present Value: The Single Period Case

Some More Terminology

Example 4.5Single Period PV

Present Values for Multiple Periods

Present Values for Multiple Periods

Present Values for Multiple Periods

Present Values for Multiple Periods

Example 4.6Saving Up

Example 4.6Saving Up

Present Value: A Generalisation

0 (1 )t

t

VPV V

r

Where Vt is the value at time t;r is the interest rate

Table 4.3Present Value Interest Factors

Example 4.7Deceptive Advertising?

Example 4.7Deceptive Advertising?

Figure 4.3Present Value of £1 for Different Periods and Rates

Tying it all Together

PV ) FV

PV = FV / )

FV ) ]

FV (1 )

tt

tt

tt

tt

r

r

r

r

Example 4.8Evaluating Investments

Example 4.8Evaluating Investments

3£335 (1 ) = £335 1.1

= £335 1.331

= £445.89

tr

Example 4.9Finding r for a Single Period Investment

Example 4.9Finding r for a Single Period Investment

1€1,250 = €1,350 / (1 )

1 = €1,350 /1,250 1.08

= 8%

r

r

r

Example 4.10Comic Collectibles as an Investment

Example 4.11Saving for University

Example 4.12Only 18,262.5 Days till Retirement

Example 4.14Waiting for Godot

Spreadsheet Strategies

Now is a good time to go over the past examples with a spreadsheet. You should show the students how to set up a capital budgeting spreadsheet as a foundation for later, more complex examples.

Activities for this Lecture

Thank You