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