Summary
Summary IB1320 Foundations of Finance - Formula Sheet Lec. 2 -16 (First Grade)
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IB1320 Foundations of Finance - Formula Sheet Lec. 2 -16 Grade: 77 - 1st.
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tec .
2
Chapter 2 PresentVale Lee . 3
Chapter 3 Perpetuities and Annuities
years
CF
in
E Investmenta mount
0 Cl
Rate of Return ro , To-1
Simple Perpetuity PV
=
Popu/CF
= =
Co (
in year - forever
=
W
rate
Future Value of Money Ct =
COL1+ Vit
( o
&
IF grows at
growth
PV =C
CF1CItyjt-t #
Growing Perpetuity
+=
+=
14 CHtr) r-g
applicate
Ct
It
E
t-year return rate =
Co
=
To -1 > cash
CF-- only when
OR + flow of the r>
-
(1+ Vt) (1 + r) g
Next year (yr1)
=
↳
one-year return The Gordan Growth Model (GGM) cFz
↓
: =
-
rate H Dividends next year
only applicable Stock Price Po
1
Today
=
for growing
.
r-9t
re = -1 growth rate of
the dividend
perpetuity
* Price / Value of 5th in Finance
E Cert
.
Lefets Profit next year
Present Value of
to the present value
PV Firm Valuation
Money
- -
.
2 Firm Value
-
P> growth rate of
= =
r
g
-
of what
thing
& evaluated
profit
by the
thing's future cFs
-
next year D
r Ac
.
-
FU %
of capital
>
Eltr)"
-
PV . Cost
3 +
g
=
↳
converted from share price Dividend He so
1 current
Discount Factor TITV) year P
Simple Annuities PV = = [ πnt] .
Net Present Valu NPV Co = + E 11 Ht
=
Ca
+
= Eg [1- ]
T Ct
E Growing PV
-
t
=
(1+V) Annuities .
t
Sal
- # of periods between
opportunity cost of Capital (Occ) r Special : Rate conversion : 1 + (-
Er(1 70
↳
=( + Us
t
rate for shorter periods
capital cost (
rate for longer
calso referred to as
periods -> 4 quarters
↳ without uncertainty rannual =
(1 + quarter) =
7
year .
, Lee .
5 Bond and bond Pricing
periodic interest paymentNotebook
Paper to
Bond - Coupon Payment = Paperless
-
Face Value payment = one-time
- payment at maturity
Lec
. 4 Capital Budgeting Rules Cl
Price of 0 couponbond NPU =
0 = Co -
+
L +IRR
FU
Rule 1 (Best rule) :
accept projects with the .
NPV NPU = 0 = -
P +
TFYTM IRR in CF terms =
Y TM in bond terms
Rult 2 Internal Rate of Return (IRR)
P =
TTM)- - > bond's ten .
: coupon payment
rate at which NPV =0 E
+ CONTMSE
I the NPV
Price of coupon bond
=
0 = -
Po +
Ct T
NPV = 0 =
Co + IRR) +RR) + ... HERRIT
-
simple annuity for all coupon payments
Accept projects with IRR the hurdle rate . Given Po =
(NM) ·
(1 -
IMT) +T
FU
(1+YTM)
Coupon Payment (CPN) FV
Internal of of the incremental cash Coupon To 5c
rate return flows rate x
=
↳ use when NPU & IRR give different suggestions
.
CI , CB1 t Cast * Use Capital Budgeting Rules to choose bonds (e
g. highest YTM/IRR)
-
=
+ .
NPVI = =
R +
RR +RM)3 +...
steps : /CA 01 ,
< /CB , 01 Bond Price Movement :
L - P* keep YTM Cst .
Hold the bond
maturity Th (in order to
>
Yes On No
-
: IRRA > : A 1 .
to :
/ -
Yes IRRI :
> Un NO : IRRB< Un 2 . Sell early V no
:
longer care about the YTM , as it involves all CPN + FU
-
Yes project B To
: : A Yes Projet B
: No : Neither U case about the bond's market P .
at selling
Equilibrium P condition
.
:
YIM =
OCC
Up risk-free rate set by CB
Rule 3 : The
Profitability Index (PI) for the next buyer Lunder risk neutrality (
PI =
① bond P & risk-free rate : inverse relationship : Po x t
ol
.
Invest if Pl > 1 ; Otherwise reject & long-term bonds =
more sensitive to A .
↳ therefore :
higher YTM to .
offset the risk
FU
Rule 4 Payback
: Time (PT) Yield to Maturity O = -P **M
)
↑ >
-
discount factor
vinitial
the time
period until cash inflows exceed cash outflows high YTM >
-
either high Fr (of price is
high
II
Invest if PT < cutofftime discount EV more or low price (if IV is low)
I a chose time period for CFic Oo
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