Summary
Summary IB1320 Foundations of Finance - Formula Sheet Lec. 2 -16 (First Grade)
- Institution
- The University Of Warwick (UoW)
IB1320 Foundations of Finance - Formula Sheet Lec. 2 -16 Grade: 77 - 1st.
[Show more]
Seller
Follow
Content preview
Notebook Paper toPaperless
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
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller xiazhang. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £7.49. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
81503 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy revision notes and other study material for 14 years now