Corporate Finance 2

Semester 2

2010-2011Micha G. Keijer

HvA/HES

• Literature:

Fundamentals of Corporate Finance (8th)Ross, Westerfield & Jordan

McGraw-Hill International edition

• Examination:

Written exam (5 ECTS)

Course outline Corporate Finance 2

Week SubjectChapter

s

1&2 Future- & Present Value of Money 5&6

3&4 Bond Valuation 7

5&6 Stock Valuation 8

7&8 Capital Market History 12

9&10 Security Markets Line 13

11&12 Cost of Capital 15

13 Mock exam

Chapter

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 5

•Introduction to Valuation: The Time Value of Money

Chapter 5

•Introduction to Valuation: The Time Value of Money

The Slides & Excel files are on the T-drive:

T:\hes\MGK\CO2

This week

Structure of an investment

1. Time preference2. Risk3. Inflation

This week

• Future- and Present Values

• DCF- method

• Discounting Annuities and EAR

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11

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2: Simple versus compound interest

First United Bank pays 4% simple interest on their savings accounts. Second Federal Bank pays 4% interest compounded annually on their savings accounts.

If you invest $1,000 in each bank, how much will you have in your accounts after twenty years?

Why are the balances different?

3: Simple versus compound interest

First United Bank

Second Federal Bank

Difference

12.191,2$

1.04$1,000

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tt

12.391$800,1$12.191,2$

800,1$800$000,1$

800$2040$

40$04.000,1$

4: Future value

You invest $3,000 in the stock market today.

How much will your account be worth forty years from now if you earn a 9% rate of return?

5: Future value

26.228,94$

40942.31000,3$

09.1000,3$

140

tt rPVFV

7: Present value

You want to have $7,500 three years from now to buy a car. You can earn 6% on your savings.

How much money must you deposit today to have the $7,500 in three years?

8: Present value

14.297,6$191016.1

500,7$

06.1

500,7$

1

3

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10: Interest rate for a single period

Last year your investments were worth $369,289. Today they are worth $401,382. No deposits or withdrawals were made during the year.

What rate of return did you earn on your investments this year?

11: Interest rate for a single period

%6905.8

086905.

1086905.1

1289,369$382,401$

11

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13: Interest rate for multiple periods

The City Museum owns a rare painting currently valued at $1.2 million. The museum paid $240,000 to purchase the painting twelve years ago.

What is the rate of appreciation on this painting?

14: Interest rate for multiple periods

%35298.14

1435298.

11435298.1

15

15

15

1000,240$000,200,1$

1

0833333.

12

1

12

12

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16: Number of time periods

Tom originally started to work for Jackson Enterprises at an annual salary of $36,500. Today, Tom earns $68,200. Tom calculated that his average annual pay raise has been 3.4%.

How long has Tom worked for Jackson Enterprises?

17: Number of time periods

697.180334348.

6251323.034.1ln

8684932.1ln

034.1ln8684932.1ln

034.18684932.1

034.1500,36200,68

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