Transactions: company takes In money In the form of equity and In the form of debt (Issue debt to the market place). Each of those has different value and characteristics. How is equity get back from corporations: dividends, stock buyback] How they return money to the developers: pay interest and pay principal 2. Secondary Markets Secondary Markets:every financial instruments that have been created by this primary transactions are traded back and for between entitles.
And In those transactions the corporation Itself Is not a direct party. So, why do we care? As investors we might care, but as corporate financial executives care because this market provides real time information, which influences their decision making virtually all the time. 0 What is the decision making that goes on? What are the things that corporate finance take into account? 0 * Analyzing project investments for the corporation that quantify the value of projected * Goal: increasing shareholders money or Increasing the value of the corporation * Monitoring the flow and managing the flow of money in (how the money structure is inside) and monitoring how the money comes out.
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Managing the flow of money and considering the information of secondary markets Chapter 5 – Introduction to Valuation: The Time Value of Money 1. Time Value of Money The value of money indicates that money has different values depending when it is occurring on time. Money today: opportunity to invest and expect in predictable way that money will change (obtain more money I. E Interests) What is the value of $100 today if we can invest at 7% per year for 10 years? Iv’: 100 N: 10 ? = $196. 720 How much do you need to invest today at 5. 5% to achieve 1 MM in 15 years? Iv’: MIM t: 5. 5 n: 15 IV. 447,9330 3. What do we mean by the future value of an investment?
Future value refers to the amount of money an investment will grow to over some period of time at some given interest rate. The amount an investment is worth after one or more periods. 4. What does it mean to compound interest? How does compound interest differ from simple interest? Compound interest: is the earning interest on interest. The compound interest is the interest earned on both the initial principal and the interest reinvested from prior rides. Simple interest: is the interest earned only on the original principal amount invested. Interest not reinvested, so interest is earned each period only on the original principal. 5. What do we mean by the present value of an investment?
Present value is the current value of future cash flows discounted at the appropriate discount rate (the rate used to calculate the present value of future cash flows [1/(1 + r)t] R: rate (or I) T: period of time 6. The process of discounting a future amount back to the present is the opposite of doing what? Is the opposite of calculating the future value. . Rule of 72 # of years it takes to double an investment. Expressed by the equation: 72/interest rate = number of years it takes to double the investment. 8. What do we mean by discounted cash flow, or DC, valuation? Discounted cash value today. 9. As you increase the length of time involved, what happens to future value? What happens to present value? As the length of time until payment grows, present values decline.
Present value: decreases because you are discounting, your money will worth less Future value: increases because you are compounding, your money will worth more (interest) 10. As you increase the rate, what happens to future value? What happens to present value? Present value: for a given length of time, the higher the discount rate is, the lower is the present value. Present value and discount rate are inversely related. Future value: the higher the discount rate, the higher is the future value. Chapter 6 – Discounted Cash Flows Valuation 1 . Present value with multiple cash flows: a first round draft choice quarterback has been signed to a 3 year $25 million contract. The details provide for an immediate cash bonus of $2 million.