Lec 1. Discounted Cash Flow Valuation
MBA/FIN 500 - Corporate Finnace / 2012. 4. 29. 00:15
• Present Value: If the payments are in the future, they are discounted to reflect the time value of money.
• Future Value: The value of an asset at a specific date.
• The One-Period Case
If
you were to invest $10,000 at 5 percent interest for one year, your investment
would grow to $10,500.
=> interest = $500 ($10,000 * .05), principal = $10,000, total due = $10,500
=> FV(Future Value) = $10,500 = $10,000 * 1.05
If
you were to be promised $10,000 due in one year when interest rates are
5-percent, your investment
would be worth $9,523.81 in today’s dollars.
• Multiperiod Case (Compounding)
Suppose
a stock currently pays a dividend of $1.0, which is expected to grow at
14% per year for the next five years. What will the dividend be in five
years?
Note, $5.92 > $1.10 + 5 X ($1.10 * 0.40) = $3.30 This is due to compounding.
• Present Value and Discounting
How much would an investor have to set aside today in order to have $20,000 five years from now if current rate is 15%?
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