Chapter 6, discounted cash flows and valuation. When you fi nish this chapter, you should have some very practical skills. For example, you will know how to calculate your own car payments or student loan payments. You will also be able to determine how long it will take to pay off a credit card if you make the minimum payment each month (a practice we do not recommend). | Fundamentals of Corporate Finance, 3/e Robert Parrino, . David S. Kidwell, . Thomas W. Bates, . 1 Copyright© 2015 John Wiley & Sons, Inc. Chapter 6: Discounted Cash Flows and Valuation NEED UPDATED PHOTO Copyright© 2015 John Wiley & Sons, Inc. 2 Learning Objectives Explain why cash flows occurring at different times must be adjusted to reflect their value as of a common date before they can be compared, and compute the present value and future value for multiple cash flows Explain the difference between an ordinary annuity and an annuity due, and calculate the present value and the future value of an annuity and annuity due Copyright© 2015 John Wiley & Sons, Inc. 3 Learning Objectives Explain what a perpetuity is and where we see them in business, and calculate the value of a perpetuity Discuss growing annuities and perpetuities, as well as their application in business, and calculate their values Discuss why the effective annual interest rate (EAR) is the appropriate way to annualize interest rates, and calculate the EAR Copyright© 2015 John Wiley & Sons, Inc. 4 Multiple Cash Flows Future value of multiple cash flows Draw a timeline to determine the number of periods for which each cash flow will earn the rate-of-return Calculate the future value of each cash flow using Equation Add the future values Level Cash Flows Annuity A series of equally-spaced and level cash flows extending over a finite number of periods Perpetuity A series of equally-spaced and level cash flows that continue forever Ordinary Annuity Cash flows occur at the end of a period Examples include mortgage payments and interest payments to bondholders Annuity Due Cash flows occur at the beginning of a period Examples include leases and car insurance Present Value of an Annuity The Present Value of an annuity is The amount needed to produce the annuity The current fair value or market price of the annuity The amount of a loan that can be repaid with the annuity Equation . | Fundamentals of Corporate Finance, 3/e Robert Parrino, . David S. Kidwell, . Thomas W. Bates, . 1 Copyright© 2015 John Wiley & Sons, Inc. Chapter 6: Discounted Cash Flows and Valuation NEED UPDATED PHOTO Copyright© 2015 John Wiley & Sons, Inc. 2 Learning Objectives Explain why cash flows occurring at different times must be adjusted to reflect their value as of a common date before they can be compared, and compute the present value and future value for multiple cash flows Explain the difference between an ordinary annuity and an annuity due, and calculate the present value and the future value of an annuity and annuity due Copyright© 2015 John Wiley & Sons, Inc. 3 Learning Objectives Explain what a perpetuity is and where we see them in business, and calculate the value of a perpetuity Discuss growing annuities and perpetuities, as well as their application in business, and calculate their values Discuss why the effective annual interest rate (EAR) is the appropriate way
