The timing of cash value/cash flows

matter.
2 key terms:
1. Future value value to the right
2. Present value - value to the left
Discounting cash flows or present
value cash flows

Bonds offer 6% while bank just

offer 5% & 7% to investor and
borrower
Bonds are for large
corporations, for small
companies it doesnt make
sense because investors might
have issue of security
Micro lending & share cropping

Memorize the formulas

Write the letters first before
substituting the numbers
PV of growing perpetuity:
g is always less than r (growth
vs. interest rate)
so the principal can grow by
time
6 key formulas:
FV = P (1+r)^n
((1+r)^n -1) /r)

S=R

P = F / (1+r)^n
(1+r)^-n / r)

A = R (1-

A R/r
Ac = R / (r-g) as growth rate increases,
the value goes up

Banks play an important role as

mediator and it solves the problem of
the lender and debtor.

Interest rate / yield of maturity = r

Coupon rate = set by the borrower,
whoever is borrowing the money. It
can be any rate. Determines the
cash flow of the bond

No coupon? Still get interest rate.

Coupon rate is different from the
interest rate. Little r tells you the
rate of return. Just embedded in
the final value. Coupon use to
determine the regular cash flow.

Bank accepted bills

Guarantee the payment of a
company and charge a fee for
the service
g average growth rate you expect
in the long term; you are expecting
the same amount of price increase

How to increase the shareholder?

Pay dividends and increase the
share price at a time.

Bond a way to bypass the bank

Borrower goes directly to the
saver to get leverage than
borrowing from the bank

How is the share price? PV of

infinite stream of dividends.
Consider what dividends is during
the period (2 years time, 3 years
time, 4 years time, etc) and the

risks of those dividends. Maximize

the share price today is long
sighted.
Consider the profits and dividends in
the long term.

Depends on the view of people

Po = d /(r-g)

Because the goal is to maximize

the dollar value for shareholders
Present value of After Tax Cash
flows
Depreciation
Needed to calculate tax
But it is an accrued expense
and is not included in the cash
flow

Ex:
Po = down
D = down
R = up
G = down

Maximizing the share price is long

term and will matter in growing your
profits
Coupon rate vs. interest rate
r = Present value of cash flows;
decided by the market
c = what the cash flow will be; decided
by the borrower
B = C (1-(1+r)^-n / r)

*Payback period
*IRR
0 = -100 + 20/ (1+r)^1 + 20 /
(1+r)^2
Or
100 = 20/ (1+r)^1 + 20 / (1+r)^2
NPV
Raw number is better than
percentage

Tips for Hansson case

REIT exercise. Model out the
REIT.
What are the incremental cash
flows? They are thinking about
expanding factory
Spread sheet about this
Introduction and jump to the
conclusion and fish in between
The most important thing is in
exhibit 5 of the appendices.
Vast information you need for
the case.
What is the effect on revenue
and expenses?
Put into units (most are in
thousands or million)
R
E
I table at page 3
T
Put into assumptions and
calculate.
Calculating what the total
expense should be
Ignore the $50million in the
introduction
r = put in random number; will
be discussed in cf 2
spreadsheet (reit calculation)
and word document (report with
assumptions)
take into account working
capital; forecast it

financial planning slide

R might have 5 rows
E might have 15 row
Total might have 30 rows
Exhibit 5 for R and E
Calculate each row yourself
instead of looking at totals.
Careful on units
For I in page 3
For Tax, go fishing for
depreciation and corporate tax
rate
Required rate a return: 10% as
temporary
How to forecast on planning

NPV
its just Revenue, Cash
expenses, Factory equipment an
Not financial expenses
Focus on REIT

Working capital

If right,
S = R ((1+r)^n-1/r)

Perpetuity = goes on forever

A = R /r
A = R / (r-g) -> growth rate
EAR = AER = compounding
Learn to calculate this

Bonds
B = 10 (1-(1.03)^-4 / 0.03) + 1000 /
1.03^4
Or
B = 10 / (1.03) + 10 / (1.03)^2 +
1000 / (1.03)^4

NPV + Soft benefits (brand loyalty,

etc)

Coupon rate is fixed

TVOM

Interest rate depends on the market. It

changes every second of the day
depends on the market forces.

$100 now is better than $100

tomorrow
$100 now or $110 tomorrow?
Calculate using P = F / (1+r)^n
100 > 98.56 (110)

If r goes up, bond goes down

Think of it as single cash flow
Premium = c > r
Discount = c < r

F = P (1+r)^n

Present value annuity formula the

power should be in whole number

Annuity

For Shares:

= summing all of the single present

values to the left

Perpetuity formula

A = R (1-(1+r)^-n / r)

P = D / (r-g)

Little g has more impact in increasing

P than Dividends

0 = 50 + 10 (1 (1+r) ^-4 ) + 20
(1+r)^4
Payback

Capital budgeting
NPV
NPV = 50 + 10 (1 (1.10)^-4 / r) + 20
(1.10)^4
IRR
Set NPV to zero and solve for r

Focus on core concepts for video

and slides
Burn through the easiest
questions first