X= principle amount K= Interest Rate M= number of times interest compounds N= Years So: Investing $100 with semi annual interest at 8% for 1 year = 100(1+ .08/2) ^2*1 =$104 Present Value: Lump Sum: PV= Xn / (1+k/m) ^ mn Where: X=Principle K=discount rate M= number of compounding N=Years So: 100$ received in 2 years with 8% discount rate compounded semi-annually 100/ (1+.08/2) ^ 2*2 =85.48 Annuity: Paid at the end of each period For Simple Interest: Xn/ (1+k)^n For Compounded Interest: 1. Calculate Effective Annual Interest Rate (EAIR) (1+k/m)^m 1 – 2. Use PV formula, plugging EAIR into k Annuity Due: Paid at the beginning of each period So: [Xn/ (1+k)^n ] * [1+k] Risk and Probability: 1. Generally, risk is a function of the probability of something occurring Risk: Quantifiable thing we know may occur Uncertainty: thing we do not know of 2. A Portfolio or Expected return on a then can be calculated by: The Risk weighted average return of a stock/portfolio = Sum of Weight of (Chance) of Economic Outcome or Return x Return 3. Continuous Probability Distribution: Assign a probability of every possible state of economy and rate of return for stock in each economy Taking weighted average return of each gives us a distribution of returns Standard Deviation: Technically a probability weighted average deviation of expected return Way of quantifying expected deviation from the expected return Greater Standard Deviation= Greater Risk C. Quantitative Methods of Valuation: Generally: There are two types of valuation: Fundamental: Evaluating the particular aspects of a company, without regard to the market Market Value: Value comes from the market, and the in the air’ theory ‘castles See Smith Drug Stores I 1. Balance Sheet Valuation: Book Value: BV per Share = BV/# of shares BV= TA-TL Flaws: Restricted by the accounting conventions Historic Cost not reflective of current values
X= principle amount K= Interest Rate M= number of times interest compounds N= Years So: Investing $100 with semi annual interest at 8% for 1 year = 100(1+ .08/2) ^2*1 =$104 Present Value: Lump Sum: PV= Xn / (1+k/m) ^ mn Where: X=Principle K=discount rate M= number of compounding N=Years So: 100$ received in 2 years with 8% discount rate compounded semi-annually 100/ (1+.08/2) ^ 2*2 =85.48 Annuity: Paid at the end of each period For Simple Interest: Xn/ (1+k)^n For Compounded Interest: 1. Calculate Effective Annual Interest Rate (EAIR) (1+k/m)^m – 1 2. Use PV formula, plugging EAIR into k Annuity Due: Paid at the beginning of each period So: [Xn/ (1+k)^n ] * [1+k] Risk and Probability: 1. Generally, risk is a function of the probability of something occurring Risk: Quantifiable thing we know may occur Uncertainty: thing we do not know of 2. A Portfolio or Expected return on a then can be calculated by: The Risk weighted average return of a stock/portfolio = Sum of Weight of (Chance) of Economic Outcome or Return x Return 3. Continuous Probability Distribution: Assign a probability of every possible state of economy and rate of return for stock in each economy Taking weighted average return of each gives us a distribution of returns Standard Deviation: Technically a probability weighted average deviation of expected return Way of quantifying expected deviation from the expected return Greater Standard Deviation= Greater Risk C. Quantitative Methods of Valuation: Generally: There are two types of valuation: Fundamental: Evaluating the particular aspects of a company, without regard to the market Market Value: Value comes from the market, and the ‘castles in the air’ theory See Smith Drug Stores I 1. Balance Sheet Valuation: Book Value: BV per Share = BV/# of shares BV= TA-TL Flaws: Restricted by the accounting conventions Historic Cost not reflective of current values
Corporate%20Finance%20-%20Mitchell%20-%20Spring%202011.docx