Corporate Finance 2
Semester 2
2010-2011
Micha G. Keijer
HvA/HES
• Literature:
Fundamentals of Corporate Finance (8th)
Ross, Westerfield & Jordan
McGraw-Hill International edition
• Examination:
Written exam (5 ECTS)
Course outline Corporate Finance 2
Week
Subject
Chapters
1&2
Future- & Present Value of Money
3&4
Bond Valuation
7
5&6
Stock Valuation
8
7&8
Capital Market History
12
9&10
Security Markets Line
13
11&12 Cost of Capital
13
Mock exam
5&6
15
Chapter
Chapter
The Slides &
Excel 5files are on
the T-drive:
•Introduction
to Valuation:
TheT:\hes\MGK\CO2
Time Value of Money
McGraw-Hill/Irwin
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.
This week
Structure of an investment
1. Time preference
2. Risk
3. Inflation
This week
• Future- and Present Values
• DCF- method
• Discounting Annuities and EAR
1

1
t
(1  r )

PV  C  (1 

r








2: Simple versus compound interest
First United Bank pays 4% simple interest on their savings
accounts. Second Federal Bank pays 4% interest compounded
annually on their savings accounts.
If you invest $1,000 in each bank, how much will you have in your
accounts after twenty years?
Why are the balances different?
3: Simple versus compound interest
First United Bank
$1,000  .04  $40
$40  20  $800
$1,000  $800  $1,800
Second Federal Bank
FVt  PV  (1  r) t
 $1,000 1.04 20
 $2,191.12
Difference
$2,191.12  $1,800  $391.12
4: Future value
You invest $3,000 in the stock market today.
How much will your account be worth forty years from now if you
earn a 9% rate of return?
5: Future value
FVt  PV  1  r 
t
 $3,000  1  .09 
40
 $3,000  31.40942
 $94,228.26
7: Present value
You want to have $7,500 three years from now to buy a car. You
can earn 6% on your savings.
How much money must you deposit today to have the $7,500 in
three years?
8: Present value
FVt
PV 
t
1  r 
$7,500

3
1  .06
$7,500

1.191016
 $6,297.14
10: Interest rate for a single period
Last year your investments were worth $369,289. Today they are
worth $401,382. No deposits or withdrawals were made during the
year.
What rate of return did you earn on your investments this year?
11: Interest rate for a single period
FVt  PV  1  r 
t
$401,382  $369,289  1  r 
1
1.086905  1  r
r  .086905
r  8.6905%
13: Interest rate for multiple periods
The City Museum owns a rare painting currently valued at $1.2
million. The museum paid $240,000 to purchase the painting twelve
years ago.
What is the rate of appreciation on this painting?
14: Interest rate for multiple periods
FVt  PV  1  r 
t
$1,200,000  $240,000  1  r 
12
5  1  r 
12
1
12
5  1 r
5.0833333  1  r
1.1435298  1  r
r  .1435298
r  14.35298%
16: Number of time periods
Tom originally started to work for Jackson Enterprises at an
annual salary of $36,500. Today, Tom earns $68,200. Tom
calculated that his average annual pay raise has been 3.4%.
How long has Tom worked for Jackson Enterprises?
17: Number of time periods
FVt  PV  1  r 
t
68,200  36,500  1.034
t
1.8684932  1.034t
ln 1.8684932  t  ln 1.034
ln 1.8684932
t
ln 1.034
.6251323
t
.0334348
t  18.697