... limited number of years is called an annuity. The present value of a
stream of cash flows is simply the sum of the present value of each individual cash flow.
Similarly, the future value of an annuity ... immediately instead of at the end of the first period.
a. Why is the present value of an annuity due equal to (1 + r) times the present value of an
ordinary annuity?
b. Why is the future value of an annuity ... in-
stallments of $465,000 each. What is the present value of the jackpot? The interest rate
at the time was about 8 percent.
The present value of these payments is simply the sum of the present values of...
... Firm
Value?
Snippets of History
Summary
Selected material from
FUNDAMENTALS OFCORPORATE FINANCE, Third Edition
with additional material from
FUNDAMENTALS OFCORPORATE FINANCE, Alternate Fifth ... from:
Fundamentals ofCorporate Finance, Third Edition by Richard A. Brealey, Stewart C. Myers, and Alan J. Marcus. Copyright
â 2001, 1999, 1995, by The McGraw-Hill Companies, Inc.
Fundamentals of ... small selection of years and interest rates.
Table A.1 at the end of the material is a bigger version of Table 1.6. It presents the fu-
ture value of a $1 investment for a wide range of time periods...
... horizon of t years, the original $100 investment will grow
to $100 ì (1.06)
t
. For an interest rate of r and a horizon of t years, the future value of
your investment will be
Future value of $100 ... cost of $15 billion.
1988 Mergers. The 1980s saw a wave of takeovers
culminating in the $25 billion takeover of RJR
Nabisco. Over a period of 6 weeks three groups bat-
tled for control of the ... person
does all day, but we can give you some idea of the variety of careers in finance. The
nearby box summarizes the experience of a small sample of recent (fictitious) graduates.
We explained...
... Therefore,
the study ofcorporatefinance is concentrated within the treasury group’s functions.
6. To maximize the current market value (share price) of the equity of the firm (whether it’s ... relatively
small percentage of individual ownership. Fewer individual owners should reduce the number of
diverse opinions concerning corporate goals. The high percentage of institutional ownership ...
sometimes personal tax rates are better than corporate tax rates.
3. The primary disadvantage of the corporate form is the double taxation to shareholders of distributed
earnings and dividends....
... Marcus
Wallace E. Carroll School of Management
Boston College
with additional material from
Fundamentals ofCorporate Finance, Alternate Fifth Edition
Essentials ofCorporate Finance, Second Edition
Stephen ... material from
Fundamentals ofCorporate Finance
Third Edition
Richard A. Brealey
Bank of England and London Business School
Stewart C. Myers
Sloan School of Management
Massachusetts Institute of Technology
Alan ... from those of the firm.
These problems are kept in check by compensation plans that link the well-being of
employees to that of the firm, by monitoring of management by the board of directors,
security...
... limited number of years is called an annuity. The present value of a
stream of cash flows is simply the sum of the present value of each individual cash flow.
Similarly, the future value of an annuity ... is all-equity financed. What must its profit margin be if it wishes to finance 8 percent
growth using only internally generated funds?
24. Internal Growth. If the profit margin of the firm in ... managers are often using a code to communicate real concerns. For example,
a target profit margin may be a way of saying that in pursuing sales growth the firm has
allowed costs to get out of control.
The...
... Microsoft’s total capital in 1997 was
$7.2 billion. With a return of 53 percent, it earned profits on this figure of .53 ì 7.2 =
$3.8 billion. The total cost of the capital employed by Microsoft ... cents of
tax on each dollar of income up to an income of $62,450. For example, if your total in-
come is $40,000, your tax bill is 15 percent of the first $25,750 of income and 28 per-
cent of the ... say that such a firm is less prof-
itable simply because it employs debt finance and pays out part of its profits as inter-
est. Therefore, when calculating the profit margin, it seems appropriate...
... annual rate of 6 percent.
a. What is the effective rate of interest if the loan is for 1 year and is paid off in one pay-
ment at the end of the year?
b. What is the effective rate of interest ... annual rate of 6 percent. However, the
borrower must maintain a balance of 25 percent of the amount of the loan, and the balance
does not earn any interest.
a. What is the effective rate of interest ... Balances. Suppose that Dynamic Sofa (a subsidiary of Dynamic Mattress)
has a line of credit with a stated interest rate of 10 percent and a compensating balance of
25 percent. The compensating...
... DEPRECIATION EXPENSES with COST
OF LABOR AND MATERIALS.
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INTRODUCTION: BASICS OFCORPORATE FINANCE
COURSE OVERVIEW
Basics ofCorporateFinance serves as an introductory ... claim on the ownership of the company. Often, the
number of outstanding shares is included on this line.
ã RETAINED EARNINGS value of the assets of the company in
excess of the claims upon those ... on a set of
assumptions concerning the future operations and finances of a company. Other
methods for estimating corporate value are presented and the relative strengths and
weaknesses of each...
... Cost of Capital
Principles ofCorporate Finance
Brealey and Myers Sixth Edition
Chapter 2
41
Short Cuts
w Sometimes there are shortcuts that make it
very easy to calculate the present value of ... Financial Officer
Comptroller
Treasurer
22
Opportunity Cost of Capital
Example
You may invest $100,000 today. Depending on the
state of the economy, you may get one of three
possible cash payoffs:
140,000110,000$80,000Payoff
BoomNormalSlumpEconomy
000,110$
3
000,140000,100000,80
C ... Years
FV of $1
10% Simple
10% Compound
20
Rate of Return Rule
w Accept investments that offer rates of return
in excess of their opportunity cost of capital.
Example
In the project listed below,...
... STATEMENT
Summary of
operations and
profitability
The Income Statement provides a summary of a company's operations
and profitability over a given period of time (at the end
of a month, quarter, ... claim on the ownership of the company. Often, the
number of outstanding shares is included on this line.
ã RETAINED EARNINGS value of the assets of the company in
excess of the claims upon those ... operations of a company. Another group
of ratios, Profitability Ratios, highlight the combined effects of
liquidity, asset management, and debt management. These ratios
include:
ã Profit Margin...