IB1320 summary sheet
Lecture 1
Market Value: share price * numbers of shares outstanding
Capital Budgeting: Choosing which investments forms should undertake
Capital Structure: How the firms pay for the investments
Payout Decision: How cash is returned to the shareholders
Project: A set of cash flows in the present and at diEerent points in the future
Valuation:
- Forward looking
- Relative to alternatives:
• Law of One Price (LoOP): Identical projects have identical prices, similar
projects have similar prices.
• Central to LoOP-pricing is the opportunity cost of capital (cost of
alternate projects).
Lecture 2
Time Value of Money: Money has greater value now than in future as it can be invested
and make a return
Time Period Notation: 0 = today, 1 = next period, t = a future time period, T = the final
time period
Cash Flow Notation: C0 = cash amount today, C1 = cash amount in the next period
Rate of Return: From investing |C0| and receiving Ct:
$! %|$" | $!
- 𝑟!,# = 𝑟# = = −1
|$" | |$" |
- 𝐶' = |𝐶! |(1 + 𝑟 )'
Present Value:
- = C0
$! $# $$
- 𝑃𝑉 = + (#()) # + ⋯+ (#())$
#()
, #!!
- Example, 𝑃𝑉 (𝐶, ) = (#(!.#)#
Discount Factor: Translates future cash flows into money today
# '
- . /
#()!
Net Present Value: present value of cash inflows – present value of cash outflows
- Translate into £’s today for inflows and outflows
Lecture 3
Perpetuity: an asset that pays a constant CF per period forever
$.
- PV = ∑/ '0# (#())$
$.!
- General formula: 𝑃𝑉 = .
)
• 1 reminds you that the stream of cash flows start from the next period
Growing Perpetuities: Includes growth rate
$.! (#(1)$%! $.!
- PV = ∑/ '0# $ =
(#()) )%1
Gordon Growth Model (GGM): Use the growing perpetuity formula to derive a firm’s
share price.
234356758 :6;' <6=) 2!
- Stock Price Today 𝑃! =
)%1
2!
- Used to back out a firms cost of capital: 𝑟 = +𝑔
>"
Annuity: Makes same payment CF for T years
- The equation for the present value of an annuity with initial payments in t = 1:
$. $. #
- 𝑃𝑉 = ∑? '0# (#())$ = ) 21 − (#())&3
Growing Annuities: An annuity pays an initial cash flow of C1 which then grows at rate g
every year for T years. Capital costs r.
- Present value of the annuity is:
? $.! (#(1)$%! $! (#(1)&
- 𝑃𝑉 = ∑'0# = 21 − (#())& 3
(#())$ )%1
Lecture 1
Market Value: share price * numbers of shares outstanding
Capital Budgeting: Choosing which investments forms should undertake
Capital Structure: How the firms pay for the investments
Payout Decision: How cash is returned to the shareholders
Project: A set of cash flows in the present and at diEerent points in the future
Valuation:
- Forward looking
- Relative to alternatives:
• Law of One Price (LoOP): Identical projects have identical prices, similar
projects have similar prices.
• Central to LoOP-pricing is the opportunity cost of capital (cost of
alternate projects).
Lecture 2
Time Value of Money: Money has greater value now than in future as it can be invested
and make a return
Time Period Notation: 0 = today, 1 = next period, t = a future time period, T = the final
time period
Cash Flow Notation: C0 = cash amount today, C1 = cash amount in the next period
Rate of Return: From investing |C0| and receiving Ct:
$! %|$" | $!
- 𝑟!,# = 𝑟# = = −1
|$" | |$" |
- 𝐶' = |𝐶! |(1 + 𝑟 )'
Present Value:
- = C0
$! $# $$
- 𝑃𝑉 = + (#()) # + ⋯+ (#())$
#()
, #!!
- Example, 𝑃𝑉 (𝐶, ) = (#(!.#)#
Discount Factor: Translates future cash flows into money today
# '
- . /
#()!
Net Present Value: present value of cash inflows – present value of cash outflows
- Translate into £’s today for inflows and outflows
Lecture 3
Perpetuity: an asset that pays a constant CF per period forever
$.
- PV = ∑/ '0# (#())$
$.!
- General formula: 𝑃𝑉 = .
)
• 1 reminds you that the stream of cash flows start from the next period
Growing Perpetuities: Includes growth rate
$.! (#(1)$%! $.!
- PV = ∑/ '0# $ =
(#()) )%1
Gordon Growth Model (GGM): Use the growing perpetuity formula to derive a firm’s
share price.
234356758 :6;' <6=) 2!
- Stock Price Today 𝑃! =
)%1
2!
- Used to back out a firms cost of capital: 𝑟 = +𝑔
>"
Annuity: Makes same payment CF for T years
- The equation for the present value of an annuity with initial payments in t = 1:
$. $. #
- 𝑃𝑉 = ∑? '0# (#())$ = ) 21 − (#())&3
Growing Annuities: An annuity pays an initial cash flow of C1 which then grows at rate g
every year for T years. Capital costs r.
- Present value of the annuity is:
? $.! (#(1)$%! $! (#(1)&
- 𝑃𝑉 = ∑'0# = 21 − (#())& 3
(#())$ )%1
