Professional Documents
Culture Documents
Principle of Corporate Finance
Principle of Corporate Finance
Corporate
Finance
Course topics
•Basic concepts of Corporate Finance
Seventh Edition
•Risk, portfolio selection, budgeting
Richard A. Brealey
Stewart C. Myers
•Incentives of managers
•Financial markets
•Asset valuation
•Debt structure
•Risk management
. •Cash management
Organization
Lectures (Prof. Kirstein) Thu 1:30-3 p.m. in A-013
No regular office hours (D-003), send an email to
bizecon@rolandkirstein.de
Tutorial (Sidi Koné) Mon 11.15-12.45, A-211
Final exam in February
Book: Brealey/Myers (7th or later ed.; or any other textbook)
Homepage http://www.ww.uni-magdeburg.de/bizecon
=> teaching, Winter 2009/10, Financial Management
=> slides, book, exercises, further information
Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.
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Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.
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Corporate Structure
Sole Proprietorships
Unlimited Liability
Personal tax on profits
Partnerships
Limited Liability
Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.
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(2) (1)
(3) (4b)
Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.
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Treasurer Comptroller
Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.
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Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.
Principles of
Corporate Chapter 2
Finance
Present Value and The
Seventh Edition
Opportunity Cost of Capital
Richard A. Brealey
Stewart C. Myers
.
2- 2
Topics Covered
Present Value
Net Present Value
NPV Rule
ROR Rule
Opportunity Cost of Capital
Managers and the Interests of Shareholders
Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.
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Present Value
Discount Rate
Interest rate used to compute
present values of future cash
flows.
Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.
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Present Value
PV = discount factor × C1
Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.
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Present Value
Discount Factor = DF = PV of $1
DF = 1
(1+ r )
Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.
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Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.
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PV = C1
(1+r) = 400
(1+.07) = 374
Step 4: Go ahead if PV of payoff exceeds investment
Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.
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Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.
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PV of C1 = $400 at 7%
400
PV = = 374
1 + .07
Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.
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PV of C1 = $400 at 12%
400
PV = = 357
1 + .12
1+
PV of C1 = $400 at 7%
400
PV = = 374
1 + .07
Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.
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Example
In the project listed below, the foregone investment
opportunity is 12%. Should we do the project?
Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.
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Example
Suppose we can invest $50 today and receive $60
in one year. Should we accept the project given a
10% expected return?
60
NPV = -50 + = $4.55
1.10
Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.
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Example
You may invest $100,000 today. Depending on the
state of the economy, you may get one of three
possible cash payoffs (with equal probability):
Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.
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Example - continued
Alternative investment is buying stock for $95.65. Next
year’s stock price is predicted as $110.
Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.
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Example - continued
Using the required ROR to discounting the expected
payoff at the expected return leads to the PV of the
project
110,000
PV = = $95,650 < $100,000
1.15
Prof. Dr. R. Kirstein, WT2009/10, Management V, Financial Management: BrealeyMyers, 7th ed.