文档介绍：FreyaHu FM –L2 1 Chapter 4 –Discounted Cash Flow Valuation Valuation: One period Case Risky cash flows are not the same as risk free cash flows. Risky cash flows are less valuable than risk free cash flows. Net present value (NPV) : NPV = -Cost +PV Future Value (FV)/ Compound Value Present Value (PV): PV = C 1/(1+r) Discount–Discount rate Valuation: Multi-period Case Future Value and Compounding FV= C o×(1 + r) T The Power of pounding Simple pound interest –interest payment is reinvested Present Value and Discounting PV = C t/ (1+r) T Discounting Present value factor = 1 / (1+r) T The Algebraic Formula NPV = -C 0+ ∑C i / (1+r) pounding Periods When interest is charged more frequently than once pounding an investment mtimes a year provides end-of-year wealth of: ?? 0(1+ ????) ??? r is thestated annual interest rate (the annual interest rate without consideration pounding) Effective annual rate (EAR)/ Effective annual yield (EAY) –annual rate of return (1+ ????) ???1 - Due to pounding, the EAR is larger than the state annual interest pounding over many years FV=?? 0(1+ ????) ???? The Annual Percentage Rate (APR) APR: expresses the totalcost of borrowing or investing as a percentage interest rate. PV=????+∑????(1+??????) ??????=1 Continuous pound every infinitesimal instantFV=????×???? FreyaHu FM –L2 2 Simplifications Perpetuity Aconstant s