Notes Lecture Finance and Accounting
Lecture 02 Introduction to Finance and Accounting 11/09/2019
Chapter 1
Sole proprietorship:
- owner controlled and liable.
- Simple to establish
- Examples: Hairdresser, cleaner, tech start up.
Partnership:
- shared control and ownership.
- Simple to establish broader skills and resources
- Examples: law firms, early Facebook, Spotify
Corporation:
- Separation owner/control
- Easier to transfer ownership.
- Limited liability
- Examples: Facebook, stock listed firms
Financial manager: Investment and financing
Financial goal of the corporation: maximize shareholder (stockholder) value. (not profit!
short term) Shareholders care about long term rather than short term.
Stockholders goal:
1. Maximize current wealth
2. Transform wealth into most desirable time pattern of consumption
3. To manage risk characteristics of chosen consumption plan.
Chapter 2
FV (future value): the amount an investment is worth after one or more periods
- FV =PV (1+r )t
Simple interest: interest earned only on the original principal amount invested
Compound interest: interest earned on both the original account and the interest already
received.
Present value: the current value of future cashflows discounted at the appropriate discount
rate.
-
FV
PV =V 0=
¿¿
CF 1 etc.
- PV ( cashflows )=
¿¿
DF (discount factor) = pv of $1
-
1
DF =
¿¿
-
Discount factors can be used to compete present value of any cash flow
NPV: adding present values of cashflows from multiple periods can be extremely useful
because it can tell you if an investment is profitable:
- NPV= sum of PV’s – Investment.
- NPV>0 profitable
- NPV <0 not profitable
1
, Lecture 02 18/09/2019
Perpetuities:
- Steady cash flows forever
C
- V 0(PV )= (don’t prove on exam).
r
Growing perpetuities:
- Needed: constant growth in cash flows and a constant discount rate)
C
- PV ( growing)= r>g!
r −g
Delayed perpetuities (Example: period 7):
Ct +1
1. PV ( perpetuity )=
r −g
C 7 100
2. PV 6 ( perpetuity )= = =2000
r 0.05
C 2000
3. Discount back to present day: PV ( perpetuity )= t
= 6 = 1492.63
(1+r ) 1.05
Annuities: steady cash flows for a fixed period of time.
- Annuity formula= perpetuity- delayed perpetuity
C 1
- PV = (1− )
R ( 1+r )t
C1
- FV of annuity= ((1+r )¿ ¿t−1) ¿ or FV annuity= PV annuity * (1+r) ^t
r
Growing annuity:
C∗1 (1+ g )t
- PV of growing annuity= (1− )
r−g ( 1+r )
t
2
Lecture 02 Introduction to Finance and Accounting 11/09/2019
Chapter 1
Sole proprietorship:
- owner controlled and liable.
- Simple to establish
- Examples: Hairdresser, cleaner, tech start up.
Partnership:
- shared control and ownership.
- Simple to establish broader skills and resources
- Examples: law firms, early Facebook, Spotify
Corporation:
- Separation owner/control
- Easier to transfer ownership.
- Limited liability
- Examples: Facebook, stock listed firms
Financial manager: Investment and financing
Financial goal of the corporation: maximize shareholder (stockholder) value. (not profit!
short term) Shareholders care about long term rather than short term.
Stockholders goal:
1. Maximize current wealth
2. Transform wealth into most desirable time pattern of consumption
3. To manage risk characteristics of chosen consumption plan.
Chapter 2
FV (future value): the amount an investment is worth after one or more periods
- FV =PV (1+r )t
Simple interest: interest earned only on the original principal amount invested
Compound interest: interest earned on both the original account and the interest already
received.
Present value: the current value of future cashflows discounted at the appropriate discount
rate.
-
FV
PV =V 0=
¿¿
CF 1 etc.
- PV ( cashflows )=
¿¿
DF (discount factor) = pv of $1
-
1
DF =
¿¿
-
Discount factors can be used to compete present value of any cash flow
NPV: adding present values of cashflows from multiple periods can be extremely useful
because it can tell you if an investment is profitable:
- NPV= sum of PV’s – Investment.
- NPV>0 profitable
- NPV <0 not profitable
1
, Lecture 02 18/09/2019
Perpetuities:
- Steady cash flows forever
C
- V 0(PV )= (don’t prove on exam).
r
Growing perpetuities:
- Needed: constant growth in cash flows and a constant discount rate)
C
- PV ( growing)= r>g!
r −g
Delayed perpetuities (Example: period 7):
Ct +1
1. PV ( perpetuity )=
r −g
C 7 100
2. PV 6 ( perpetuity )= = =2000
r 0.05
C 2000
3. Discount back to present day: PV ( perpetuity )= t
= 6 = 1492.63
(1+r ) 1.05
Annuities: steady cash flows for a fixed period of time.
- Annuity formula= perpetuity- delayed perpetuity
C 1
- PV = (1− )
R ( 1+r )t
C1
- FV of annuity= ((1+r )¿ ¿t−1) ¿ or FV annuity= PV annuity * (1+r) ^t
r
Growing annuity:
C∗1 (1+ g )t
- PV of growing annuity= (1− )
r−g ( 1+r )
t
2
