Present Values Flashcards
primary market
IPO (initial public offering)
formerly private company goes public
mainly sold to institutional investors
future value formula
future value = present value x (1+r)^t
r = interest rate
present value formula
PV = C/(1+r)^t
(=> discounted cash flows, DCF)
C = cash flow
r = discount rate
discount factor
DF = 1/(1+r)^t
r = interest rate
net present value
NPV = C0 + C1/(1+r)
C0 = required investment (always negative, add minus)
rate of return
return = profit/ investment
net present value rule
accept investments that have positive net present values
rate of return rule
accept investments that offer rates of return in excess of their opportunity costs of capital
perpetuity return formula
r = C/PV
r = return
C = cashflow
present value of perpetuity formula
PV of perpetuity = C/r
r = discount rate
perpetuity due formula
PV = C + C/r
(adding on the first year’s cash flow)
present value of annuity formula
PV of annuity = C/r x [1 - 1/(1+r)^1]
r = interest rate
Gordon Model
PV of growing perpetuity = C/r-g
g = growth rate
