Lecturer: Huyen Nguyen, Ph.D.
Faculty of Business – FPT University
5/6/2023
Fundamentals of
• Stockholders
Corporate Finance
want to know cash return on investment,
and
market price of their stocks.
• Managers are concerned with impact of their decisions on
the
financial statements to confirm that things are going as
Subject code: FIN202
• Creditors are concerned with how much debt the firm is using and whether the firm will have enough cash to meet its
debt obligations.
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CHAPTER 4 REVIEW
1. THREE PERSPECTIVES TO ANALYZE FINANCIAL STATEMENTS
planned.
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1
in which each number has been scaled by a
• Common-size financial statements are financial statements
common
measure of firm size:
Balance sheets as a percentage of total assets Income statements as a percentage of net sales.
• Common-size financial statements make it easier to
evaluate changes in a firm's performance and financial condition over time and comparing firms that are
significantly different in size.
CHAPTER 4 REVIEW
2. COMMON-SIZE FINANCIAL STATEMENTS • Financial ratios
problems caused
by comparing two
or more
companies of
different size, or
when looking at
the same
company over
time as the size
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CHAPTER 4 REVIEW
3. FINANCIAL RATIOS
Liquidity
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measure the ability of a company to cover
eliminate
ratios
its current bills.
Efficiency
ratios
tell how efficiently the firm uses its assets.
tell how much debt a firm has in its capital
Leverage
structure and whether the firm can meet
ratios
its long-term financial obligations.
Profitability
ratios
focus on the firm's earnings.
changes. look at a company based on market data
Market value
as opposed to historical data used in
indicators
financial statements.
2
• A diagnostic tool that uses financial ratios to assess a firm's financial strength with focus on correcting the problems
within the context of maximizing the firm's ROE. • Component: ROE = Net profit margin x Total asset turnover
x Equity multiplier
CHAPTER 4 REVIEW
• Benchmarks are used to provide a standard for evaluating
4. DUPONT SYSTEM OF ANALYSIS the financial
performance of a firm.
• Type of benchmark:
Net profit
margin
measures operating efficiency.
• Comparison to the firm’s historical performance (at least
Total asset
measures how efficiently the firm's assets are
turnover
being used.
• Comparison to a select group of firms in the same
Equity
multiplier
measures financial leverage
• Comparison to the aggregate of firms in the same
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CHAPTER 4 REVIEW
5. BENCHMARKS
Trend Analysis
3-5 years)
Peer Group Analysis
industry
Industry Analysis
industry
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3
1. not an exact science
2. relies on accounting data and historical costs 3. few guidelines or principles for determining whether a ratio is “high”
or “low”, or is a reason for confidence or for
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CHAPTER 4 REVIEW
6. MAJOR LIMITATIONS TO FINANCIAL STATEMENT AND RATIO ANALYSIS
concern
Fundamentals of
Corporate
Finance, 2/e
ROBERT PARRINO, PH.D.
DAVID S. KIDWELL, PH.D.
THOMAS W. BATES, PH.D.
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Chapter 5: The Time Value of Money
Chapter 5: The Time Value of Money
TIME VALUE OF MONEY
(What and why)
FUTURE VALUE
CONTENT
(Concept, formula, application)
PRESENT VALUE
(Concept, formula, application)
DISCUSSION
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5
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Learning Objectives
1. EXPLAIN WHAT THE TIME VALUE OF MONEY IS
AND WHY IT IS SO IMPORTANT IN THE FIELD
OF FINANCE.
2. EXPLAIN THE CONCEPT OF FUTURE VALUE,
INCLUDING THE MEANING OF THE TERMS
PRINCIPAL, SIMPLE INTEREST AND
COMPOUND INTEREST, AND USE THE
FUTURE VALUE FORMULA TO MAKE
BUSINESS DECISIONS.
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Learning Objectives
3. EXPLAIN THE CONCEPT OF PRESENT VALUE,
HOW IT RELATES TO FUTURE VALUE, AND USE
THE PRESENT VALUE FORMULA TO MAKE
BUSINESS DECISIONS.
4. DISCUSS WHY THE CONCEPT OF
COMPOUNDING IS NOT RESTRICTED TO
MONEY, AND USE THE FUTURE VALUE
FORMULA TO CALCULATE GROWTH RATES.
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1. Receive immediately
$1000 at the end of the
2. Receive $1100 at the end
of the year.
SUPPOSE THAT YOU WIN A
LOTTERY AND HAVE TWO
OPTIONS:
• How does a manager determine the value of a
day.
• How much is a series of future cash-flows WHICH ONE WILL YOU
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CHOOSE? WHY?
• The price/value today of cash-flows that occur
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The Time Value of Money o EXCHANGING
CONSUMPTION OPPORTUNITIES
future cash-flow, whether the cash-flow is a
payment to be made or income to be received? worth today?
in the future is determined by the time-value-of
money (TVM).
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Consume Today or Tomorrow?
or
• TVM is based on the belief that people prefer to
Tomorrow
Today
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The Time Value of Money o CONSUME
TODAY OR TOMORROW?
consume goods today rather than wait to
consume the same goods tomorrow
An apple we can have today is more valuable
to us than an apple we can have in one year.
Money has a time value because buying an
apple today is more important than buying an
apple in one year.
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Savings or consuming?
or
Buy a house? Put in
the bank?
• The rate of interest de termines the trade-off
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The Time Value of Money
o CONSUME TODAY OR TOMORROW? • A dollar
someone has today can be spent for consumption or loaned
to earn interest • A dollar loaned earns interest that increases
wealth and the ability to consume
between consumption today and saving
(investing)
or Interest 18
9
• Time value of money (TVM) is the idea that to inflation and loss of potential earnings.
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The Time Value of Money
money tends to decline in value across time due
o TIMELINES AID PROBLEM SOLVING • Timelines are an
effective way to visualize cash flows
• Present cash outflows as negative values • Present cash
inflows as positive values
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IMPORTANT
Five-year Timeline for
a $10,000 Investment
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10
worth after a certain amount of time has passedare worth before a certain amount of time has
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The Time Value of Money
o FUTURE VALUE VERSUS PRESENT VALUE • Cash-flows
are evaluated based on future value or present value
• Future value measures what cash-flows are • Present
value measures what future cash-flows passed
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IMPORTANT
Five-year Timeline for
a $10,000 Investment
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Future Value versus Present Value 5/6/2023
process of increasing
process of reducing
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The Time Value of Money
o FUTURE VALUE VERSUS
PRESENT VALUE
FUTURE VALUE
• Compounding is the
COMPOUNDING
cash-flows to a future
value
INTEREST RATE
i
• Discounting is the
DISCOUNTING
future cash-flows to a
present value
PRESENT VALUE
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SIMPLE INTEREST VS COMPOUND INTEREST
• only based on the
Simple
principal amount
Interest
• consists of both simple
Compound
interest and interest-on
Interest
interest
INTEREST
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IMPORTANT
Future Value of $100 at 10 Percent
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How Compound Interest Grows
on $100 at 10 Percent
the end of a period if we know the interest rate • If principal of $X is loaned for one period at the
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Future Value and Compounding
o SINGLE PERIOD LOAN • We can determine the balance in an account at
earned on the principal
interest rate i, the account balance will increase to $X(1 + i)1
• The term (1+ i)nis the future value interest factor or future value factor
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1
end of the first period and the new account • The account balance is $X(1 + i) at the end of
the first period and $X(1 + i)2 at the end of the
Future Value and Compounding
o TWO-PERIOD LOAN • A two-period loan is two consecutive single
period loans
• Interest earned is added to the account at the
balance is the amount that earns the interest rate i during the second period
• Compound interest consists of both simple
second period.
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Future Value and Compounding
o TWO-PERIOD LOAN • The principal is the initial deposit or loan amount
• Simple interest is paid on the original principal amount only
interest and interest-on-interest
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IMPORTANT
Future Value of $100 at 10 Percent
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Future Value and Compounding
o FUTURE VALUE EQUATION • The general equation to find a
��
future value �� (5.1)
where:
FVn= future value of investment at end of period n PV = original principle (P0) or
present value i = the rate of interest per period
n = the number of periods, often in years
* The term (1+ i)nis the future value interest factor or
future value factor
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��
in the account at the end of that time? ������ = ���� × (�� + ��)
������ = $������ × (�� + ��. ��)��
i=
Future Value and Compounding
FUTURE VALUE EXAMPLE You deposit $100 in a savings account earning 10%
compounded annually for five years. How much is
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PV =
$100
10%
������ = $��61.05
n=
5
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How Compound Interest Grows on
$100 at 10 Percent
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Future Value of $1 for Different
Periods and Interest Rates
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Future Value Factors
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the larger the future value of $1 at the end of a • If compounding occurs m times within a
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Future Value and Compounding
o COMPOUNDING MORE THAN ONCE A YEAR
• The more frequently interest is compounded, given time period
�� ��
period, the future value equation becomes FV ����× (5.2) i =
FV = $������ × (�� + FV = $������. ����
37
$10010%5
m= 2
Future Value and Compounding
o COMPOUNDING WITHIN A PERIOD EXAMPLE • You deposit
$100 in an account that pays
10% annually with semi-annual compounding
for 5 years. What is the ending account balance? ��
PV =
����
��)
FV = ���� × (�� +
��. ��
����
��)
n=
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FV = $������ × (�� +
FV = $������. ���� Future Value and Compounding
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o COMPOUNDING WITHIN A PERIOD EXAMPLE • You deposit
$100 in an account that pays
10% annually with semi-annual compounding
for 5 years. What is the ending account balance?
��
����
��)
FV = ���� × (�� +
��. ��
����
��)
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e = 2.71828, the base of the natural logarithm
Future Value and Compounding
o CONTINUOUS COMPOUNDING
• When compounding occurs on a continuous
basis, the future value equation becomes
����
�� (5.3)
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have at the end of five years if the bank pays 5% ������ = $����, ������.37
Future Value and Compounding Using Excel – Future Value and
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o CONTINUOUS COMPOUNDING EXAMPLE • Your
grandmother wants to put $10,000 in a savings account. How much
money will she
annual interest compounded continuously? ����
������ = ���� × ��
������ = $����, ������ ×
����.������ 41
Compounding
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are worth before a certain amount of time has
• Discounting is the process of reducing future
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Present Value
• Present value measures what future cash-flows passed
cash-flows to a present value
FUTURE VALUE
DISCOUNTING
differ only in the arrangement of the elements.
PRESENT VALUE
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Present Value and Discounting
o PRESENT VALUE EQUATION • General equation to find present value ������
��
(��ା��) (5.4)
• This equation has the same elements as
Equation 5.1, the future value equation. They
Here, (1 + i)nis used for division and is called
the present value factor or discount factor.
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Present Value and Discounting
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Comparing Future Value & Present
Value
Calculations
COMPOUNDING
DISCOUNTING
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• A present value calculation takes end-of-the
period cash flows and reverses the effect of
Present Value and Discounting o PRESENT VALUE EQUATION
compounding to determine the equivalent beginning-of-the-period cash flows cost $40,000. If your
bank pays 5% interest on
This is discounting and the interest rate i is called the discount rate.
Present value (PV) is often referred to as the discounted value of future cash-flows.
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Present Value and Discounting
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o PRESENT VALUE CALCULATION EXAMPLE • You intend to
buy a BMW 330 Sports Coupe
three year from today. You predict the car will
savings, compounded annually, how much will
you need to deposit today to have $40,000 after
one year?
$����, ������
������
��
(�� + ��) ���� =
���� =
(�� +��. ����)��
���� = $����, ������. ����
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Present Value and Discounting
o PRESENT VALUE CONCEPTS
• Time and the discount rate affect present value The greater the amount
of time before a cash flow is to
occur, the smaller the present value of the cash-flow.
The higher the discount rate, the smaller the present
value of a future cash-flow.
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Present Value Factors
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Present Value of $1 for Different
Periods and Discount Rates
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IMPORTANT
Five-year Timeline for
a $10,000 Investment
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Future Value and Present
Value
Compared
• Many situations require using a time value of
money calculation to determine
a rate of
53
Finding the Interest Rate o TIME VALUE
OF MONEY CALCULATIONS
change or growth rate
• An investor or analyst may want
the growth rate in sales
the rate-of-return on an investment
the effective interest rate on a loan 54
27
(Quy tắc 72)
• The Rule of 72 is used to estimate the time
(number of periods) it takes for an amount to
The Rule of 72
o ESTIMATE THE NUMBER OF PERIODS
double.
The time it takes for the amount to double is
approximately equal to 72/i, where i equals the
percentage earned each period.
The Rule of 72 is fairly accurate for interest rates
between 5% and 20%.
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The Rule of 72
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25%
Interest rate Time takes for an Difference
50%
amount to double in
reality
Rule of 72 72%
(Compounding)
100%
2%
3% 24 23,45
5% 14,4 14,21
7% 10,3 10,24
9%
12%
56 0,2
0,0
0.0
0,1
0,2
0,3
0,3
1
0,3
0,6
28
