Applied Financial Management: Maximizing Value and Corporate Finance, Assignments of Investment Theory

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APPLIED FINANCIAL

MANAGEMENT

BIRKBECK, UNIVERSITY OF LONDON

GRACE (BO) PENG

GOALS & GOVERNANCE OF THE FIRM

1. Raise cash by selling out financial assets to investors
2. Invest cash in firm operation and purchase real assets
3. Generate cash by firm operation 4a) Reinvest; 4b) Return cash to investors Maximi ze Market Value

FIVE THEMES OF CORPORATE FINANCE

• Corporate finance is all about maximizing value
• The opportunity cost of capital sets the standard for

investment decisions

• A safer dollar is worth more than a risky dollar
• Smart investment decisions create more value than smart

financing decisions

• Good governance matters

STUDY AIM

HOW CORPORATIONS MAKE FINANCIAL DECISION:

• understand different financial markets function;
• financial instruments valuation (stocks & bonds)
• make capital budgeting decisions (under certainty and uncertainty);
• application of the Capital Assets Pricing Model;
• capital structure theory and dividend policy

ASSESSMENT

• Class test (40%): Tuesdays, 6 March 2018
• Course work (60%): Friday, 16 March 2018

Lecture 1

Basic Concepts

CALCULATING FUTURE VALUE Future Value of £100: FV= £100 × (1+r) t

CALCULATING FUTURE VALUE What is the future value of £100 if interest is compounded annually at a rate of 7% for two years? Today Year

£100 × 1.

2

CALCULATING PRESENT VALUE Present Value = × Today Year

£87.34 ÷ 1.

2

Discou nt Factor

the longer you have to wait for your money, the less it is worth today PRESENT VALUE PV of £

NET PRESENT VALUE

NPV= PV- investment = × +C 0

Return = = = 13.5%

MULTIPLE CASH FLOWS

Discounted cash flow formula

Present Value = + + + +……+

Net Present Value=C 0 +

EXAMPLE What is the present value of £ 1 billion every year, for all eternity, if the perpetual discount rate is 10%? PV = =

EXAMPLE What if the investment does not start making money for first 3 years? PV = x ( )= 7.51 billion