fina 2303 chapter 3

cost benefit analysis => benefits>costs - qualifying costs and benefits (how to compare stocks at different times, currencies or risks) - steps find costs by looking at market price and quantity find benefit  net value of the project: benefits-costs --> positive: competitive markets (condition when goods are bought and sold at the same price, price determines value of the good-personal opinion on "fair price" is irrelevant) why ppl buy and sell stocks? (not a competitive market, ppl have different views on the market value of certain stocks)   ------------------------------------------------------------------------------------------------------------------------------------- demand for loan of big bank surges, enn receives a surge in deposit interest rate of big bank increase, those of enn decrease   how valuable? (benefits-costs) 28500-25000=3500 own opinions about future prospects do not alter value of present decision          

market prices and valuation principle - why only one competitive price for a good??? law of one price (in competitive markets, securities with same cash flow have same price) arbitrage (buying and selling equivalent goods to benefit from price difference) arbitrage opportunity (make profit without taking any risk or investing)  

time value of money and interest rate - time value of money difference in value between today's (PV) and future's money (FV) difference is due to interest rate (opportunity cost of delaying consumption) - interest rate  deposit money: convert today's money into future's money borrow money: convert future's money into today's money - interest rate factor (1+ r)   --> rate of exchange between today's and future's money - discount factor (1/1+r) --> tdy's value of a dollar received in future - interest rates' other expressions :discount rate, cost of capital, opportunity cost of capital,                                                                  required rate of return, risked adjusted rate of return -      

interest rates (discount rate) - we may wanna know the implied r in an investment - rearrange basic PV equation then solve for r FV = PV(1+r)^(n) r = (FV / PV)^(1/n) - 1 timelines - date 0 is tdy, beginning of the first year - date 1 is the end of the first year - cash flow = -tdy's payment+cash inflow of year ended of each year  

 valuing cash flows at different points in time - compounding (cash flow's future value, effect of earning 'interest on interest' FVn = C*(1+r)^(n) - discounting (value of future cash flow at earlier point in time) PV = C/(1+r)^(n) - compound interest = simple interest + interest on interest - use financial cal to calculate number of years (n) FV = PV(1+r)^(n) FV/PV = (1+r)^(n) n(FV/PV) = n*ln(1+r) n = ln(FV/PV) / ln(1+r) ------------------------------------------------------------------------------------------------------------------------------------- value of the investment = benefits (return of investment) -costs of investment (return of saving money in bank)  net value of investment in one year=105000--110000= -5000 (should not make the investment) net value of investment tdy=5000/(1+0.1)=4545.45