15. Future Value of £200 ( 4 Years, 7% Interest ) What if the Interest Rate Goes Up to 8% ? 0 1 2 3 4 PV = £200 End of Year FV 1 = £214 FV 2 = £228.98 FV 3 = £245 FV 4 = £262.16
16. Future Value of £200 ( 4 Years, 8% Interest ) 0 1 2 3 4 PV = £200 End of Year Compounding – The Process of Earning Interest in Each Successive Year FV 1 = £216 FV 2 = £233.28 FV 3 = £251.94 FV 4 = £272.10
17. The Power Of Compound Interest Periods 0% Future Value of One Pound (£) 1.00 0 2 4 6 8 10 12 14 16 18 20 22 24 10.00 15.00 20.00 25.00 30.00 5.00 10% 5% 15% 20% 40.00
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19. Present Value of £200 ( 4 Years, 7% Interest ) What if the Interest Rate Goes Up to 8% ? 0 1 2 3 4 Discounting End of Year PV = £200 FV1 = £214 FV2 = £228.98 FV3 = £245 FV4 = £262.16
20. Present Value of £200 ( 4 Years, 8% Interest ) 0 1 2 3 4 Discounting End of Year PV = £200 FV1 = £216 FV2 = £233.28 FV3 = £252 FV4 = £272.10
21. The Power Of High Discount Rates Periods Present Value of One Pound (£) 0 2 4 6 8 10 12 14 16 18 20 22 24 0.5 0.75 1.00 0.25 10% 5% 15% 20% 0%
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Notes de l'éditeur
Formula can be rearranged to compute required return, if price and dividend known: Equity Valuation As will be discussed in chapter 5, the required return on common stock is based on its beta, derived from the CAPM Valuing CS is the most difficult, both practically & theoretically Preferred stock valuation is much easier (the easiest of all) Whenever investors feel the expected return, rˆ , is not equal to the required return, r , prices will react: If exp return declines or reqd return rises, stock price will fall If exp return rises or reqd return declines, stock price will rise Asset prices can change for reasons besides their own risk Changes in asset’s liquidity, tax status can change price Changes in market risk premium can change all asset values Most dramatic change in market risk: Russian default Fall 98 Caused required return on all risky assets to rise, price to fall
Formula can be rearranged to compute required return, if price and dividend known: Equity Valuation As will be discussed in chapter 5, the required return on common stock is based on its beta, derived from the CAPM Valuing CS is the most difficult, both practically & theoretically Preferred stock valuation is much easier (the easiest of all) Whenever investors feel the expected return, rˆ , is not equal to the required return, r , prices will react: If exp return declines or reqd return rises, stock price will fall If exp return rises or reqd return declines, stock price will rise Asset prices can change for reasons besides their own risk Changes in asset’s liquidity, tax status can change price Changes in market risk premium can change all asset values Most dramatic change in market risk: Russian default Fall 98 Caused required return on all risky assets to rise, price to fall