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DCF Valuation & Loan Formulas

The document discusses various formulas for valuing cash flows in corporate finance, including: 1) Formulas for calculating the future value and present value of multiple cash flows, as well as the present value of an ordinary annuity. 2) Formulas for calculating the future value and present value of growing and perpetuity cash flows. 3) The calculation of period rates and effective annual rates from annual percentage rates. 4) Different types of loan structures including pure discount loans, interest-only loans, and amortized loans with fixed payments and changing interest/principal amounts.

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Aayushi Reddy
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519 views6 pages

DCF Valuation & Loan Formulas

The document discusses various formulas for valuing cash flows in corporate finance, including: 1) Formulas for calculating the future value and present value of multiple cash flows, as well as the present value of an ordinary annuity. 2) Formulas for calculating the future value and present value of growing and perpetuity cash flows. 3) The calculation of period rates and effective annual rates from annual percentage rates. 4) Different types of loan structures including pure discount loans, interest-only loans, and amortized loans with fixed payments and changing interest/principal amounts.

Uploaded by

Aayushi Reddy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

FINA 1310 – Corporate Finance

Lecture 3
DCF VALUATION

FV of Multiple Cash Flows: General Formula


 
t t−1
FV t=CF0 ×(1+r ) +CF 1 ×(1+r ) +…+CF t
  
PV of Multiple Cash Flows: General Formula
 
CF 1 CF t
PV t=CF 0 + 1
+…+ t
(1+ r ) (1+ r)
 
Ordinary Annuity Present Value: General Formula of PV
(end of period payment - mortgage payment)
 

{ [ ]}
1
1−

{ [ ]}
( 1+r )t CF 1
PV =CF × = × 1−
r r ( 1+r )t
  
 CF: the amount of cash flow every period (CF ↑ ⟹PV ↑)
 t: number of annuity periods (t ↑ ⟹PV ↑)
 r: interest rate (discount rate, required return, …) (r ↑ ⟹PV ↓)
 
Ordinary Annuity Future Value: General Formula of FV
(end of period payment)
 
Annuity FV =CF × { ( 1+r )t−1
r }
 
Annuity Due Formula - both PV and FV:
(beginning of the period - rent payment)
 
Annuity due value=ordinary annuity due × (1+ r )
 
 
Growing Annuity - General Formula:

{ [ ]}
t
(1+ g)
1−
(1+r )
Growing annuity PV =CF ×
r −g
 
Growing annuity FV =CF × { ( 1+r )t−(1+ g)t
r −g }
 
Perpetuity Present Value - General Formula:
 
CF
Perpetuity PV =
r

 Calculation of FV of a perpetuity is not feasible due to an infinite stream of cash flows.

Growing Perpetuity - General Formula:


 
CF
Growing Perpetuity PV =
r−g
 
Period rate

APR
Period rate=
m
 
Effective annual rate (EAR)
‒ The actual rate you earn per year, accounting for compounding
 
EAR=
FV −PV
PV
= 1+
m(
APR m
−1 )
 
m: the number of compounding periods per year

APR
m⟶ ∞ , EAR=℮ −1

Pure Discount Loans


 The borrower receives money today and repays a single lump sum (all principal +
interest) at the end. Eg: Treasury Bills
V
PV =
(1+r )t

V: Lump sum payment

  

Interest-Only Loans
 Interest every period and repay the entire principal + the final interest at the end.

 
 

Amortized Loans - Fixed Principal Payments


 Principle payment amount is constant.
 Interest payment reduces each period as principle reduces
 The borrower repays an equal part of principal + the interest of the remaining principal
every period.

Interest Payment=Beginning Balance × Interest Rate

 The amount of principal repayment is the same ever year


 The amount of interest payment declines each year as principal reduces
Amortized Loans - Fixed Equal Payments
 
 Amount paid each period is constant
 The principle and interest components within the payment differs

{ [ ]}
1
1−
( 1+r )t
P rinciple=CF ×
r
DIFFERENT BASIS OF INTEREST CALCULATION

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