Module 3

Session 3 - Time Value of  Money and Valuation (Chapter 4)

All page numbers are references to Corporate Finance: A Focused Approach 5th edition by Ehrhardt and Brigham (Cengage South-Western, 2014)

Need  to know almost everything plus you need to learn how to use your financial  calculator. Specifically, you can solve for any of the variables (present  value, future value, payment, interest rate, and number of periods) for present  value, future value, and annuity problems. You should be able to solve for the  present value of; annuities, perpetuities, growing perpetuities, and a stream of  uneven cash flows. You should be able to convert simple interest (aka APR,  stated rate, quoted rate, and a few other names for an uncompounded annual  interest rate) to an effective annual interest rate and/or a periodic rate. You should be able to solve multiple step time value of money problems.  You  should be able to solve all of the end-of-chapter questions and problems. Note, that some variation all of those questions and problems have appeared in past quizzes and exams.  I consider the following problems to be exam level problems 5, 8, 18, 19, 21b, 24, and 27-34.

This  chapter develops the valuation techniques that we use for the rest of the  course. This is the most important chapter in the course. The rest of the  course will apply techniques learned in this chapter.

Do not  need to know - Growing Annuity (until we get to the stock valuation chapter).

This  textbook has no instruction to assist in using calculators and spreadsheets.  You will need to be able to use a financial calculator for the quizzes and  exams. It is critical that you  �set up�� your calculator correctly. Here is a link to simple instructions for most  calculators.

Note,  that your calculator is probably set to 12 payments per year and 2 decimal  places. You need to change this to 1 payment per year and at least 4 decimal  places.

1. Watch  the Chapter  Introduction and Overview video. The Powerpoints for all of this chapter’s videos are located here. An important concept, and the most common loan in your personal life, is the amortized loan. This video discusses Amortized  Loans in detail. If you find yourself  making lots of errors, watch this  video that discusses the most common  TVM errors.

2. Easy Concepts and  Calculations. A key part of learning time value of money is  recognizing problems. Below are some audio solutions (courtesy of Dr. Ron Best) to simple problems from this chapter.  Use these problems to verify your calculator and/or spreadsheet are set up correctly.

4. More Difficult  Concepts and Calculations. Be able to solve all of the chapter  examples and end of chapter problems. A key part of learning time value of money  is recognizing problems. Below are audio solutions (courtesy of Dr. Ron Best)  to more difficult problems from this chapter.

5. Additional  Support Material. There is some good internet support material for this  topic.

7. There is a longer  quiz for this chapter, as the only way to learn this material is to do many,  many problems.

Revised January 21, 2016

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