rate of interest can be used to express the time value of money.

Simple interest SI P0 +P0(i )(n) $180 $100 +$100(0.08)(10) where SI simple interest in dollars P0 principal, or original amount borrowed (lent) at time period 0 i interest rate per time period n number of time periods compound interest or FV5 $100(1 +0.08)power(5) ______________________________________________________________________________ Present value The current value of a future amount of money, or a series of payments, evaluated at a given interest rate. PV(i,n) = FVn /(1 + i)n The present value of annuities(ordinary) PV =FV (1/ (1 + i)n) FV { 1- {1/ (1 + i)n}/i} Future value (terminal value) value at some future time of a present amount of money, or a series of payments, evaluated at a given interest rate FV(i,n) = PVn * (1 + i)n RETURN = Profit /Investment D+(PNOW_ P LAST) /P LAST EXPECTED RETURN = (P) amount of money(R)return the results will be in dollars INTEREST PV =FV/(1 + i)n (1 + i)n= FV/ PV i=(FV/PV) POWERE1/n -1
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VALUATIONI (PVIFAkd,n) MV(PVIFkd,n) VALUE OF BOND or discounted cash flow =(DCF) = interest rate in dollar +

interest rate in dollar + principals (1 + i)n of market or required rate (1 + i)n of market or required rate ------------------------------------------------------shares--------------------------------------------------------------------D ke Do(1 + g) (ke - g) + pn (1 + ke)3

PRICE OF SHARE(NO GROWING) = PRICE OF SHARE(GROWING) = VALUE OF SHARE

GROWTH

= dividend +principals
Do + D2 + D3 (1 + ke) (1 + ke)2 (1 + ke)3 = P(reinvest)* R(interest rate)

DIVIDEND GROWTH MODEL (DGM) it is used to valuation the dividend growing rate is constant = Do(1 + g) + Do(1 + g)2 + Do(1 + g)3 + Do(1 + g)n (1 + ke) (1 + ke)2 (1 + ke)3 (1 + ke)n

------------------------------------------------------earning-------------------------------------------------------earnings yield The earnings per share (EPS) divided by market share price = Earnings/Company value= E /V= D /V+ BE /V Where (BE) is retained earn or growth rate
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or weight average of money (to make percent the results/100) proportion of total financing = proportion of finance / total financing COST OF DEPT AFTER TAX = kd(1_TAX) 11.00 (1 0.40) 6.60%

11.00(THE

COST BEFORE TAX) 6.60%( THE COST AFTERTA)

VALUE OF STOCK = D/K+1 VALUE OF STOCK(GROWTH) = D/K_G COST OF DEPT AFTER TAX = Return OF DEPT )(1_TAX) COST OF PREFERRED = D(DIVIDEND)/P(PRICE) COST OF UITY = (RF)(RM_RF)()
Cost of Equity: Before-Tax Cost = COST OF DEPT Before-tax Risk premium in of Debt Plus Risk Premium Approach

= D(DIVIDEND)/P(PRICE) +G Weighted Average Cost Capital(WACC) =COST OR PERCENT RETURN XPROPORTION OF TOTAL FINANCING PROPORTION OF TOTAL FINANCING=CAPITAL/TOTAL CAPITAL net present value = present value OF CASH FLOW_( initial outlay+ Flotation costs) VARIANCE (2 ) = {(R)_(XR)P2}(P) Coefficient of variation (CV) VARIANCE / EXPECTED RETURN Required Rates of Return (RF)(RM_RF)() FUTUR DIVIDEND

Q _we are concerned is whether a firm can affect its total valuation (debt plus equity)

and its cost of capital by changing its financing mix

A _financing mix are assumed to occur by issuing debt and repurchasing common stock or by issuing common stock and retiring debt.

Q _what happens to the total valuation of the firm and to its overall required return when the ratio of debt to equity, or the relative amount of financial leverage, is varied.
WE assume earnings are pays out & no grow & no income taxes. In the subsequent discussion we are concerned with three different rates of return. The first is Ki =i /B = Annual interest on debt / Market value of debt outstanding The second is K e = E / S = earning available to common shareholders / Market value of common stock outstanding The third is Ko =O/V = net operating income / Total market value of the firm (O) net operating income = I + E = (interest paid + earnings available to common shareholders) (V)Total market value of the firm=B + S = (the sum of the market value of its debt + equity) SO K o = K i(B / B+ S) + K e(S / B+ S)