CHAPTER 5: INTRODUCTION TO VALUATION: TIME VALUE OF MONEY

Future Value: (FV) The amount an investment is worth after one or more periods. Also compound CLEAR
value. CAL:
Compounding: the process of accumulating interest in an investment overtime to earn more interest.
2nd, (+/-)
Interest on interest: interest earned on the reinvestment of previous interest payments.
enter
Compound interest: interest earned on both the initial principle and the interest reinvested from reset,
prior periods.
Simple interest: interest earned only on the original principle amount invested.
Present Value: the current value of future cash flows discounted at the appropriate discount rate.BEG: 2nd, PMT,
Discount: To calculate the present value of some future amount.
2nd enter
Discount rate: The rate used to calculate the present value of future cash flows.
CHAPTER 6: DISCOUNTED CASHFLOW VALUATION
StuartGabriel,asecondyearMBAstudent,hasjustbeenofferedajobat$80,000ayear.Heanticipateshissalaryincreasingby9percentayear
untilhisretirementin40years.Givenaninterestrateof20percent,whatisthepresentvalueofhislifetimesalary?
Cleartimevalueofmoneymemory:2ndCLRTVMCompoundingshouldremainat P/Y=1(thirdrowsecondcolumn),ENTER(firstrowsecond
column),downarrow(firstrowfourthcolumn),C/Y=1.
Annuity: a level steam of cash flows for a fixed period of time.
Firststep:findoutIandPMT
Annuity due: an annuity for which the cash flows occur at the
I={(interestrategrowthrate)/(1+growthrate)}*100
beginning of the period.
={(.20.09)/(1+.09)}*100
Perpetuity: An annuity for which the cash flows continue
=10.09
forever.
PressSTO,1tostorethenumber
CONSOL: a type of perpetuity
PMT=CurrentAnnualSalary/(1+growthrate)
Growing Perpetuity: A constant stream of cash flows without
=(80,000/1.09)
end that is expected to rise indefinitely.
=73,394.50
Growing annuity: a finite number of growing annual cash flow.
Stated interest rate/quoted interest rate: the interest rate
PressSTO,2tostorethenumber
expressed in terms of the interest payment made each period.
SecondStep:enterthefollowing
N=40,numberofpayment/cashflowsinthegrowingannuity. Also quoted interest rate.
Effective annual rate: Interest rate expressed as if it were
I=pressRCL,1torecallthenumberwesaved
compounded once per year.
PV=Unknown
Annual percentage rate (APR): the interest rate charged per
PMT=RCL,2torecallthenumber
FV=0
TI BA II Plus Version
CPTPV=$711,731
General Process to Calculate EAR on the TI BA II Plus
FORMULAFORPRESENTVALUEOFGROWINGPERP
PV=C/RG
Press 2nd 2.This selects the ICONV function on the TI BA II Plus.
HoffsteinCorporationisexpectedtopayadividendof$3per
You should see NOM= on your calculator screen.
sharenextyear.Investorsanticipatethattheannualdividend Enter the interest rate you want to convert to the EAR, then press
willriseby6%peryearforever.Therequiredrateofreturn
ENTER
is11%.Whatisthepriceofthestocktoday?
Press the button twice. You should see C/Y= on your calculator
C1
screen. On this screen you input the number of times per year your
PV
rg
interest is compounded. Enter the interest rate, then press ENTER.
Finally, press the once. You should see EFF= on your calculator
$3.00

screen, which stands for the effective annual rate. Press the CPT key
0.11 0.06
and the EAR will be displayed on the calculator display.
$60.00
Applying these steps to Timmys problem:
8% compounded daily
Press 2nd 2. Make sure the screen says NOM=
Press 8, then ENTER
Press the arrow twice, then type in 365 followed by ENTER
Press the once, then CPT
The EAR should equal 8.33%
8.25% compounded quarterly
Press 2nd 2. Make sure the screen says NOM=
Input 8.25, then ENTER
Press the arrow twice, then type in 4 followed by ENTER
Press the once, then CPT
The EAR should equal 8.51%