lecture 2

CORPORATE OBJECTIVES
How is shareholder wealth maximised? Shareholder wealth can be maximised by maximising the purchasing power that shareholder derive through dividend payments and capital gains over time. The magnitude of cash flows accumulating to the company The timing of cash flows accumulating to the company The risk associated with the cash flows accumulating to the company.
Net present value (NPV) When the value of a cost or benefit is computed in terms of cash today, we refer to it as the Present Value (PV). Therefore, the different between a project’s present value of the benefit and present value of the cost has been called Net Present Value (NPV)
Interest rates and the time value of money
One unit currency in the future over the period can be write in (1+ r f ) Hence, the risk-free interest rate would also convert the future cash flow or benefit into current value. Future benefit in today’s value=future benefit / risk free interest rate.
1 1 + r

Interest rates and the time value of money
the amount of 1 +1 r is called the one year discount factor or one year discount rate.
Present value and the NPV decision rule
No- Arbitrage and Security prices NoValuing a security No Arbitrage Price of a security Price(Security)=PV(All cash flows paid by the security) Risk- free interest rate= bank deposit rate
Arbitrage and Law of One Price
Law of One Price If equivalent investment opportunities trade simultaneously in different competitive markets, then they must trade for the same price in both markets. On the other words, the price in different market should be equality because arbitrage.
Interest rates and the time value of money
The interest rate: An Exchange Rate Across Time The rate at which we can exchange money today for money in the future is determined by the current interest rate. Risk-free interest rate: for given period as the interest rate at which money can be borrowed or lent without risk over that period.
Arbitrage and Law of One Price
Arbitrage The practice of buying and selling equivalent goods in different markets to take advantage of a price difference is know as arbitrage.
Interest rates and the time value of money
The market price determine skill has ignore an important factor which is time In practice, most cost and benefits has occurred in different point of time.
Present value and the NPV decision rule
Net Present Value NPV=PV(benefits)-PV(costs)
Present value and the NPV decision rule
The NPV decision rule The NPV represents the value of the project in terms of cash today. Therefore, good projects are those with a positive NPV Hence the rule is: when making an investment decision, take the alterative with the highest NPV. Choosing this alternative is equivalent to receiving its NPV in cash today.
Interest rates and the time value of money
Interest rate can help us evaluate investment project. e.g. cost=(10,000 today)×(1.07 interest rate)=10700 in one year after Also, we can use interest rate to convert future cash flow into the value today.
Interest rates and the time value of money
The time value of money The time value of money is the difference in amount of value between money today and money in the future. For example: 100 pounds deposit in commercial bank will earn the rate of depositing interest.
VALUING COSTS AND BENEFITS
Using market prices to determine cash values The very beginning to evaluate a project is to identify its current costs and benefits without time value. Competitive market price is the price that all traders are received. e.g. if you have a opportunity to trade 10 cars of Audi A4 and receive a flat which more than 100 square meter in downtown of Guangzhou. How you make your decision.
ARBITRAGE AND FINANCIAL DECISION MAKING
CORPORATE FINANCE
CORPORATE OBJECTIVES
Primary financial objective Primary financial objective of any corporate should be to make decisions that maximise the value of the company for its owners.