Corporate

Finance @
EDHEC

Prof. Schroth
Corporate Finance 1
Details
MSc inFinance
Introduction
Types of firms
The corporation
EDHEC Business School
Corporate taxation
Ownership v. control

Valuation and
Decision
Enrique Schroth
Making
Principles
Time value of money Professor of Finance
NPV rules EDHEC Business School
Valuing cash flow
streams

Revision Lecture 1
15th September, 2021

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 Module details

Corporate
Finance @
EDHEC

Prof. Schroth

Details • My details:
Introduction
Types of firms
The corporation
Corporate taxation
Ownership v. control • Email: enrique.schroth@edhec.edu
Valuation and
Decision
Making • Office hours and consultation: during scheduled Q&A
Principles
Time value of money
sessions, or spontaneous Zoom sessions, or by appointment
NPV rules
Valuing cash flow
(send me an email to arrange)
streams

Revision

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 Module details

Corporate
Finance @
EDHEC • Course details:
Prof. Schroth • Live Teaching: 10 × 3-hour on Campus lectures and 5 ×
Details 2-hour Q&A or open format live online sessions.
Introduction
• Asynchronous learning: group work and revision of
Types of firms materials distributed or assigned in class, including
The corporation
Corporate taxation tutorials, mini lectures and exercises.
Ownership v. control
• Assessment: 20% interim group assignment, 30% final
Valuation and
Decision
group assignment, 50% written examination
Making • Blackboard page: best for posting questions and
Principles
Time value of money downloading all materials (lecture notes, answer keys,
NPV rules
Valuing cash flow
Q&A, assignment instructions, mock exams).
streams
• Useful textbook:
Revision
1 J. Berk and P. DeMarzo, Corporate Finance, 5th Global
Edition (2019), Pearson Education.

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 A brief introduction to Corporate Finance

Corporate
Finance @ Learning objectives:
EDHEC
(Berk and DeMarzo, Chapters 3 and 4)
Prof. Schroth

Details 1 Know the four major types of firms including means for
Introduction distributing income to owners;
Types of firms
The corporation
Corporate taxation 2 Distinguish between limited and unlimited liability;
Ownership v. control

Valuation and 3 Understand the taxation consequences for corporates.

Decision
Making
Principles
4 Understand the concept of PV and explain why
Time value of money maximizing NPV is always the correct decision rule.
NPV rules
Valuing cash flow
streams 5 Calculate the no-arbitrage price of an investment
Revision opportunity.
6 Given cash flows and an interest rate, compute the Net
Present Value for a series of cash flows.
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 The Four Types of Firms

Corporate
Finance @
EDHEC

Prof. Schroth
1 Sole Proprietorship (‘Sole Trader’, ‘Entreprise Individuelle’)
Details

Introduction
Types of firms 2 Partnership (‘Société en Nom Collectif’)
The corporation
Corporate taxation
Ownership v. control

Valuation and
3 Limited Liability Company (‘Private Liability’ or LTD,
Decision
Making
‘Société à Responsibilité Limitée’)
Principles
Time value of money
NPV rules 4 Corporation (‘Public Liability’ or PLC, ‘Société Anonyme
Valuing cash flow
streams Par Actions’)
Revision

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 Types of Firms: Sole Proprietorship

Corporate
Finance @
EDHEC 1 Business is owned and run by one person.
Prof. Schroth

Details
2 Typically has few, if any, employees.
Introduction
Types of firms
The corporation
⇒ Advantages:
Corporate taxation
Ownership v. control
• Easy to create
Valuation and
Decision ⇒ Disadvantages:
Making
Principles • No separation between the firm and the owner
Time value of money
NPV rules
Valuing cash flow
• Unlimited personal liability
streams

Revision
• Limited life

Examples: your builder, your local café, ...

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 Types of Firms: Partnership

Corporate
Finance @
EDHEC

Prof. Schroth 1 Similar to a sole proprietorship, but with more than one
Details owner.
Introduction
Types of firms 2 All partners are personally liable for all of the firm’s
The corporation
Corporate taxation
debts. A lender can require any partner to repay all of the
Ownership v. control
firm’s outstanding debts.
Valuation and
Decision
Making 3 The partnership ends with the death or withdrawal of any
Principles
Time value of money single partner.
NPV rules
Valuing cash flow
streams

Revision
⇒ Creates managerial and creative synergies relative to sole
traders, but there is more room for conflict.

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 Types of Firms: Partnership (cont’d.)

Corporate
Finance @
EDHEC
Partnerships have two typers of owners:
Prof. Schroth

Details
1 General Partners (GPs)
Introduction
• who have unlimited liability;
Types of firms • run the firm on a day-to-day basis.
The corporation
Corporate taxation
Ownership v. control 2 Limited Partners (LPs)
Valuation and • who have limited liability and cannot lose more than their
Decision
Making initial investment;
Principles • have no management authority and cannot legally be
Time value of money
NPV rules involved in the managerial decision making for the
Valuing cash flow
streams business.
Revision

Examples: Law firms, Consultancies, Private Equity funds,

Hedge funds.
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 Types of Firms: Limited Liability Companies

Corporate
Finance @
EDHEC

Prof. Schroth

Details 1 All owners have limited liability.

Introduction
Types of firms 2 They can also run the business.
The corporation
Corporate taxation
Ownership v. control
⇒ Like a corporation (next), without separation of ownership
Valuation and
Decision and control and disclosure requirements.
Making
Principles
Time value of money
NPV rules
Examples: Most start-ups, Virgin Atlantic, and recently many
Valuing cash flow
streams large corporations ‘gone private’.
Revision

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 Types of Firms: Corporations

Corporate
Finance @
EDHEC

Prof. Schroth
A legal entity that is separate from its owners
Details

Introduction
Types of firms 1 Has many of the legal powers individuals have such as the
The corporation
Corporate taxation ability to enter into contracts, own assets, and borrow
Ownership v. control

Valuation and
money
Decision
Making
Principles
2 The corporation is solely responsible for its own
Time value of money obligations. Its owners are not liable for any obligation the
NPV rules
Valuing cash flow
streams
corporation enters into.
Revision

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 Types of Firms in the US

Corporate
Finance @
EDHEC

Prof. Schroth

Details

Introduction
Types of firms
The corporation
Corporate taxation
Ownership v. control

Valuation and
Decision
Making
Principles
Time value of money
NPV rules
Valuing cash flow
streams

Revision

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 Ownership of corporations

Corporate
Finance @
EDHEC

Prof. Schroth • Owners are represented by shares of stock.

Details • Owner of stock is called
Introduction
Types of firms
• Shareholder;
The corporation • Stockholder; or
Corporate taxation
Ownership v. control
• Equity Holder
Valuation and
Decision • Sum of all ownership value is called equity.
Making
Principles
Time value of money • There is no limit to the number of shareholders and, thus,
NPV rules
Valuing cash flow
streams
the amount of funds a company can raise by selling stock.
Revision
• Owner is entitled to dividend payments.

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 Taxation of corporations

Corporate
Finance @
EDHEC
Example of Double Taxation:
Prof. Schroth

Details • You are a shareholder in a corporation that has income

Introduction before taxes of £4 million.
Types of firms
The corporation • Once the firm has paid taxes, it will distribute the rest of
Corporate taxation
Ownership v. control its earnings to its shareholders as a dividend.
Valuation and
Decision
• There are 1 million shares outstanding.
Making
Principles • Assume the corporate tax rate is 34%, and the personal
Time value of money
NPV rules tax rate on dividend income is 20%.
Valuing cash flow
streams

Revision As a shareholder with 100 shares, how much will you

receive after all taxes are paid?

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 Taxation of corporations (cont’d.)

Corporate
Finance @
EDHEC

Prof. Schroth
Solution:

Details • First, the corporation must pay its taxes: 34% × £4

Introduction
Types of firms
million = £1.36 million in corporate taxes.
The corporation
Corporate taxation
Ownership v. control

Valuation and
Decision
Making
Principles
Time value of money
NPV rules
Valuing cash flow
streams

Revision

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 Taxation of corporations (cont’d.)

Corporate
Finance @
EDHEC

Prof. Schroth
Solution:

Details • First, the corporation must pay its taxes: 34% × £4

Introduction
Types of firms
million = £1.36 million in corporate taxes.
The corporation
Corporate taxation
• That leaves £2.64 million to distribute to shareholders.
Ownership v. control

Valuation and
Decision
Making
Principles
Time value of money
NPV rules
Valuing cash flow
streams

Revision

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 Taxation of corporations (cont’d.)

Corporate
Finance @
EDHEC

Prof. Schroth
Solution:

Details • First, the corporation must pay its taxes: 34% × £4

Introduction
Types of firms
million = £1.36 million in corporate taxes.
The corporation
Corporate taxation
• That leaves £2.64 million to distribute to shareholders.
Ownership v. control
• Collectively, shareholders will have to pay 20% × £2.64
Valuation and
Decision million = £528,000 in taxes on the dividends.
Making
Principles
Time value of money
NPV rules
Valuing cash flow
streams

Revision

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 Taxation of corporations (cont’d.)

Corporate
Finance @
EDHEC

Prof. Schroth
Solution:

Details • First, the corporation must pay its taxes: 34% × £4

Introduction
Types of firms
million = £1.36 million in corporate taxes.
The corporation
Corporate taxation
• That leaves £2.64 million to distribute to shareholders.
Ownership v. control
• Collectively, shareholders will have to pay 20% × £2.64
Valuation and
Decision million = £528,000 in taxes on the dividends.
Making
Principles • This leaves £2.64 million - £528,000 = £2,112,000 after
Time value of money
NPV rules all taxes are paid.
Valuing cash flow
streams

Revision

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 Taxation of corporations (cont’d.)

Corporate
Finance @
EDHEC

Prof. Schroth
Solution:

Details • First, the corporation must pay its taxes: 34% × £4

Introduction
Types of firms
million = £1.36 million in corporate taxes.
The corporation
Corporate taxation
• That leaves £2.64 million to distribute to shareholders.
Ownership v. control
• Collectively, shareholders will have to pay 20% × £2.64
Valuation and
Decision million = £528,000 in taxes on the dividends.
Making
Principles • This leaves £2.64 million - £528,000 = £2,112,000 after
Time value of money
NPV rules all taxes are paid.
Valuing cash flow
streams

Revision
As the owner of 100 shares, you will have £211.20 after
both corporate and personal taxes are paid.

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 Ownership versus control

Corporate
Finance @
EDHEC

Prof. Schroth
The corporate management team:
Details

Introduction
Types of firms
• In a corporation, ownership and direct control are typically
The corporation
Corporate taxation
separate.
Ownership v. control

Valuation and
• Board of Directors
Decision
Making
• Elected by shareholders
Principles • Have ultimate decision-making authority
Time value of money
NPV rules
Valuing cash flow • Chief Executive Officer (CEO): Board delegates day-to-day
streams

Revision decision making to CEO.

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 Organizational chart of a typical corporation

Corporate
Finance @
EDHEC

Prof. Schroth

Details

Introduction
Types of firms
The corporation
Corporate taxation
Ownership v. control

Valuation and
Decision
Making
Principles
Time value of money
NPV rules
Valuing cash flow
streams

Revision

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 The firm and society

Corporate
Finance @
EDHEC Goal of the firm’s management team:
Prof. Schroth

Details
• Shareholders will agree that they are better off if
Introduction
management makes decisions that maximizes the value
Types of firms
The corporation
of their shares.
Corporate taxation
Ownership v. control • Often, a corporation’s decisions that increase the value of
Valuation and the firm’s equity benefit society as a whole.
Decision
Making
Principles
• As long as nobody else is made worse off by a
Time value of money
NPV rules
corporation’s decisions, increasing the value of the firm’s
Valuing cash flow
streams equity is good for society.
Revision
• It becomes a problem when increasing the value of the
firm’s equity comes at the expense of others.

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 Ethics and Incentives within corporations

Corporate
Finance @
EDHEC 1 Agency problems
Prof. Schroth • Managers may act in their own interest rather than in the
best interest of the shareholders.
Details
• One potential solution is to tie management’s
Introduction
Types of firms
compensation to firm performance.
The corporation ⇒ How should performance be measured?
Corporate taxation
Ownership v. control 2 CEO Performance
Valuation and
Decision
• If a CEO is performing poorly, shareholders can express
Making their dissatisfaction by selling their shares. This selling
Principles
Time value of money pressure will drive the stock price down.
NPV rules • Hostile takeovers: Low stock prices may entice a
Valuing cash flow
streams
Corporate Raider to buy enough stock so they have
Revision enough control to replace current management.
• Formal reorganisation
• Liquidation

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 Cost-Benefit analysis

Corporate
Finance @
EDHEC Example: Suppose a jewelery manufacturer has the
Prof. Schroth opportunity to trade 10 ounces of gold and receive 20 ounces
Details
of palladium today.
Introduction
Types of firms
The corporation
Corporate taxation
Ownership v. control

Valuation and
Decision
Making
Principles
Time value of money
NPV rules
Valuing cash flow
streams

Revision

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 Cost-Benefit analysis

Corporate
Finance @
EDHEC Example: Suppose a jewelery manufacturer has the
Prof. Schroth opportunity to trade 10 ounces of gold and receive 20 ounces
Details
of palladium today.
Introduction
Types of firms
• To compare the costs and benefits, we could first convert
The corporation
Corporate taxation
both commodities to a common unit.
Ownership v. control ⇒ If the current market price for palladium is £600 per
Valuation and
Decision
ounce, then the 20 ounces of palladium we receive has a
Making
Principles
cash value of
Time value of money (20 ounces of palladium) × (£600/ounce) = £12, 000.
NPV rules
Valuing cash flow
streams

Revision

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 Cost-Benefit analysis

Corporate
Finance @
EDHEC Example: Suppose a jewelery manufacturer has the
Prof. Schroth opportunity to trade 10 ounces of gold and receive 20 ounces
Details
of palladium today.
Introduction
Types of firms
• To compare the costs and benefits, we could first convert
The corporation
Corporate taxation
both commodities to a common unit.
Ownership v. control ⇒ If the current market price for palladium is £600 per
Valuation and
Decision
ounce, then the 20 ounces of palladium we receive has a
Making
Principles
cash value of
Time value of money (20 ounces of palladium) × (£600/ounce) = £12, 000.
NPV rules
Valuing cash flow
streams
⇒ If gold can be bought and sold for a current market
Revision
price of £1,300 per ounce. Then the 10 ounces of gold we
give up has a cash value of
(10 ounces of gold) × (£1, 300/ounce) = £13, 000.

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 Cost-Benefit analysis (cont’d.)

Corporate
Finance @
EDHEC • Therefore, the jeweler’s opportunity has a benefit of
Prof. Schroth
£12,000 today and a cost of £13,000 today.
Details • In this case, the net value of the project today is
Introduction
Types of firms
£12, 000 − £13, 000 = −£1, 000.
The corporation
Corporate taxation
⇒ a negative net value implies that costs exceed benefits,
Ownership v. control
and that the jeweler should reject the trade.
Valuation and
Decision
Making
Principles
Time value of money
NPV rules
Valuing cash flow
streams

Revision

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 Cost-Benefit analysis (cont’d.)

Corporate
Finance @
EDHEC • Therefore, the jeweler’s opportunity has a benefit of
Prof. Schroth
£12,000 today and a cost of £13,000 today.
Details • In this case, the net value of the project today is
Introduction
Types of firms
£12, 000 − £13, 000 = −£1, 000.
The corporation
Corporate taxation
⇒ a negative net value implies that costs exceed benefits,
Ownership v. control
and that the jeweler should reject the trade.
Valuation and
Decision
Making Note: We used the current market price to convert from ounces
Principles
Time value of money
of platinum or gold to £
NPV rules
Valuing cash flow
⇒ often in valuation we are not concerned about the
streams
‘fairness’ of the exchange prices, nor the instrinsic
Revision
valuations of the exchanged goods (e.g., the value of silver
and gold to the jeweler).

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 Applying the valuation principle

Corporate
Finance @
EDHEC

Prof. Schroth

Details
Example: You are offered the following investment
Introduction
opportunity: In exchange for $50,000 today, you will receive
Types of firms 2,500 shares of stock in the Ford Motor Company and e10,000
The corporation
Corporate taxation today. The current market price for Ford stock is $14 per
share, and the current exchange rate is $1.12 per e.
Ownership v. control

Valuation and
Decision
Making • Should you take this opportunity?
Principles
Time value of money
NPV rules
• Would your decision change if you believed the value of
Valuing cash flow
streams the euro would rise over the next month?
Revision

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 Applying the valuation principle (contd.)

Corporate
Finance @
EDHEC

Prof. Schroth Solution: The costs and benefits must be converted to their
Details cash values. Assuming competitive market prices:
Introduction
Types of firms
• 2,500 shares × $14 / share = $35, 000.
The corporation
Corporate taxation • e10,000 × $1.12 / e= $11, 200.
Ownership v. control

Valuation and ⇒ the next value of the opportunity is

Decision
Making $35, 000 + $11, 200 − $50, 000 = −$3, 800. → Reject
Principles
Time value of money
NPV rules
Note: Our personal opinion about the future prospects of the
Valuing cash flow
streams euro and Ford does not alter the value the decision today.
Revision Only current market prices do.

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 The time value of money

Corporate
Finance @
EDHEC

Prof. Schroth
Consider an investment opportunity with the following certain
Details
cash flows:
Introduction
Types of firms • Cost: £100,000 today;
The corporation
Corporate taxation • Benefit: £105,000 in one year;
Ownership v. control

Valuation and
Decision
Making
Principles
Time value of money
NPV rules
Valuing cash flow
streams

Revision

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 The time value of money

Corporate
Finance @
EDHEC

Prof. Schroth
Consider an investment opportunity with the following certain
Details
cash flows:
Introduction
Types of firms • Cost: £100,000 today;
The corporation
Corporate taxation • Benefit: £105,000 in one year;
Ownership v. control

Valuation and
Decision ⇒ The decision to invest is not trivial because money in
Making
Principles
the future is not worth the same as money today.
Time value of money
NPV rules ⇒ The difference in value between money today and
Valuing cash flow
streams
money in the future is due to the time value of money.
Revision

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 The interest rate

Corporate
Finance @
EDHEC

Prof. Schroth
• The current interest rate is the rate at which we can
Details exchange money today for money in the future.
Introduction
Types of firms
• Suppose the current annual interest rate is 7%.
The corporation
Corporate taxation
⇒ By investing or borrowing at this rate, we can exchange
Ownership v. control
£1.07 in one year for each £1 today.
Valuation and
Decision ⇒ The interest rate is just another price: the price of
Making
Principles
money in the future!
Time value of money
NPV rules
• The Risk-Free Interest Rate or Discount Rate (rf ) is
Valuing cash flow
streams the interest rate at which money can be borrowed or lent
Revision without risk.

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 Interest rate factors and discount factors

Corporate
Finance @
EDHEC

Prof. Schroth • The Interest Rate factor is

Details
1 + rf ;
Introduction
Types of firms
The corporation
Corporate taxation
it determines the future value of £1 invested today.
Ownership v. control

Valuation and
Decision
• The Discount factor is
Making
Principles 1
Time value of money ;
NPV rules 1 + rf
Valuing cash flow
streams

Revision it determines the present value of £1 (or e1 or $1) earned

in the future.

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 Back to the Example

Corporate
Finance @
The value of the investment in one year:
EDHEC
• If the the interest rate is 7%, then our costs are:
Prof. Schroth

Details

Introduction Cost = (£100, 000 today) ×

Types of firms
The corporation
Corporate taxation
(£1.07 in one year/£1 today)
Ownership v. control
= £107, 000 in one year.
Valuation and
Decision
Making • Both costs and benefits are now in terms of ‘£ in one
Principles
Time value of money year,’ so we can compare them and compute the
NPV rules
Valuing cash flow
streams
investment’s net value:
Revision
£105, 000 − £107, 000 = − £2, 000 in one year.
⇒ We could earn £2,000 more in one year by putting our
£100,000 in the bank rather than making this investment.
⇒ We should reject the investment.
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 Back to the Example (cont’d.)

Corporate
Finance @ The value of the investment today:
EDHEC

Prof. Schroth • Consider the benefit of £105,000 in one year. What is the
Details
equivalent amount in terms of £ today? :
Introduction
Types of firms
The corporation
Corporate taxation
Benefit = (£105, 000 in one year)/
Ownership v. control

Valuation and
(£1.07 in one year/£1 today)
Decision
Making = £98, 130.84 today.
Principles
Time value of money
NPV rules • This is the amount the bank would lend to us today if we
Valuing cash flow
streams promised to repay £105,000 in one year.
Revision ⇒ The net value of the investment is
£98, 130.84 − £100, 000 = − £1, 869.16 today.
⇒ We should reject the investment.
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 Present versus Future value

Corporate
Finance @
EDHEC
In the previous example:
Prof. Schroth
• If we converst from £ today to £ in one year:
Details

Introduction
Types of firms
The corporation
Corporate taxation
(−£1, 869.16 today) × (£1.07 in one year/£1 today)
Ownership v. control
= −£2, 000.00 in one year.
Valuation and
Decision
Making • The two results are equivalent but expressed as values at
Principles
Time value of money different points in time.
NPV rules
Valuing cash flow
streams
• The present value (PV) is the value in terms of £ today;
Revision the future value (FV) of the invesment is expressed in
£ in the future.

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 Application: Delay decisions

Corporate
Finance @
Suppose the cost of replacing a fleet of company lorries with
EDHEC more energy efficient vehicles is £100 million in 2021.
Prof. Schroth

Details
• The cost is estimated to rise by 8.5% in 2022.
Introduction • If the interest rate is 4%, what is the cost of delaying the
Types of firms
The corporation
decision by one year, in terms of £ of 2021?
Corporate taxation
Ownership v. control

Valuation and
Decision
Making
Principles
Time value of money
NPV rules
Valuing cash flow
streams

Revision

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 Application: Delay decisions

Corporate
Finance @
Suppose the cost of replacing a fleet of company lorries with
EDHEC more energy efficient vehicles is £100 million in 2021.
Prof. Schroth

Details
• The cost is estimated to rise by 8.5% in 2022.
Introduction • If the interest rate is 4%, what is the cost of delaying the
Types of firms
The corporation
decision by one year, in terms of £ of 2021?
Corporate taxation
Ownership v. control Solution:
Valuation and • If the project were delayed, its cost in 2022 would be
Decision
Making £100 million × 1.085 = £108.5 million.
Principles
Time value of money • The present value of this cost using the interest rate of
NPV rules
Valuing cash flow
streams
4%, i.e., expressed in 2021 £, is
1
Revision £108.5 million × 1.04 = £104.33 million.
⇒ The cost of a one-year delay would be
£104.33 million − £100 million = £4.33 million in 2021
(today’s) £.
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 Net present value

Corporate
Finance @
The Net present value (NPV) of a project or investment is
EDHEC
the difference between the present value of its benefits and the
Prof. Schroth
present value of its costs
Details

Introduction NPV = PV (Benefits) − PV (Costs)

Types of firms
The corporation = PV (All project net cash flows).
Corporate taxation
Ownership v. control

Valuation and
Decision
Making • Accepting (Rejecting) an investment with positive
Principles
Time value of money (negative) NPV is equivalent to receiving (spending) its
NPV rules
Valuing cash flow NPV in cash today
streams

Revision
• We can also use the NPV decision rule to choose among
alternative projects: the alternative with the highest
NPV will lead to the largest increase in the value of the
firm.
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 Separating investment and financing

Corporate
Finance @ Example: You are considering a risk-free investment that costs
EDHEC

Prof. Schroth
£7,000 and pays £8,500 in one year. You can either pay all
cash for the investment or you can borrow half and pay cash for
Details
the other half. If you borrow £3,500, you will be required to
Introduction
Types of firms
pay back £3,710 in one year. Suppose the risk-free rate is 6%.
The corporation
Corporate taxation
⇒ What is the project’s NPV? Is the NPV affected if you
Ownership v. control
borrow some of the funds?
Valuation and
Decision
Making
Principles
Time value of money
NPV rules
Valuing cash flow
streams

Revision

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 Separating investment and financing

Corporate
Finance @ Example: You are considering a risk-free investment that costs
EDHEC

Prof. Schroth
£7,000 and pays £8,500 in one year. You can either pay all
cash for the investment or you can borrow half and pay cash for
Details
the other half. If you borrow £3,500, you will be required to
Introduction
Types of firms
pay back £3,710 in one year. Suppose the risk-free rate is 6%.
The corporation
Corporate taxation
⇒ What is the project’s NPV? Is the NPV affected if you
Ownership v. control
borrow some of the funds?
Valuation and
Decision
Making Solution: the NPV of the project is
Principles
1
• If you pay all cash: £8, 500 × 1.06
Time value of money − £7, 000 = £1, 018.87
NPV rules
Valuing cash flow
streams
• If you borrow £3,500 to finance half of the project:
1
Revision (£8, 500 − £3, 710) × 1.06 − £3, 500 = £1, 018.87
⇒ The method of financing the investment does not
impact the value of the investment.
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 Using timelines

Corporate
Finance @
EDHEC • A timeline is a linear representation of the timing of
Prof. Schroth
potential cash flows.
Details • Drawing a timeline of the cash flows will help you
Introduction
Types of firms
visualize the financial problem.
The corporation
Corporate taxation
Example: Assume that you are lending $10,000 today and that
Ownership v. control
the loan will be repaid in two annual $6,000 payments.
Valuation and
Decision
Making
Principles
Time value of money
NPV rules
Valuing cash flow
streams

Revision

Inflows (Outflows) are represented as positive (negative)

sums.

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 Future values

Corporate
Finance @
EDHEC

Prof. Schroth

Details

Introduction
Types of firms Example: Suppose we plan to save $1000 today, and $1000 at
The corporation
Corporate taxation the end of each of the next two years. If we can earn a fixed
Ownership v. control
10% interest rate on our savings, how much will we have three
Valuation and
Decision years from today?
Making
Principles
Time value of money
NPV rules
Valuing cash flow
streams

Revision

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 Future values and compounding

Corporate
Finance @
EDHEC

Prof. Schroth

Details

Introduction
Types of firms
The corporation
Corporate taxation
Ownership v. control

Valuation and
Decision
Making
Principles
Time value of money
NPV rules
Valuing cash flow
streams

Revision

34 / 42
 Future values and compounding

Corporate
Finance @
EDHEC

Prof. Schroth

Details

Introduction
Types of firms
The corporation
Corporate taxation
Ownership v. control

Valuation and
Decision
Making
Principles
Time value of money
NPV rules
Valuing cash flow
streams

Revision

35 / 42
 Future values and compounding

Corporate
Finance @
EDHEC

Prof. Schroth

Details

Introduction
Types of firms
The corporation
Corporate taxation
Ownership v. control

Valuation and
Decision
Making
Principles
Time value of money
NPV rules
Valuing cash flow
streams

Revision

36 / 42
 Future values and compounding

Corporate
Finance @
EDHEC

Prof. Schroth

Details

Introduction
Types of firms
The corporation
Corporate taxation
Ownership v. control

Valuation and
Decision
Making
Principles
Time value of money
NPV rules
Valuing cash flow
streams

Revision

37 / 42
 Future values and compounding

Corporate
Finance @
EDHEC

Prof. Schroth

Details

Introduction
Types of firms
The corporation
Corporate taxation
Ownership v. control

Valuation and
Decision
Making For each inflow:
Principles
Time value of money FVn = C × (1 + r ) × (1 + r ) × ... × (1 + r ) = C × (1 + r )n
NPV rules | {z }
Valuing cash flow
streams n times
Revision

37 / 42
 Future values and compounding

Corporate
Finance @
EDHEC

Prof. Schroth

Details

Introduction
Types of firms
The corporation
Corporate taxation
Ownership v. control

Valuation and
Decision
Making For each inflow:
Principles
Time value of money FVn = C × (1 + r ) × (1 + r ) × ... × (1 + r ) = C × (1 + r )n
NPV rules | {z }
Valuing cash flow
streams n times
Revision For all:
N N
FV = ∑ FVn = ∑ C × (1 + r )n
n =0 n =1
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 Present values and discounting

Corporate
Finance @
EDHEC

Prof. Schroth

Details

Introduction
Types of firms
The corporation
Corporate taxation
Example: Assume that an investment will pay you $5,000 now
Ownership v. control
and $10,000 in five years.
Valuation and
Decision
Making
Principles
Time value of money
NPV rules
Valuing cash flow
streams

Revision

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 Present values and discounting

Corporate
Finance @
EDHEC

Prof. Schroth

Details

Introduction
Types of firms
The corporation
Corporate taxation
Ownership v. control

Valuation and
Decision
Making
Principles
Time value of money
NPV rules
Valuing cash flow
streams

Revision

39 / 42
 Present values and discounting

Corporate
Finance @
EDHEC

Prof. Schroth

Details

Introduction
Types of firms
The corporation
Corporate taxation
Ownership v. control

Valuation and For each inflow:

Decision
Making 1 1 1 C
Principles PVn = C × × × ... × =
Time value of money
|1 + r 1 + {z
r 1 + r} (1 + r )n
NPV rules
Valuing cash flow n times
streams

Revision

39 / 42
 Present values and discounting

Corporate
Finance @
EDHEC

Prof. Schroth

Details

Introduction
Types of firms
The corporation
Corporate taxation
Ownership v. control

Valuation and For each inflow:

Decision
Making 1 1 1 C
Principles PVn = C × × × ... × =
Time value of money
|1 + r 1 + {z
r 1 + r} (1 + r )n
NPV rules
Valuing cash flow n times
streams

Revision For all:

N N
C
PV = ∑ PVn = ∑ n
n =0 n =0 (1 + r )
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 Rules of discounting and compounding

Corporate
Finance @
EDHEC

Prof. Schroth

Details

Introduction
Types of firms
The corporation
Corporate taxation
Ownership v. control

Valuation and
Decision
Making
Principles
Time value of money
NPV rules
Valuing cash flow
streams

Revision

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 Revision questions

Corporate
Finance @
EDHEC

Prof. Schroth 1 If gasoline trades in a competitive market, would a

Details transportation company that has a use for the gasoline
Introduction value it differently than another investor?
Types of firms
The corporation 2 How do you compare benefits at different points in time?
Corporate taxation
Ownership v. control 3 If interest rates fall, what happens to the value today of a
Valuation and
Decision
promise of money in one year?
Making
Principles
4 What is the NPV decision rule?
Time value of money
NPV rules 5 Does the NPV decision rule depend on the investor’s
Valuing cash flow
streams preferences?
Revision
6 What is the Law of One Price?

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 Revision questions

Corporate
Finance @
EDHEC

Prof. Schroth

Details
7 What is Arbitrage?
Introduction 8 If a firm makes an investment that has a negative NPV,
Types of firms
The corporation
how does the value of the firm change?
Corporate taxation
Ownership v. control 9 What is the Separation Principle?
Valuation and
Decision 10 How do you calculate the present value of a cash flow
Making
Principles
stream?
Time value of money
NPV rules
11 What benefit does a firm receive when it accepts a project
Valuing cash flow
streams with a positive NPV?
Revision

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