CORPORATE FINANCE

Nayan Jaiswal
 Time value
of money
and multiple cash flows
14 Future value
of angle
and multiple cash flow
24 Present value
of shingle
period for
34 Annuity :
Equal cashflow every
limited number of periods
PV analysis
-

FV analysis

for
44 Perpetuity Equal cashflow every period
-

infinite number of period

.

54
Growing annuity and growing perpetuity
 Future Value
of single cashflow
-

Can be related to the situation

of fined
deposits .

'

i
↳I =

Invest
PV ( Itm )
Pv is invested
@ time T
u
Jou

10% b- years What

ER 100 is invested @ joy
.

will be the future value

FV = 100 ( 1+0.175

◦ For the different periods of compounding

↳ xD
Ftl = PV
( g) +

No
compounding periods in a
year
n =
of
 For annual compounding ,
A- I

semi -

annually ,
A- 2

n -12
monthly
-

n = 52
weekly
,

4
guateuly in =

For continuous compounding ,

n= •

lt ( nm)
Fit =

n→ co
pv
( pg)
I +

= py.e.PT

A-
After weekly compounding the increase is

below that
negligible
Future Value Multiple cashflow.sn
*
of
Burn value of
individual cashflowa
of future
-

↑
 Beg of year
9

I 1 I 1
0 I 2 3

11 2L 3L
Maturity

.¥
3
1 ( lo 1)

Total FV =
100000 ( to 1)
3
+ 20000011132+300000
I
( 1. 1)

* Present value
ay shingle cashflow in
amount required
-

Can relate with

any target
future .

discount the Fu
To
find PV we
-

FV = PV ( Itm)T
Discount
P" =
, ¥ux= factor
 i i
that will
Er : Suppose you want to buy a
flat
What to invest @ 8%
50 lakh
now
cost Rs .

50L 5 years
to
get after
.

=%;%
-
PV =
3402916

with qualerly compounding

;÷÷→
=

Present value multiple cashflow

*
of cash flows
value individual
of
Sum
of present
-

i i i i
4 C2 CT

{
Total
→
¥ñ '

PV g÷g .

Deem
¥ix
=
 Er : Suppose bank ask you to deposit some
to
lllmpaum value and promises pay 50,000 ,

at the end of year

1
yeah
70,000 and 100000 ,

interest rate at 10%

2 and
years llespeltively of
.

What to invest now .

i i i i
100000
50000 70000

< {:
{
v
A
'

(1+0.1)
AUM <
B tooooo
<
( 1+0.133
C

PY = A + Btc

= 1784373

Instalment Interest Peuincipal Pturicipal left

1. 50000 17843.73 32156-27 146281

&
70000 14628.1 55371.5 90909.09

3. 100000 9090.09 90909.09 0

 period for limited
Equal CF every
no
Annuity :
.

of period .

Can be related to loan aituation

PV
of annuity
-

at the end each period

Case 1 :
If cash
flows are
of

i i i i - - - - - - -

PV
of =
¥ +
4%2 ¥µp+ +
- - - - -

¥µj
annuity
It is a sequence of geometric progression
a = first term = C-
It M

M = Common ratio =

¥
teams T
no
of
=
n =
.
 Sum =

a¥R
÷"
=

Fml

11 ¥7]
Pv
of annuity =

G-
-

Er : I Rs 100000 as loan annual

If can
pay
loan amount
instalments for next 10 years What .

to get if loan rate is 12% Cannuat

can I expect
table
make loan amortization
.

Also

100000
M 12 % C =
=

T = 10
 (÷ ) ]
"

Loan
10%0-1 ' -

=
,

En Rs 10000 as loan monthly

:
If I can
pay
10 what
next years
instalments for
.

loan amount can I expect to get if

make
12% (annual ) Also
a
loan rate is
.

loan amortization table .

C = 10000

M = 12% per annum = 1% per month

T 10 10×12=120 months
=

years =

Loan PV
of call ¥µi]
-

= =

annuity
10%-11 ¥0,120]
-

= 697005
 loan =

G- (1-1%7)

µ:÷
c- -

calculator
* How to calculate a
using
-
Method of eirteupolation
e-
8% it ? 9%
v.

I 1 I

loan & ◦◦◦ ◦ ° 789416 .

q

= 824214

19%-8%3
" = • % +

Y;;;;;;?% ×
 the
Case 2 :
If cashflow are in
beginning of
each period .

0 I 2 T -
l 7

I
-

,
- -

1
-

1
-

,
- -
- - -

C C C
C
C
↓

¥u)T
{
-1

Sum = C +
¥ +
¥ig2
- - - -

[ Empt -1

Geometric progression
a = C

u =

¥
n = T

%I¥÷
pit
of =

annuity
 CHI / ¥
'
Pv
of
-

annuity
start sometime in
case 3 :
If cashflows from
future .

C C C

I 1 I 1 I 1 -
I
4 5
- -

3 t
-

2
-
- - -

0 I

¥ñ Fai
"

¥5
a=
¥µ M
¥
=

a
,

T 3
n
-

pug annuity
¥x!Y¥¥!-
=

PV
of annuity
=

µ¥µp ( (1%5-3)
I -
Session 3

* Future value
of annuity at the end each
case the cash flows are of
1 :
If
period

i
°
%
2

, i ,
-
-
- - - - - - - -

C C C C

Fu ?
get ¥ñ]
=

* = -

Hid

↓
1=11 =

G- (
I
-¥µp)(
Consider it as a

CF and
Atingle
compound if Joe
@ u%
T period
/ CHUY if
of annuity %
-

FV
=
 the cash flows
Case 2 :
If
are in the
beginning of
each period .

til
of annuity =

¥341 + a)
'
-1
] .

2=1000
Example Suppose 1 deposit
: every
instalments ] @ 8% what
160
.

month
for 5 years interest is
will be the maturity value if
compounded monthly .

1000
-
Instalment ,
C =

month
9=8%112 per
60 months
years
=

F- 5

Maturity value =
F. V
of annuity .

¥1M (
) CHM )' -

if

10004,1%3-11 1)
"

%)
=

, + -
 =

rate is
Same but interest
Example :
-

example
compounded quateuly
.

( = 1000

rate
q%_ greater
M
per
=

nt
→ Thine in graters
FY = C
( g) I +

rate
↳
Quarterly

* Perpetuity number
Equal cashflow every period for
infinite
of periods
bonds
Ex : Perpetual
 the end each
Case 1 :
Y cushy lows are at
of
period

i i i - - -
- - - -

is
C
C
C

dean Ever Enis

PV = Aum

of geometric prog
.

=
Infinite aeguenee
So =

IR
a =

¥µ ,
R =

+¥
s. =

µ,

PV
of perpetuity
=

G-
Er : -

Suppose perpetual bond promises

a & 10 as

10%
cashflow every period Jael forever If
.
a-

bond
what will be the price of

i. Price
g
band = Pv
of perpetuity
100 £
=

& =
%% =

each
Case 2 : in the beginning of
Y cashflow
- are

period .

LHM)
Pu
of perpetuity =

§
2=10 is ein the
Er :
-
Dame example , but cashflow of
each period
beginning of
.

Pu =

•4¥ =
%
= 110 I
 '
◦
! k 's
Rs "↓¥@ ↓
2=10 10%
2--10
and 2=100@
invested
10%

* Growing Perpetuity
based dividend
-

It is used to price equity on

growing perpetuity cashflow

discount model .
m ,

rate forever
growth
.

at constant
glows

i i i i - - - - - - - - - - -
%
2

C CG ) cat g)
-1g

ñE=_
 * =

÷ ,
+
Y.it?-.+Y,::?-i
Infinite sequence of geometric progression
a- -

¥ , u=%
PV
of growing Cee 9
=
te >
'
↓
perpetuity g
-

Discount growth
hate
rate

* Dividend discount model for valuing equity

-

We expect to get dividend

as future benefits
be value
from firm Therefore equity
can
.
,

those future benefits

.

RV all
by taking of dividend
discount model the
Under dividend
,

to at constant rate
g for
is expected grow
forever .

¥g
u >
of equity
Value
=

, g
Er : what can be of equity
the
fair value

model if the Joon

based on dividend discount
dividend 2=5 per akane
is expected to pay of
to
next and dividend is expected grow
year 10%
of equity
cost is
@ 5% . The

2=100
Value
of equity
=

10%
5-
-
5%
=

% .
=

*
Growing Annuity
at constant growth rate for
Cashflow a
grow
limited number
of periods
.

i i i i - - - - - -
- -

I
C catg)
C G + g)
2
C
(1+9)-1-1

÷' ÷ :÷:
{#
" .

a.
PV =

a- -

¥, r=Y¥ñ
Sn =

a¥pR)_
Pv
og growing =

÷g / ' -

4,4%4
annuity
Session 4

based dividend
of equity
on
* Valuation
discount model

-
m this case we assume
that the life of
is divided into 2 phases
foin dividend is
phase : In this phase ,

14 growth at
higher
expected to guow
rate Er : g
growth
.
,

took to investment in
Nate -
we keep our
 till the end
the
equity of the join of
growth phase
.

24 Mature phase : - In phase the dividend

this
become stagnant and
amah
rate
.

growth
.

Er :
92 "

D D 8D DG -1925
1
¥
,
!
,

0 I 2 3 T I ¥2

grow !ETmuity (
×
grow ?÷pEpdaily
Terminal value
Value at which look to exit at the end of
we
-

growth phase .

TV PH
of growing perpetuity
=

711
Ceeg
=

-
 =
D
(1+9,7-14+92)
a-
g,

Alem Pil
Value of equity
=
of

¥!÷+
'

E.
- -

+
-
-
-
-

÷÷:"+:÷ ,

value
of
¥11 %÷F)+¥ñ
-

equity .

the mixed
Er : -

Suppose analyst forecastto be 2=5 .

The

period dividend
ay
the join
to at the rate of
dividend is expected grow 2--100 at
stock will be add for
b- % and the
what is the fair
do
the end of years
5
is 15%
.

cast of equity
value of equity if
 D= 2=5 5% et 15%
g.
=
, ,

TV = 2=100 ,
7=5 years

"
ang
equity
=
5-
115%-5%1
f- I;;÷ %a:÷i
=
2=67.99
 Bondttnalyais
Bond : It is a
fixed security
tricorne .

thaÑash flows associated

-

It means
bond are certain
with
.

Website : CCIL

Emi .

8% GS 2027

↓
Year
Coupon Maturity
rate

Coupon paid every

is
feminine
-

and face value is paid

period till maturity
at maturity .

Variablesassociatedwitband
Mate know the
14 It helps us to
-

Coupon
periodic cashflow
that we get from
bond till maturity .
 is estimated as
Coupon cashflow
band
rate ✗ Face value of .

coupon

It us to know coupon
24 Face Value -
helps
bond is aver pays
payment and at maturity
)
the band holder ( if 1--4--2=100
value to
face
.

i i
2
i is
3
, ,

8 8 8 8 8 -1 100
8
1¥ ,

time the bond

At what
34 Time to maturity -

will mature .

annual
It is the average
44 Yeild to maturity -

band Cretan) It acts

yield from a .

the
as discount mate led to tend
price of bond .
54 Credit Rating
-

AAA
AA
A

B. BB
} Investment grade bands

BB

}
B.
bands
Speculative grade
Ccg
CC ( Junk band ]

Default

*
Solvency and Insolvency
their
Firms which can
pay
dotcom :

liabilities

Fuims which cannot pay their

1-7 :

liabilities

bond
64 Price Present value
of future cashflow
:
of
the band
of
.

8% as 2027 If yield
6- maturity
Suppose
.

Er :
bond
What is the price of
.

is 7% .
 É 15C -1 FV

8+100

{
¥
Arm ¥ ,
,
c+
a + MY

Price
of
band =

÷ ,÷µp + -
-
- - -
+
{÷a
FI
annuity

P =

G- I
' _

¥-1 I¥ñ
(
+

%÷ l ⇐ it É÷%
' -

+
is
=

%,

= 104 I .
 Note
YTM Price bond > FV
rate >
of
If coupon
,

FV
bond
Price of
=

YTM
rate
If
= ,

coupon bond < Fx

Paice of
rate 2 YIM ,

If coupon

* Relationship between price of

band and yield
to maturity
Anvers e) but it is not
- Downward doping
curved line .

linear , it
a
gives
 Session 5

interest rate
* Duration
of a Bond :
Change in ,

bond
how it will be impacting value
of

^
→ Non linear portion is
Thieve of captured by convexity
bond

↳
Duration captures
> linear
relationship
bond
YTM beth YTM and

police

It uidicates the average

Duration
*
Macaulay :
bond
using
time taken to pay
the puke of
its internal cash flow

¥
:::::;::-
=

-
 is the % in
*
Modified Duration : It change
in KTM
band piece w.at unit
change
D
modified
=

d¥x Ida
=

ftp.xpt/--p- %-)
as
dance , price of
bond is
given

÷ ¥2
-1 -

P
-

+
- -
-

w.at '

Differentiating
'
M

.io?:-.i- - - :E.-;:*-FÉt.dP-ae- ᵗ;g=P

a+-nlcDmod-
E. ÷=

%,
Dmac =
Volatility of
Dmod ¥
•
=

band price
 violates duration decreases
If coupon rate ,

4. 32125 years
Dmae =

= 4.04416%
D. mod
bond will
1% price of
If YTM changes by
Dmod
approximately change by
* How to convert nominal
rates to real Mates ?
interest that
• Nominal rates -

Are the rates by

we see in the market and is not adjusted
for inflation .

rate)
rate ( interest
Real rate :
Inflation adjusted
-

inflation
are
nominal rate and
# Case 1 :
Tf
Mates
aiinpte Nominal Mate

Ru
tµ ± inflation
-
=

rate .
# Case 2 :
Y
nominal hate and
inflation rate
rates
continuously compounding
.

are

Ree = Rn -
M

YTM 8% however
Example :
If bond promises of
be real YTM of
a

is 6% What will
inflation
.

bond ?
1.8882%
Case 1
Rn
; I
= =
:
-

6%
2%
8%
=

Case 2 Ree
-

=
:

Return
continuously compounded
*

dimple return return

Actual return earned Not an actual between

based on investment but

being wntinously
in given security compounded
 Rt =

T-uialqg.ua?nitialPriee-
Daily
Pᵗp
return =

eat
log ( p
FV = Pv
Rt
.

= ,

1- = I

eat
8¥ =

log / %¥ )
= •

◦ We cannot add daily sreinple return to find

multi period return (Foy simple)
return to find
◦ we can add daily compounded
multi period return

return Return of
Ri + Rs is
given
For auinpte
-

Geometric Aum

( It Ri ) ( ↳ R2 )
-

I bust as nominal return)

*
Average of aeinpte return

*
Geometric average
=
"
tÉ+RÉG+Rn) -

*
Average of compounded return

ten
Mi t Mz Ms
- -

+
-
-
- -
-

=
-

How to convert c. c return to simple

Example :
return ?
( Rt ett 1)
=
-

Rt =

log (pP÷)
it
pP÷,
eʳᵗ l
Pᵗp¥ Rt
-
=
→ =
=
Session 6 :

Risk

✓ →
Nan
ayatematic
Systematic Risk
Risk
-

Also called as market -

Risk due tofirm

wish specific factors
.

Risk due to impact -

we can
diversify away
market like this risk by making
of factors
change win interest rate , portfolio
rate,
change
in exchange
in
macroeconomic
change
for
any
variable
rate
example iiflation ,

unemployment
rate , production
wider etc on the prices
securities in market
of
a .

we cannot reduce
risk
the systematic
 ply by making
Min a

portfolio .

* Covariance : It captures the linear association

the two denies
between
.

Cov ( 1 2)
,
= 512

=
?§ ,
(Rit-(R2t-R
Covariance can be -1-1 - .

An the
If covariance is positive →
average
in shame
two aeries are
moving
direction .

on the
If covariance is
negative average

two aeries are

moving ein opposite
direction .
* Correlation : It is standardised measure
of
covariance .

7,2 couth 2)
%ˢ
= =

Lies between +1 and -1

between two aeries

-

Showa the atuegth

correlation
If +1 Perfect + ve
-

can =

=
Both aeries move in same

direction with Aarne % change .

correlation
-

If Cole =
-
I
Perfect negative
=
Both aeries move in opposite
direction with shame % change
association between the aeries
If core 0 No
-

-
Series are moving randomly

to 0
-
Weak cowlelation -
Value near

Value to +1 I
correlation near or -

Strong
-
* Risk Premium

Extra return over and above uiskfuee rate

by investing
in
expect to earn
that we

instrument / security
risky
.

Risk El Ri ) Rt
premium
-

in atati slid
Expected means the average
the historical
E- Cri) Take average of
return

* Market risk premium

E- ( Rm)
↓ -

Rf
Benchmark market wider
)
leg Nifty 50 , BSE Reuven
* Marko units Portfolio
securities
It is a
portfolio of risky
-

Two asset
◦

portfolio
of annuity
1
E- (a) =
Expected ekturn

Ellen =
Expected of aeeuiutg
return 2

a = standard deviation of
returns of aeuiuty 1

standard deviation of
returns
of annuity 2

I =

between eeeturns of
COV G , 2) = 8,2 = covariance
and 2
security
1

cool G. 2) =
correlation between return of
1 and
security 2

712 =
TI % =
8120102
tire

Proportion of investment insecurity

1
Wi =

investment in security 2
We =
Proportion of

Wz = l -

Wi
 Expected return WIECM ) KKE Gz)
of = , +

Portfolio
Variance Crispr )
of
a portfolio is

gp2 = Wfff + WIFE +

2WiW2%
Bedouin 7

CA ) (B) + 2 COVCA B)
var ( ATB ) = van + van ,

rare ( Witt + WzB) =

Vaellw A) ,
+ varcwz B) +

2cov( win WzB ) ,

Vwe(WiAtWqB) =
With + W2Ñ + 2WiWzTAB

A- 100%
n
Efficient try ' B.= 0%
Elm)
☐

Frontier ÷ •

g-
- -
- -
- - - -

graphical uepuesentation •

minimum
raiuiance Portfolio
.

relationship
of .

yÉ
.
_ . . .

i. ,
between expected A-

? ?%i=o%
_ . _

return of portfolio : ¥ -100%

B-

and wish of portfolio µ, ; ;

based on different 0T Risk ¥
proportion of
investment in
different
security .
* Minimum variance portfolio
in
It is the proportion of investment
lead to minimum
securities that
different
risk
of portfolio
.

*
Efficient frontier
frontier from
minimum
It is the upper part of
variance portfolio that provides higher expected
risk
level
.

return for given of

◦ Risk averse investors

risk
Fear
of
-

to more risk
less risk
Prefer
-

◦ Risk neutral investors

about risk
-

Do not care

◦
Risk seeking return
-

Prefer more risk for the given expected

* Multi asset Portfolio
need the variable
We
following
-

[YIon)
Proportion of
µ
weight reckon w =
,

=
investment in

different
nx , securities

24 Variance covariance matrix

I 2 -
- -

n
-
-
-

'

[ §
e
ri "
=

i Covariances
"
l

"
" '

n on , '
Fi → variance
of
aeaviitas
different
36 Expected return vector
of
E- be ) =
( Eon ) EW - - -
-
- - - - - - - -
Eben )]

of portfolio
i.
Expected return

E- Lnp) = E- ( M) .IN =
IN , Ecu )t With]
,
-
- - - - -
+ Wn Ellen]
 return
1<4 Variance
of of portfolio
Tpd =
IN É IN

Iww;) 1%9:)
t.nl ni ≤
g
:
=
-

,
Tel

tf = W
'

E W =
Wifi + KHE +2 Wink TE
 Session 8

risk
*
Capital Market Line : It is a
portfolio of
free
asset (
govt bond )
and risky aeuaities
Can risk portfolios)
variables
we need
following
portfolio
-

E
crispy]
=

Expected return
of risky
( ) of risk thee
-

fleet) Expected
=
uetueen
yield
asset

standard deviation of Wisby portfolio

Tcuispy)
- =

asset -

O
risk free
-

standard deviation of
%
=
-

Mt )
luisky
= 0
-

Cov ,

ref )
Cuisky
-

= 0
con ,

Huis Proportion of asses merit in risky

by
-
=

portfolio
assessment in risk free
-

Kint = proportion of
asset
 CCMD
of capital
return market line
*
Expected
E-
www.pyotluispyj-kluf
×
Cut )
Flu lamb) =

returns CML
* Variance
of of
var CC ML) =
laihrisky Frisky
•

standard dal (CMD =

laluisky Feisty
.

*
Equity Analysis
line It is the relationship
de market
wiety
=

and accepted
(beta] risk
between systematic the sneakily
return ) of
return ( Required
-

What is beta ?
security return
It represents the sensitivity of
to market return
with respect
.
 ^ undervalued security
Elki) →

¥;
- -
-
-

Properly
◦

valued security
↳
°

•
'
• →
overvalued sneaeeittg
i
>B

*
Regression
Ri=d+BRmtEt
we can estimate
B. =
Cov Cri Rm ) , '
-
l month beta
vaulrm) 3 month beta

6 month beta

1 beta
year
3 beta
yet

Lifetime
Question : How to estimate costof equity 2
cost of equity Creguoied rate
Answer : To estimate

of equity )
we can use
return
of ,

Model ( CAPM )
Capital Asset
Pricing
CAPM cost is
given as
According ,
to ,

Re = E- ( ri ) =
Rft Bi IE LRM ) -

Rf ]

rate return
required of
of equity
or
Rc = Coat
Mate)
Rf = 10 years ( Govt band
(mainly take 1
ya)
'

Bi = most recent beta

based on the
El Rm ) market return
=
Expected
data
market return
longest period
# Nate
:

lather 13-1 ,
stock is risky as
as market .

than market
When p >1 stock is more risky
,

than market
when 13<1 ,
stock is less risky
*
Holding Period Return
historical data CHPR )
Average return you given
HPR Rc Undervalued stock
If >

valued
HPR = Rc Properly
HPR < Rc overvalued stock

* Coat debt It is the YTM associated with

of
:

the debt

En ! Bond = 8% 452027
Price = I 102

FV = 100

MY =
9 (7.51 %)
kind bonds
If tuim has issued different of or

loan then total

have taken different amount
of ,

cost
cost of debt will be weighted sum of
debt / loans
of
With + klzllz + kits Ms -
- - - - - -
+ Khun
all -
*
Weighted Average Coat
of capital
IN Aoc =

Weighted arm
of
coat
of equity
and cost debt
of
The interest debt is text deductible
◦

payment on

IN ACC = D- Md (l -
)
T

D -1 E

# Note ! E = Market value of equity

( Market capital)

E- shares
Marketplace
No
✗ of