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Principles of Finance Videos 166 videos

Principles of Finance: Unit 1, Company Formation, Structure, Inception
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How is a company... born? Can it be performed via C-section? Is there a midwife present? Do its parents get in a fight over what to name it? In thi...

Principles of Finance: Unit 1, Intro: Company Formation, Structure, and Inception: Unit Intro
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Company Formation, Structure, and Inception: Unit Intro. Sorry, Leo DiCaprio fans—we're not going to be breaking down the plot of Inception. We'r...

Principles of Finance: Unit 1, Alex, That’s Finance Potpourri for $500
67 Views

Okay, so you want to be a company financial manager. It's basically up to you to make money for the shareholders. It would also be swell if you mad...

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Principles of Finance: Unit 5, Present Value (aka Another Twist) 4 Views


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Description:

Hit play to learn all about present value.

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English Language

Transcript

00:00

principles of finance a la shmoop present value another twist all right

00:07

well you've just won a mini lottery it pays $10,000 a year for five years it's [hand scratching lottery ticket]

00:12

backed by Jeff Bezos founder of Amazon so if you attribute no risk to the money

00:17

not being paid you buy into the 10% of your stock market appreciation thing

00:23

meaning that you actually believe the market will go up on average about ten

00:27

percent a year for the next few decades and you'd love to just put your money in

00:31

an index fund and well forget about it and go play some golf [man hits golf ball]

00:35

so the question what price buys you out of this annuity and yeah forget taxes

00:40

because well in most structures it's way better to leave the money coming in in

00:44

small payments over long periods of time if you take a lot of money out in year [stacks of money falling]

00:49

one well if you'd likely be taxed at a much higher rate than otherwise but

00:53

that's a separate issue from this problems fine illustration here well

00:56

here's the discount rate and this is what the math looks like so you got your

01:00

one you're gonna take out ten thousand bucks

01:02

you're gonna divide it by the interest rate there it's it's one plus point one

01:05

at point one for ten percent of your compounding notice it's to the first

01:09

power because it's after one year of compounding and you get to nine grand

01:12

and change and then a year two you take out another ten grand the present value

01:16

of it you have to discount by two iterations of that ten percent of your

01:21

thing you can you get eighty two hundred bucks

01:23

then we scoop all the way down to year five that's ten thousand dollars given

01:27

to you five years from now with no risk associated on the premium on top of it

01:31

and you're gonna guess that ten percent a year is about your opportunity cost of

01:35

compounding in the market that's one plus 0.1 there so you get one point one

01:39

to the fifth power and if you divide that into ten thousand will you get

01:43

sixty two hundred bucks and change okay so then you just add up this column this

01:47

stuff over here the nine grand plus eighty two hundred plus seventy got and

01:50

so on and you get about thirty eight grand so using the discount rate of 10%

01:55

a year ie the opportunity cost of what you could do with the money deploying it

01:58

elsewhere while the dough today is worth yeah about thirty eight grand

02:02

steep discount from the fifty thousand dollars you thought you'd won great

02:06

marketers those lottery people well the exercise here is really

02:09

important to understand professionals use present value technique

02:13

to value companies in the stock market and these flows don't just apply to

02:18

bonds or promise series of payments they apply to companies and all kinds of [people handling money]

02:23

other investing things that are coming your way in the meantime keep cursing

02:26

Bezos name to the heavens for tricking you because as long as you're near a [man is angry at computer]

02:30

computer microphone well he's probably listening or trying to sell you

02:33

something

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