STRATEGIC CORPORATE STRATEGIC CORPORATE FINANCEFINANCE

MODULE I MODULE I

CORPORATE VALUATIONCORPORATE VALUATION

TIME VALUE OF MONEYTIME VALUE OF MONEY

Concept value of moneyConcept value of money

Money has value;Money has value; It is a medium of exchange;It is a medium of exchange; It is a standard unit of account; ( to measure cost, It is a standard unit of account; ( to measure cost,

price, profit etc.) i.e. stable unit as assumed in price, profit etc.) i.e. stable unit as assumed in accounting which is wrong due to inflation.accounting which is wrong due to inflation.

It is a standard of deferred paymentIt is a standard of deferred payment It is a store of value; (like gold)It is a store of value; (like gold) The value of money may be reduced due to The value of money may be reduced due to

inflation. The value is not same across the inflation. The value is not same across the countries and time has an effect on value.countries and time has an effect on value.

Concept of time value of moneyConcept of time value of money

Money has time value;Money has time value;Money can be employed to generate more Money can be employed to generate more

real returns;real returns; In inflationary conditions, a rupee today In inflationary conditions, a rupee today

represents more real purchasing power than represents more real purchasing power than a rupee year hence;a rupee year hence;

Future may be viewed as uncertain, Future may be viewed as uncertain, individuals prefer current consumption to individuals prefer current consumption to future consumption.future consumption.

Time value of MoneyTime value of Money

Earlier projects were acceptable if total Earlier projects were acceptable if total benefits over a period of time exceeds its benefits over a period of time exceeds its cost. Here it is assumed that value of money cost. Here it is assumed that value of money remains the same;remains the same;

One should know –One should know –

Future ValueFuture Value

Present ValuePresent Value

of cashflows at different time lines. of cashflows at different time lines.

Time Value of MoneyTime Value of Money

To understand time value of money one To understand time value of money one must know two basic processes;must know two basic processes;

Process of CompoundingProcess of CompoundingProcess of DiscountingProcess of Discounting

Different SituationsDifferent Situations

Compound & Simple InterestCompound & Simple Interest Increased frequency of CompoundingIncreased frequency of Compounding Doubling PeriodDoubling Period

Different SituationsDifferent Situations

Future Value of Single AmountFuture Value of Single Amount Present Value of Single AmountPresent Value of Single Amount Future Value of Multiple FlowsFuture Value of Multiple Flows Present Value of Uneven Cashflows (NPV)Present Value of Uneven Cashflows (NPV) Future Value of an AnnuityFuture Value of an Annuity Present Value of an AnnuityPresent Value of an Annuity