“A growing annuity is a cash flow that grows at a constant rate for a specified period of time.”
Stuart Gabriel, a second-year MBA student, has just been offered a job at $80,000 a year. He anticipates his salary increasing by 9 percent a year until his retirement in 40 years. Given an interest rate of 20 percent, what is the present value of his lifetime salary?
Stuart Gabriel, a second-year MBA student, has just been offered a job at $80,000 a year. He anticipates his salary increasing by 9 percent a year until his retirement in 40 years. Given an interest rate of 20 percent, what is the present value of his lifetime salary?
Clear time value of money memory: 2nd CLR TVM
Compounding should remain at P/Y = 1 (third row second column), ENTER (first row second column), down arrow (first row fourth column), C/Y = 1.
First step: find out I and PMT
I = {(interest rate-growth rate)/(1+growth rate)}*100
= {(.20-.09)/(1+.09)}*100
=10.09
I = {(interest rate-growth rate)/(1+growth rate)}*100
= {(.20-.09)/(1+.09)}*100
=10.09
Press STO, 1 to store the number
PMT = Current Annual Salary/ (1+growth rate)
= (80,000/1.09)
=73,394.50
= (80,000/1.09)
=73,394.50
Press STO, 2 to store the number
Second Step: enter the following
N = 40, number of payment/cash flows in the growing annuity.
I = press RCL, 1 to recall the number we saved
PV = Unknown
PMT = RCL, 2 to recall the number
FV = 0
CPT PV = $711,731
Growing Perpetuity
Second Step: enter the following
N = 40, number of payment/cash flows in the growing annuity.
I = press RCL, 1 to recall the number we saved
PV = Unknown
PMT = RCL, 2 to recall the number
FV = 0
CPT PV = $711,731
Growing Perpetuity
“Assume that you are assessing a stock that paid $2 as dividends last year. Assume that you expect these dividends to grow 2 percent a year in perpetuity, and that your required rate of return for investing in this stock, given its risk, is 8 percent. With these inputs, you can value the stock using a perpetual growth model:
Expected dividends next year / (Required return - Expected growth rate) = $2 (1.02) / (.08 - .02) = $34.00”
“These cash flows are the essential building blocks for virtually every financial asset. Bonds, stocks, or real estate properties can ultimately be broken down into sets of cash flows. If you can discount these cash flows, you can value all of these assets.”
Expected dividends next year / (Required return - Expected growth rate) = $2 (1.02) / (.08 - .02) = $34.00”
“These cash flows are the essential building blocks for virtually every financial asset. Bonds, stocks, or real estate properties can ultimately be broken down into sets of cash flows. If you can discount these cash flows, you can value all of these assets.”
_________________________________________________________________
Building a Small Business That Warren Buffett Would Love,available at Amazon.comorBarnesandNoble.com.
The over-arching vision of Building a Small Business That Warren Buffett Would Loveis to create
One Million Jobs.
Like us on Facebook to find out how you can support this mission!
Posts
No comments:
Post a Comment