# Unit 2 Notes: Corporate Finance Mathematics

Corporate Finance lecture notes for the EMBA at UNSW.

Time value of money

- Time affects value – we would rather to have money now so that we can invest money now and then have a lot in 10 years’ time.

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Future Value,,

Present Value,PV = ,

Annuities~~

Conditions/Assumptions~~

Regular sets of cash flows~~

Identical~~

Repeated amount for set period of time~~

The first amount occurs in the next period,,

Perpetuity – cash flows that goes on forever,

Growing Perpetuity~~

Use in shares~~

Real rate of return = no inflation,

Equivalent Rates~~,

Annual Equivalent Rate (AER),

Generic AER,

Part period rate,

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## Applying to Mortgage

### Calculating principle outstanding

#### Forward Method

Remaining Periods | Principle at start | Repayment per month | Interest on principal | Principle reduction | Principle at end |

Order of Calc | (1) | (2) | (3) | (4) | (5) |

Calculation | PV of Annuity formula | (1) x j/m | (1) – (3) | (1) – (4) |

#### Backward Method

Remaining Periods | Principle at start | Repayment per month | Interest on principal | Principle reduction | Principle at end |

Order of Calc | (1) | (2) | (5) | (4) | (3) |

Calculation | PV of Annuity formula | (2) – (4) | (1) – (3) | PV of all future repayments at the start of the next period |

Lookout

- Different n in the PV formula for (1) and (3) gives you the amount for that period.
- n to calculate (1) and (3) is the
**number of remaining period**usually in months - Repayment is per month (2). May need to be adjusted to calculate Interest on Principal.

i.e Repayment per month *x 12* subtract Principle reduction *in 1 year*