Management and Organizational Studies 2310A/B Chapter 4: CHAPTER RECAP

• School: Western University
• Department: Management and Organizational Studies
• Course: Management and Organizational Studies 2310A/B
• Professor: Danny Morrison

Document Summary

A stream of cash flows: a series of cash flows lasting several periods. Pv0 = (c1 / (1+r)) + (c2 /(1+r)^2) + + cn/(1+r)^n. Perpetuities and annuities ( two types of cash flow streams) Perpetuities: a stream of equal cash flows that occurs at regular intervals and lasts forever. Consol: a bond that promises it"s owner, a fixed cash flow every year forever. The valuation principle tells us that the value of a perpetuity must be the same as the cost we incurred to create our own identical perpetuity. Present value of a perpetuity with constant cash flows c and discount rate (r) By depositing the amount c/r today, we can withdraw interest of c/r x r. Annuities: a stream of equal cash flows arriving at a regular interval over a specified period of time. Difference between annuity and perpetuity is that annuity ends after some fixed number of payments.