Recording 1: Welcome Message by the Subject

Coordinator – Aelee Jun

FIN222 Lecture 1 Recording 2: Learning Development Resources

CH4: Time Value of Money: Valuing CF Streams – Dr David Hartley
CH5: Interest Rates

LD Maths and Stats Support

SUMMARY

Learning Development Consultations

• One on one or small group
Maths and Stats Seminars
• Online via Zoom

Maths and Stats Support

Dr David Hartley
•
•
Online available
Stats lecturer available
• Register online to receive the invite

• Learning-development@uow.edu.au
Building 11 Level 2 (take the lift opposite the UniShop entrance to the top floor)
Appointments (Monday to Friday):
Topic Notes Online Moodle Modules
• hartleyd@uow.edu.au • From decimals to factorising and • Self-Enrol in a Teaching Resource
• Learning-development@uow.edu.au logarithms
• 4221 3977
ALL FREE!!!
https://www.uow.edu.au/student/learning-co-op/

LD Maths and Stats Support LD Maths and Stats Support

MATHS AND STATS SEMINARS MATHS AND STATS SEMINARS

• Algebra skills for various maths & stats • Full program and registration via the Algebra for level 2 Finance • 1 𝐴 1 𝑋 1 𝐵
courses Learning Co-Op: - Day: Friday 11th March 𝐴 𝐵
𝑋
• Fractions https://www.uow.edu.au/student/learning- - Time: 12:30-1:30 1 𝐵
• Order of Operations and Scientific co-op/study-support-seminars/ - Location: Zoom
Calculators • Pre-recorded version and direct links on • 𝐴 𝑋 𝐵 𝐶 𝑋
- Solving equations 𝐴 𝐵𝐶
• Logarithms the: 𝑋
- Rearranging formulas 1 𝐵
• Hypothesis Testing Learning Development Maths and Stats
(TCHR134_20) Moodle site

To receive the Zoom invite, register via:

The Learning Co-Op or email your LD Maths Lecturer
Recorded version & links at self-enrol Moodle site: LD Maths and Stats
LD Maths and Stats Support LD Maths and Stats Support
MATHS AND STATS SEMINARS ONLINE MODULES

Logarithms with Applications to Finance • Statistical Literacy (TCHR418_13) • Available through:

- Day: Friday 19th March • Producing Data
• Describing and Presenting Data – https://www.uow.edu.au/student/learnin
- Time: 12:30-1:30 • Solve for investment term 𝑛 • Interpreting Data g-co-op/mathematics-and-statistics/
- Location: Zoom • Introduction to Excel
𝐹𝑉 𝑃𝑉 1 𝑟 – Moodle: Login  All sites (scroll down) 
- Introduction to logarithms • Calculation Animations
• Hypothesis Test tool Teaching resource  click relevant
- Logarithm laws
• Maths Refresher (TCHR541_15) module
- Solving finance Eqs. using logs
• Numbers and operations
• Self-enrol (no password)
• Algebra and Equations
To receive the Zoom invite, register via: • Handling and Presenting Data
The Learning Co-Op or email your LD Maths Lecturer
Recorded version & links at self-enrol Moodle site: LD Maths and Stats

LD Maths and Stats Support LD Maths and Stats Support

BATEMANS BAY BEGA

Wendy Law Alison Sandwith

Appointments: via Wendy’s email Appointments: via Alison’s email

wlaw@uow.edu.au sandwith@uow.edu.au

Available: via appointment Available: details on LD Maths and Stats Moodle site

Workshops: Contact for information Workshops: Contact for information

LD Maths and Stats Support LD Maths and Stats Support

SHOALHAVEN SOUTH WESTERN SYDNEY

Sheridan Reilly David Hartley

Appointments: via Sheridan’s email Appointments: phone 4221 3977 or email

sreilly@uow.edu.au hartleyd@uow.edu.au

Available: details on LD Maths and Stats Moodle site Available: Monday to Friday

Workshops: Contact for information Workshops: Run on request

 LD Maths and Stats Support LD Maths and Stats Support
SOUTHERN HIGHLANDS SOUTHERN SYDNEY

David Hartley David Hartley

Appointments: phone 4221 3977 or email Appointments: phone 4221 3977 or email

hartleyd@uow.edu.au hartleyd@uow.edu.au

Available: Monday to Friday Available: Monday to Friday

Workshops: Run on request Workshops: Run on request

LD Maths and Stats Support

WOLLONGONG

Maths: David Hartley (Monday to Friday)

Stats: Vicki Kendrick (Contact for availability)

Appointments: phone 4221 3977 or email

Recording 3: Subject Overview
hartleyd@uow.edu.au

vkendric@uow.edu.au

Subject Overview- Delivery mode

Expectation for workload
• Lecture (2h)
A 6-credit point subject requires that students commit
– Pre-recorded lecture via Moodle
about 12 hours study a week including attendance at
• Tutorial/Workshop (2h) lectures and tutorials
TW/01 Monday 4:30-6:30 Online
• 4 hours with teachers + 8 hours on your own per
TW/02 Monday 2:30-4:30 Online
week and per subject
TW/03 Thursday 10:30-12:30 Online

TW/04 Thursday 1:30-3:30 Online

TW/06 Monday 11:30-1:30 Online

TW/09 Thursday 11:30-1:30 1-G05

TW/12 Wednesday 1:00-3:00 32-G01

TW/13 Friday 10:30-12:30 21-G08

TW/14 Thursday 5:30-7:30 35-G20

TW/15 Friday 1:30-3:30 19-1064
17 18
 Lecture Tutorial (First-hour)
• No live lectures. • Attendance Compulsory (starting next week)
• The pre-recorded lectures will be uploaded every • Do I have homework to do?
Monday – Yes. Each week! The list of Questions in the subject
• Lecture notes: Two versions outline.
– Student version will have some gaps to fill in. So you can fill them in • Why is it important to do homework?
while watching the lecture. – We will collect your homework 5 times over the session.
– Full version: No gaps.
– The combined marks from 5 submissions will determine
– It’s up to you which one to use when watching the lecture.
10% of the total assessment marks.
• Please have your calculator with you.
– It will help you keep up with the subject materials on a
• Reading the chapter before watching the lecture is weekly basis.
strongly recommended. – You will learn better and more when you come knowing
what you don’t know.
• Solutions to tutorial questions will be available by
Friday evening each week.
19 20

Tutorial (First-hour) Tutorial (First-hour)

Marking criterion for homework preparation
• You are required to check Moodle site every
week to see if homework is due in the • Assessment will be based on the level of efforts put into
the process of solving given problems and not on the
following week. If collected, you will see the correctness of the answers.
link (like Week 3 Homework Submission)
• For each submission (worth 2 marks), two criteria will be
under ‘Online homework submission’ applied.
• You are required to submit the scanned copy – i) [1 mark] the number of PARTS you have attempted
of your answers in PDF format. – ii)[1 mark] the quality of preparation for attempted parts
• If you use a smart phone, an app called – The maximum you can obtain from criterion ii) varies
‘Camscanner’ or ‘Office Lens’ converts a photo depending on the portion of parts attempted.
• Given the threshold values of 0, 0.25, 0.5, 0.65, 0.75, 0.85 and 1,
image to PDF format. the highest mark obtainable under ii) is the closest upper
• If collected, homework is due by the start time threshold value to marks obtained from i).
of your tutorial. • For example, if 7/9 (=0.78) from i), the maximum obtainable
for ii) is 0.85.
21 22

Workshops (Second-hour) Assessment tasks

• Attendance Compulsory • Homework preparation -10%
• What are the differences between Tutorial (T) and – 5 random collections
Workshop (W)? • Mid-Session Test -20%
T W – Friday 4:30pm, 9 April in Week 6
Do I have to prepare? Yes No – No tutorial/workshop in Week 6
The class is run based Pre-specified tutorial Unseen pop quiz – 40 multiple choice questions for 100 minutes
on questions
• Individual Assignment -20%
Assessment attached? Yes No
– Due on Thursday, 6 May 2021, Week 9
Personalised attention Less likely More likely
from teachers?
– The assignment manual will be available following
Solution will be Yes No. Only in class.
Lecture 4.
available on Moodle? • Final Exam - 50%
– Covers from Lecture 4 to the final lecture

23 24
 Consultations Text book
• Aelee Jun • Berk, J, Demarzo, P, Harford, J, Ford, G,
– Wednesday 10:00-12:00pm Mollica, V & Hull, J 2019, FIN222
Fundamentals of Corporate Finance,
– Thursday 2:00-4:00pm
Custom edition for the University of
– Use a Zoom link under ‘Zoom online consultation’ on Wollongong, Pearson
Moodle
– Phone 4221-5077
– Email ajun@uow.edu.au
– Please make an appointment by emailing me • You can use Berk’s 3rd edition.
• For a meeting outside my consultation hours An additional “Option” chapter will be
• If you would like a face-to-face consultation available via Moodle.

• Registration instruction for Mylab

finance access is on Moodle.
25 26

Calculator
• Essential for this subject
• Please carry one for all your classes including lectures
• You can only use one of the APPROVED CALCULATORS.
The list of eligible calculators can be found from
https://www.uow.edu.au/student/exams/calculators/index.html
Recording 4:
• Do I have to buy a financial calculator?
– No. Scientific calculator will work fine. Financial System &
Basics of Time Value of Money

27

Lecture 1 Reading Lecture 2 Reading Learning Outcome 1

• 4.1 • 5.1
• 4.2 • 5.2 1. Demonstrate an understanding of how financial
• 4.3 • 5.3 system works and calculate the value of different types
• 4.4 -Inflation and real vs nominal rates of cash flow streams including financial assets such as
-Growing Perpetuity -Yield curve and Discount rates shares and bonds.
• 4.5
-Yield curve and The economy
– Solving for the cash
• 6.1 
Flows
• 6.2
- Rate of return
- Solving for the number of -Zero-coupon bond cash flows
periods • 6.3
• 6.4
-Interest rate changes and bond
prices
-Interest rate risk and bond prices
-Bond prices in practice
• 6.5
29 30
 Notations
• FV =Future Value What comes to your mind?
• PV = Present value
• r = Interest rate
• n = Number of periods
• m= Frequency of compounding Finance
• g= growth rate
• k = the period where the first cash flow
occurs (not in the text book)

31 32

What is ‘Corporate Finance’ about?

What does Oxford Dictionary say?

• FINANCE is…
– The money used or needed to support an
activity, project
Quantitative Tools and Techniques financial
– The management of money
managers can use to make optimal
– The money available to a person, company or
country
financial decisions in a way that
maximises shareholders’ wealth (share
price)
33

3 major decisions facing financial managers Role of Financial System

• Investment decision • As you see in three areas of financial decision, it involves
– What assets to buy either access to funds or investment of funds.
– Real assets can be tangible or intangible. – Investment decision requires investment of funds.
• Tangible assets: equipment, machinery, manufacturing – Financing decision requires access to funds.
facility, land, buildings
• Financial system consists of financial markets and
• Intangible: patents, trademarks (intellectual properties)
financial institutions.
• Financing decision
• A critical role of the financial system in the economy is to
– How to raise the needed cash to support investments
gather money from people and businesses with surplus
– Two basic sources of funds: Debt and Equity
funds to invest and channel money to those who need it.
• Working capital management decision
– Channel money from surplus units to deficits units
– How to manage current assets and liabilities
• Our Aim is to learn relevant quantitative tools and
related concepts which will assist financial managers in
making above decisions.
35 36
 Goal of the financial manager
Financial System • What is an appropriate goal of the financial manager?

Have $ to invest
Need $ • To maximize the wealth of the owners, the shareholder
(which is best measured by market value of the firm’s
stock =current stock price).
$
• To see whether an asset is fairly valued, we learn how to
compute an intrinsic value (=fair value) of the asset. In
the world of Finance, an intrinsic value is determined by

$ three things!
– Future cash flows
– Timing of cash flows
– Riskiness of the cash flows
38

Reminder FV? when more than FVn=C (1+r/m)mn r=10%

one compounding
period is involved?
Time value of money m =No of times per year that interest is compounded
|_____| Rate per period Total No of periods
A dollar today is worth more than a dollar $1 > $1 10%
tomorrow. $1 $1.1
$1(1+0.1)1 =$1.1
Which one of these assets would you rather own? 0 1

Year 0 1 2 3 4 5 6 7 8 5% 5%
Asset 1 2x1
|_____|_____|_____|_____|_____|_____|_____|_____| $1(1+0.1/2) =$1.1025 $1 $1.1025
$100 0 0.5 1

Year 0 1 2 3 4 5 6 7 8
Asset 2 |_____|_____|_____|_____|_____|_____|_____|_____| 2.5% 2.5% 2.5% 2.5%
4x1
$100 $105
$1(1+ 0.1/4) =$1.1038 $1 $1.1038
5% 0 0.25 0.5 0.75 1

The interest rate plays a role of converting cash across

time!
39 40

Example 1: Future Value Example 2: Present Value

• Your aunt is planning to invest in a bank deposit • Megan expects to need $50,000 as a down payment on a
that will pay 7.5% per annum compounding house in six years. How much does she need to invest
today in an account paying 7.25% per annum
semi-annually. If she has $5,000 to invest, how
compounding quarterly?
much will she have at the end of four years?
C
PV 
FV  C(1  r) n
(1  r)n
0.075 2 x 4
 5.000(1  )
2 50, 000

 $6712.35 0.0725 6 x 4
(1  )
4
 $32, 489.54
41 42
 How do we value an asset?
• How to value future cash flows?
– In finance, the value of asset is determined by future
cash flows the firm can generate and the risk involved.
– Then do we know how to value different type of future
cash flows mathematically? Let’s learn today.
Recording 5: How much is the asset worth TODAY? i.e) What is the maximum
price you’re willing to pay today?
Solving for PV, FV, r and n
Year 0 1 2 3 4 5 6 7 8
|_____|_____|_____|_____|_____|_____|_____|_____|
P=? $100 $100 $100 $100 $100 $100 $100 $100

44

Let’s learn different type of CFs ANNUITIES

PV and FV of an annuity
• A stream of equal cash flows arriving at a regular
x(1+r)n
interval and ending after a specified period  FV
Annuity PV C C C C
– $500 paid each month for a year
0 1 2 3 n
– $600 per week for 12 weeks
– $20000 per annum for 10 years C C C C
PV = + + ++
• A stream of equal cash flows that occurs at (1+ r) (1+ r)
2
(1+ r)
3
(1+ r)
n

regular intervals and lasts forever Perpetuity

• A stream of cash flows that occurs at regular C 1 
PV = 1-
r  (1+ r)n 
Total No of periods 
intervals and grows at a constant rate forever  (payments)
Rate per period 
Growing perpetuity
FV C 1  C
PV = 1- (1+r)n = (1+ r)n -1
r  (1+ r)n  r
45 20

PV and FV of an annuity Deferred Annuity

Example 3. If you can afford a $1000 monthly car payment for 2
years, how much car can you afford if interest rates are 12% PV1
compounded monthly? PV = C 1 
(1  r )1 PV1 = 1-
r  (1+ r)n  C C C C
C 1 
PV = 1- C=$1000 r=0.12/12 n=2X12=24
r  (1+ r)n  =0.01 0 1 2 3 4 n
k
1000  1 
= 1- =$21243.39 C 1 
0.01  (1.01)24  1- =PVk-1
r  (1+ r)n 
PV = 
Example 4. Starting with his next monthly salary payment,
Harold intends to save $200 each month. If the interest rate is (1  r ) k 1
6% per annum, payable monthly, how much Harold have Example 5. What is the present value of an ordinary annuity
saved after 2 years? consisting of 10 annual payments of $100 with an interest rate of 10%
C r=0.06/12 n=2X12=24 per annum, with the first payment occurring in 3 years time?
FV = (1+ r)n -1 C=$200
r =0.005 100  1 
1- $614.46
=
200
(1.005)24 -1 =$5086.39 0.1  (1.1)10    $507.82
0.005  PV = (1.1)2
47 48 (1.1) 2
 Perpetuity

C C C

0 1 2 3

lim C 1- 1  C
PV =  =
n r  (1+ r)n  r
Example 6. A government security promises to pay $3 per annum
from next year forever. If the interest rate is 8% per annum,
how much is the security worth?

C
PV = = $3/0.08=$37.50
r
49
50

Deferred Perpetuity
PV1
PV = C
(1  r )1 PV1 =
r C C C

0 1 2 3 4
k
C
=PVk-1
PV = r
k 1
(1  r )
Example 7. You are considering an investment in venture capital that
will return nothing in the first three years and $400,000 a year in
perpetuity after that. What is the present value of the investment,
given an interest rate of 10% p.a.?
$400,000
4, 000, 000
0.1   $3, 005, 259
PV = 3 (1. 1)3
51 (1.1) 52

Growing Perpetuity Deferred Growing Perpetuity

PV1
PV = C
(1  r )1 PV1 =
r-g C C(1+g) C(1+g)2
C C (1+g) C (1+g)2
0 1 2 3 4
0 1 2 3 k
C
C 1st future
r-g
=PVk-1
PV = cash flow PV =
r-g (1  r ) k 1
Example 9. Company A will pay its first dividend of $3 in Year 3 and
Example 8. The expected dividend next year is $1.30, and dividends
after that, it is expected to grow at a constant rate of 6%. The
are expected to grow at 5% forever. If the discount rate is 10%, what is
opportunity of cost of capital is 15%. What is the value of Company A?
the value of this promised dividend stream?
$3
C = $1.3 $33.33
PV = = $26 PV = 0.15  0.06  2
 $25.20
r - g (0.1-0.05) (1.15) 2 (1.15)
54
53
 Solving for rate of return
• Suppose you have an investment opportunity that requires a
$1000 investment today and will have a $2000 payoff in six years.
What is the annual rate of return on the investment?

55 56

Solving for the number of periods (=n) Solving for the number of periods (=n)
Example 12. One of your customers is delinquent on their accounts payable
• How long will it take $50,000 placed in a term balance. You have mutually agreed to a repayment schedule of $500 per
month. You will charge 1% per month interest on the overdue balance. If the
deposit at 10% interest to grow into $75,000? current balance is $13,000, how long will it take for the account to be paid off?
C 1 
FV  C(1  r)n • Natural logarithm (Ln(X)) is the PV  1
r  (1  r )n 
logarithm to the base e of a $13,000 
500 
1
1 
75,000  50,000(1.1)n number: Eg. Ln (2) ( easily 0.01  (1.01)n 
 1 
solvable by a calculator!), $13,000  50,000 1 
75,000 n 
 (1.01) 
(1.1)n  Ln(2)=0.69314718...... 13,000 
 1 
1 
50,000 50,000  (1.01)  n 

• Natural logarithm power rule:  1  13,000

1  
(1.1)n  1.5 Ln (XY)=Y*Ln (X)
n 
 (1.01)  50,000
13,000 1
Eg. Ln (28)=8*Ln2 1 
ln(1.1)n  ln(1.5) =8*0.69314718 =5.545177
50,000 (1.01)n
1
0.74 
n  ln(1.1)  ln(1.5) 1
(1.01)n

 (1.01)n
0.74
ln(1.5)
n  4.2542years 1.3514  (1.01)n

ln(1.1) ln(1.3514)  ln(1.01)n

ln(1.3514)  n ln(1.01)
ln(1.3514)
n
ln(1.01)
57 58
n  30.26months

Example 11 Summary
• What are the three main financial decisions within a
As winner of breakfast cereal competition, you can corporation?
choose one of the following prizes. r=12%
• Can you explain the role of a financial system?
a. $100,000 now PV=$100,000
• What is the goal of financial managers?
b. $180,000 at the end of five years
180, 000 • Can you compute FV and PV when the frequency of
PV   $102,136.83
(1.12)5 compounding is more than once per year?
c. $11,400 a year forever. $11, 400 • Can you compute PV or FV for each different type of
PV   $95, 000 cash flows?
0.12
d. $19,000 for each of 10 years – Annuity
$19, 000  1 
PV  1    $107, 354.24 – Perpetuity
0.12  (1.12)10 
– Growing perpetuity
e. $6,500 next year and increasing thereafter by 5% per – Deferred Annuity
year forever. – Deferred Perpetuity
$6, 500
PV   $92, 857.14 – Deferred Growing Perpetuity
0.12  0.05
• Can you solve for C or r or n?
59 60