Seminar 1 (07.02.

2021)
Introduction to Corporate Finance
Recommended literature:
1. Ross S.A., Westerfield R.W., Bradford D.J. Fundamentals of Corporate
Finance, Chapter 1.
2. Berk J., P. DeMarzo. Corporate Finance, Part I, Chapter 1.
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Lecture 1

Edspira

Additional reading:
Jensen, Michael C. “Value Maximization, Stakeholder Theory, and the Corporate
Objective Function.” Business Ethics Quarterly, vol. 12, no. 2, 2002, pp. 235–256.
JSTOR, www.jstor.org/stable/3857812. Accessed 7 Feb. 2021.

Tasks:
1. Suppose you receive $100 at the end of each year for the next three years.

a. If the interest rate is 8%, what is the present value of these cash flows?
PV = sum of C/(1+r)^t. PV = 100/(1+8%)^1 + 100/(1+8%)^2 +
100/(1+8%)^3 = 257,71
b. What is the future value in three years of the present value you computed
in (a)?
FV = PV*(1+8%)^3 = 324,64
c. Suppose you deposit the cash flows in a bank account that pays 8%
interest per year. What is the balance in the account at the end of each of the
next three years (after your deposit is made)? How does the final bank
balance compare with your answer in (b)?

FV= 100*(1+8%)^(3-1) + 100*(1+8%)^(3-2) + 100*(1+8%)^(3-3) = 324,64

 You have just graduated and need money to buy a new car. Your rich Uncle
Henry will lend you the money so long as you agree to pay him back within
four years, and you offer to pay him the rate of interest that he would
otherwise get by putting his money in a savings account. Based on your
earnings and living expenses, you think you will be able to pay him 5000
thousand rubles in one year, and then 8000 thousand rubles each year for the
next three years.

a) If Uncle Henry would otherwise earn 6% per year on his savings, how
much can you borrow from him?
5000/1.06+8000/1.06^2+8000/1.06^3+8000/1.06^4=24890.7
b) Now suppose that Uncle Henry gives you the money, and then deposits
your payments to him in the bank each year. How much will he have four
years from now?
5000*1,06^(4-1)+8000*1,06^(4-2)+8000^1,06^(4-3)+8000 = 31423,9
24890,7*1,06^4 = 31423,9

2. Ellen is 35 years old, and she has decided it is time to plan seriously for her
retirement. At the end of each year until she is 65, she will save $10,000 in a
retirement account. If the account earns 10% per year, how much will Ellen
have saved at age 65?
paymen
year t FV
158630.
1 10000 9
144209.
2 10000 9
131099.
3 10000 9
119181.
4 10000 8
108347.
5 10000 1
98497.3
6 10000 3
89543.0
7 10000 2
81402.7
8 10000 5
9 10000 74002.5
10 10000 67275
11 10000 61159.0
 9
55599.1
12 10000 7
13 10000 50544.7
45949.7
14 10000 3
41772.4
15 10000 8
37974.9
16 10000 8
34522.7
17 10000 1
31384.2
18 10000 8
28531.1
19 10000 7
25937.4
20 10000 2
23579.4
21 10000 8
21435.8
22 10000 9
19487.1
23 10000 7
17715.6
24 10000 1
25 10000 16105.1
26 10000 14641
27 10000 13310
28 10000 12100
29 10000 11000
30 10000 10000
164494
0
PV = PMT*(1-(1+r)^-n)/r = 10000*(1-1.1^(-30))/0.1 = 94269.1447
FV = PV * (1+r)^n = 94269.15*(1.1^30)= 1644940.23

3. Your company is planning to purchase a cafe for 100,000 rubles. The bank
offers you a loan for 30 years with equal annual payments of 8% per year.
The bank demanded that 20% of the amount be paid as a down payment.
What is the size of the annual payment to the bank, given the conditions set?
=PMT(0,08;30;80000;;0) =

PMT = (PV * r )/ (1-(1+r)^-n) = (80000*0.08)/(1-1.08^-30) = 7106.19

4. You would like to lease the working space in Moscow. This deal will give
you 384 thousand rubles a year for 6 years as a payment. Then you are going
 to sell the space. According to your estimates, its value in 6 years will
amount to 9 million rubles. Obtaining these incomes is associated with a
certain probability and risk, which analysts estimate at 10%. Determine the
present value of your income stream in case the flows arrive at the end,
beginning and middle of the year.

PV = 384/(1+10%) + 384/(1+10%)^2 + … + 384/(1+10%)^6 +

9000/(1+10%)^6 = 6752,685

PV = 384/((1+0,1)^(0,5)) +384/((1+0,1)^((1,5))+…+384/((1+10%)^5.5)+
9000/((1+10%)^6) =

PV = 384/((1+0,1)^0) +384/((1+0,1)^1)+…+384/((1+10%)^5)+
9000/((1+10%)^6)

Is it beneficial for you to lease the working space and sell it after 6 years if
the cost of this space on the market at the time of valuation is 7 million
rubles?

Tests. Topic 1
1. The possibility of conflict of interest between the stockholders and
management of a firm is called agency problem.
2. Someone other than a stockholder or creditor who potentially has a claim on
the cash flows of the firm is Stakeholder.
3. Mark the feature that is specific for public companies:+
a) limited number of shareholders
b) no separation of ownership and control (management)
c) possibility of agency conflict between shareholders and managers
d) private placement of debt and equity services
4. Mark the features that are specific for a financial model of the company:
a) the main goal of the company is to maximize the current value per share of the
stock
b) risks are not considered while estimating the value
c) opportunity costs are considered while estimating the value
d) the main goal of the company is to maximize its accounting profit
5. A concept of corporate finance, which states that the same amount of money
received by an economic entity at different periods, turn out to be unequal in
terms of their purchasing power, is called _____________________.
6. Mark the feature that is NOT specific for a corporation as a type of
company:
a) complexity of establishment and registration, higher level of
legislative regulation
b) double taxation
c) owners are reliable with their property for all liabilities of their
business
d) owners can face agency problem
7. The process of accumulating interest on an investment over time to earn
more interest is called compounding.
8. The procedure of finding the present values in time value of money is
classified as:
a) compounding
b) discounting
c) money value
d) stock value
9. The rate used to calculate the present value of future cash flows is a future
cash flows.
10.Which theory (concept) of corporate finance states that corporate executives
have a moral and financeial duty to act in the best interests of the parties
they serve, specifically the shareholders:
a) concept of ideal capital markets
b) concept of the time value of money
c) theory of agency relations
d) theory of asymmetric information
11. To say that there is "asymmetric information" in the issuing of common
stock or debt means that:
a) investors have nearly perfect information
b) the markets have nearly perfect information
c) investors have more accurate information than management has
d) management has more accurate information than investors have
12. To say that there is "asymmetric information" in the issuing of common
stock or debt means that:
a) investors have nearly perfect information
b) the markets have nearly perfect information
c) investors have more accurate information than management has
d) management has more accurate information than investors have
13.Financing decisions of the company include:
a) dividends and share repurchase
b) choosing investment projects
 c) asset diversification
d) raising capital with debt or equity
14.The Law of One Price:
a) there is no arbitrage opportunity
b) CAPM holds
c) all investments are risk-free
d) financial markets are not competitive

Home task:
1. Studying the Law of One Price, difference between S-corporation and C-
corporation, difference between financial and accounting approach to
corporation
2. Data case about Natasha Kingery (see additional file)