【正文】 t Earnings 169。2020 Pearson Education, Inc. Chapter 15 21 The Value of Lost Earnings ?Finding PDV ?The summation of column 4 will give the PDV of lost wages – $650,252 ?Jennings’ family could recover this amount as partial pensation for his death 169。2020 Pearson Education, Inc. Chapter 15 23 The Value of a Bond ?Determining the Price of a Bond ?Coupon Payments = $100/yr. for 10 yrs. ?Principal Payment = $1,000 in 10 yrs. 10102)1(10 0 0$)1(100$... )(1$1 0 0)(1$1 0 0 P D VRRRR?????????169。2020 Pearson Education, Inc. Chapter 15 25 The Value of a Bond ?Perpetuity is a bond that pays out a fixed amount of money each year forever ?Present value of a perpetuity is an infinite summation ?Can express the value of a perpetuity by PDV = $100/R ?In general, PDV = payment/R 169。2020 Pearson Education, Inc. Chapter 15 27 Effective Yield on a Bond ?Calculating the Rate of Return from a Bond ?P is value of perpetuity – market price ?Can use equations to find value of R given P and the payment PP a y m e n tRt h e nRP a y m e n tP ??169。2020 Pearson Education, Inc. Chapter 15 29 Effective Yield on a Bond ?Calculating the Rate of Return from a Bond ?See graph showing how R depends on P PRRRRR of i n t e r m s C alc u lat e)1(1 00 0$)1(1 00$.. . )(1$ 10 0)(1$ 10 0 P DV :B o ndC o u p o n 10102?????????169。2020 Pearson Education, Inc. Chapter 15 31 Effective Yield on a Bond ?Yields vary on different bonds ?Ex: Corporate bonds yield more than government bonds ?The degree of risk a bond holds is reflected in the yield ? Riskier bonds have higher yields ? Government unlikely to default ? Some corporations are more stable than others 169。2020 Pearson Education, Inc. Chapter 15 33 Yields on Corporate Bonds Closing prices for IBM on March 5, 2020 7 189。 08 129 Wall Street Journal, 3/6 ?: coupon payments for one year ($) ?13: maturity date of bond (2020) ?: annual coupon/closing price ($) ?10: number of bonds traded that day (10) ?: closing price ($) ?: change in price from previous day (down ) 169。2020 Pearson Education, Inc. Chapter 15 35 The Yields on Corporate Bonds ?The Lucent bond matures in 5 years and has a yield of: %.R*R)(R...R)(.R)( 01311 00)1(1551552??????????169。2020 Pearson Education, Inc. Chapter 15 37 The Net Present Value Criterion for Capital Investment Decisions ?Firms have to decide when and how much capital to invest in ?Comparing the present value (PV) of the cash flows from the investment to the cost of the investment can give firms information needed to make worthwhile decisions 169。2020 Pearson Education, Inc. Chapter 15 39 The Net Present Value Criterion for Capital Investment Decisions ? 0 N P V if I n v e s tr i s k s i m i l a r a w i t hc a p i t a l of c o s ty o p p o r t u n i t or r a t e d i s c o u n t N P V 1 0 )(n y e a r s f o r p r o f i t s c o s t c a p i t a l n?????????????RRRRCC1010221)1(...)1()1(???? n169。2020 Pearson Education, Inc. Chapter 15 41 The Net Present Value Criterion for Capital Investment Decisions ?The Electric Motor Factory (choosing to build a $10 million factory) ?8,000 motors/ month for 20 yrs ? Cost = $ each ? Price = $? Profit = $10/motor or $80,000/month ? Factory life is 20 years with a scrap value of $1 million ?Should the pany invest? 169。2020 Pearson Education, Inc. Chapter 15 43 Net Present Value of a Factory Interest Rate, R 0 6 Net Present Value ($ millions) 4 2 0 2 4 6 8 10 ?Firm should not invest for discount rates below ?Firm should not invest for discount rates above R* = 169。2020 Pearson Education, Inc. Chapter 15 45 Real Versus Nominal Discount Rates ?Assume price, cost, and profits are in real terms ?Therefore, ? P = ()() = , Year 2 P = ()() = … ?C = ()() = , Year 2, C =…. ? Profit remains $960,000/year 169。2020 Pearson Education, Inc. Chapter 15 47 Net Present Value of a Factory Interest Rate, R 0 6 Net Present Value ($ millions) 4 2 0 2 4 6 8 10 ** If R = 4%, the NPV is positive. The pany should invest in the new factory. 169。2020 Pearson Education, Inc. Chapter 15 49 The Net Present Value Criterion for Capital Investment Decisions ?Electric Motor Factory ?Construction time is 1 year ? $5 million expenditure today ? $5 million expenditure next year ?Expected loss is $1 million the first year and $ million the second year ?Profit is $ million/yr. until year 20 ?Scrap value is $1 million 169。2020 Pearson Education, Inc. Chapter 15 51 Adjustments for Risk ?Determining the discount rate for an uncertain environment: ?This can be done by increasing the discount rate by adding a riskpremium to the riskfree rate ? Amount of money that a riskaverse individual will pay to avoid taking a risk 169。2020 Pearson Education, Inc. Chapter 15 53 Diversifiable vs. Nondiversifiable Risk ?Diversifying spreads risk over many options ?Invest in many types of investments – diversify portfolio ?Firms invest in many different projects ?No reward for assets that have only diversifiable risk – tend to earn return close to risk free return on average 169。2020 Pearson Education, Inc. Chapter 15 55 Diversifiable vs. Nondiversifiable Risk ?The Capital Asset Pricing Model (CAPM) ?Model in which the risk premium for a capital investment depends on the correlation of the investment’s return with the return on the entire stock market ?If you invest in a mutual fund, there is no diversifiable risk but there is nondiversifiab