Finanzas I

Valor Presente, Objetivos de la

Firma y Gobierno Corporativo
Roberto Valdivieso/ Beatriz Hernández
Trimestre I 2019

“ ”
Don’t put your money under your mattress
Temas a Cubrir

• Introduccion a Valor Presente

• Concepto de Valor Presente Neto
• Gobiero Corporativo

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Present and Future Value
Present Value Future Value
Value today of a Amount to which an
future cash investment will grow
flow. after earning interest

Discount Rate Discount Factor

Interest rate used Present value of
to compute a $1 future
present values of payment.
future cash flows.

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Future Values

Future Value of $100 = FV

FV  $100  (1  r ) t

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Future Values

FV  $100  (1  r ) t

Example - FV
What is the future value of $100 if interest is
compounded annually at a rate of 6% for five years?

FV  $100  (1  .06 )  $133 .82 5

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Future Values

FV  $100  (1  r ) t

Example - FV
What is the future value of $400,000 if interest is
compounded annually at a rate of 5% for one year?

FV  $ 400,000  (1  .05)  $ 420,000 1

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Present Value

Present Value = PV

PV = discount factor  C1

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Present Value

Discount Factor = DF = PV of $1

DF  1
(1 r ) t

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Valuing an Office Building

Step 1: Forecast cash flows

Cost of building = C0 = 370
Sale price in Year 1 = C1 = 420

Step 2: Estimate opportunity cost of capital

If investment alternatives in the
capital market offer a return of 5%, then
Cost of capital = r = 5%

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Valuing an Office Building

Step 3: Discount future cash flows

PV  C1
(1r )  420
(1.05)  400
Step 4: Go ahead if PV of payoff exceeds
investment

NPV  370  400  30

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Net Present Value

NPV = -Required investment  PV

C1
NPV = -C0 
1 r

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Risk and Present Value
• Higher risk projects require a higher
rate of return
• Higher required rates of return cause
lower PVs

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Risk and Net Present Value

NPV = -Required investment  PV

NPV = -370,000  375,000

 $5,000

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Rate of Return Rule

• Accept investments that offer rates

of return in excess of their
opportunity cost of capital
Example
In the project listed below, the foregone investment
opportunity is 12%. Should we do the project?

profit 420,000  370,000

Return    .135 or 13.5%
investment 370,000

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Net Present Value Rule

• Accept investments that have

positive net present value
Example
Suppose we can invest $50 today and receive $60
in one year. Should we accept the project given a
10% expected return?
60
NPV = -50 +  $4.55
1.10
Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos
Opportunity Cost of Capital

Example
You may invest $100,000 today.
Depending on the state of the economy,
you may get one of three possible cash
payoffs:
Economy Slump Normal Boom
Payoff $80,000 110,000 140,000
80,000  110,000  140,000
Expected payoff  C1   $110,000
3
Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos
Opportunity Cost of Capital

Example - continued
The stock is trading for $95.65. Next
year’s price, given a normal economy, is
forecast at $110

The stocks expected payoff leads to an

expected return.
expected profit 110  95.65
Expected return    .15 or 15%
investment 95.65

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Opportunity Cost of Capital

Example - continued
Discounting the expected payoff at the
expected return leads to the PV of the
project

110,000
PV   $95,650
1.15

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Opportunity Cost of Capital

Example - continued
Notice that you come to the same
conclusion if you compare the expected
project return with the cost of capital.

expected profit 110,000  100,000

Expected return    .10 or 10%
investment 100,000

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Net Present Value Rule
Calculating Present Values When There Are Multiple Cash Flows

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Net Present Value Rule
Calculating Present Values When There Are Multiple Cash Flows
Your real estate adviser has come back with some revised
forecasts. He suggests that you rent out the building for two
years at $20,000 a year, and predicts that at the end of that
time you will be able to sell the building for $400,000. r=12%

Perhaps you should revert to the original plan of selling

in year 1.

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Investment vs. Consumption
• Some people prefer to consume now. Some prefer to invest now
and consume later. Borrowing and lending allows us to reconcile
these opposing desires which may exist within the firm’s
shareholders.
income in period 1
100

An
80

Some investors will prefer A

60 and others B

40

20 Bn

20 40 60 80 100
income in period 0

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Investment vs. Consumption

The grasshopper (G) wants to

consume now. The ant (A) wants
to wait. But each is happy to
invest.
Each invests $185,000 in the building
project and returns $210,000 at
the end of the year.
G wants to consume now so G
borrows $200,000 and repays
$210,000 at the end of the year.
The existence of capital markets
allows G to consume now and still
invest with A in the project.

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Investment vs. Consumption

Dollars A invests $185 now • The grasshopper (G) wants to consume

and consumes $210 now. The ant (A) wants to wait. But
Next Year each is happy to invest. Each invests
next year $185,000 and returns $210,000 at the
210 end of the year. G wants to consume
now so G borrows $200,000 and repays
$210,000 at the end of the year. The
existence of capital markets allows G to
194 consume now and still invest with A in
the project.

G invests $185 now,

borrows $200 and
consumes now.

Dollars
185 200
Now

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Investment vs. Consumption

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Investment vs. Consumption

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Investment vs. Consumption

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Investment vs. Consumption

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Investment vs. Consumption

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Investment vs. Consumption

En presencia de mercados de capitales, las decisiones de Inversión

son independientes de las de Consumo
Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos
The Classical Viewpoint

• Van Horne: "In this book, we assume that the objective of

the firm is to maximize its value to its stockholders"
• Brealey & Myers: "Success is usually judged by value:
Shareholders are made better off by any decision which
increases the value of their stake in the firm... The secret of
success in financial management is to increase value."
• Copeland & Weston: The most important theme is that
the objective of the firm is to maximize the wealth of its
stockholders."
• Brigham and Gapenski: Throughout this book we operate
on the assumption that the management's primary goal is
stockholder wealth maximization which translates into
maximizing the price of the common stock.

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

The Objective in Decision Making

• In traditional corporate finance, the objective in decision

making is to maximize the value of the firm.
• A narrower objective is to maximize stockholder wealth.
When the stock is traded and markets are viewed to be
efficient, the objective is to maximize the stock price.
Maximize equity Maximize
Maximize value market estimate
firm value
of equity value
Assets Liabilities
Existing Investments Fixed Claim on cash flows
Generate cashflows today Assets in Place Debt Little or No role in management
Includes long lived (fixed) and Fixed Maturity
short-lived(working Tax Deductible
capital) assets

Expected Value that will be Growth Assets Equity Residual Claim on cash flows
created by future investments Significant Role in management
Perpetual Lives

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Maximizing Stock Prices is too “narrow” an
objective: A preliminary response

• Maximizing stock price is not incompatible

with meeting employee needs/objectives. In
particular:
– Employees are often stockholders in many
firms
– Firms that maximize stock price generally are
firms that have treated employees well.
• Maximizing stock price does not mean that
customers are not critical to success. In
most businesses, keeping customers happy
is the route to stock price maximization.

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Why traditional corporate financial theory
focuses on maximizing stockholder wealth.

• Stock price is easily observable and constantly

updated (unlike other measures of performance,
which may not be as easily observable, and certainly
not updated as frequently).
• If investors are rational (are they?), stock prices
reflect the wisdom of decisions, short term and long
term, instantaneously.
• The objective of stock price performance provides
some very elegant theory on:
– Allocating resources across scarce uses (which
investments to take and which ones to reject)
– how to finance these investments
– how much to pay in dividends

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

The Classical Objective
Function
STOCKHOLDERS

Hire & fire Maximize

managers stockholder
- Board wealth
- Annual Meeting

Lend Money No Social Costs

BONDHOLDERS Managers SOCIETY
Protect Costs can be
bondholder traced to firm
Interests
Reveal Markets are
information efficient and
honestly and assess effect on
on time value

FINANCIAL MARKETS

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

What can go wrong?

STOCKHOLDERS

Managers put
Have little control their interests
over managers above stockholders

Lend Money Significant Social Costs

BONDHOLDERS Managers SOCIETY
Bondholders can Some costs cannot be
get ripped off traced to firm
Delay bad
news or Markets make
provide mistakes and
misleading can over react
information

FINANCIAL MARKETS

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Managers and Shareholder
Interests
• Tools to Ensure Management Pays
Attention to the Value of the Firm
– Manager’s actions are subject to the scrutiny of
the board of directors.
– Shirkers are likely to find they are ousted by more
energetic managers.
– Financial incentives such as stock options

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Goals of The Corporation

• Shareholders desire wealth maximization

• Do managers maximize shareholder wealth?
• Managers have many constituencies “stakeholders”
• “Agency Problems” represent the conflict of interest
between management and owners

Agency Problem Solutions

1 - Compensation plans
2 - Board of Directors
3 - Takeovers
4 - Specialist Monitoring
5 - Auditors

Finanzas I 2019 ESEN - Valor Presente y Objetivos Corporativos

Lecturas recomendadas

– Principios de Finanzas Corporativas, 9/E.

Brealey - Myers – Allen

Lectura apoyo:
Capitulo 2 completo

Ejercicios :
Capitulo 2
Preguntas 1 a 5
Ejercicios prácticos 1.

Finanzas I 2019 ESEN