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1、McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.3-0Corporate Finance Ross Westerfield JaffeSixth EditionSixth Edition3Chapter Three Financial Markets and Net Present ValueMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.3-1

2、Chapter Outline3.1 The Financial Market Economy3.2 Making Consumption Choices Over Time3.3 The Competitive Market3.4 The Basic Principle3.5 Practicing the Principle3.6 Illustrating the Investment Decision3.7 Corporate Investment Decision Making3.8 Summary and ConclusionsMcGraw-Hill/IrwinCopyright 20

3、02 by The McGraw-Hill Companies, Inc. All rights reserved.3-23.1 The Financial Market Economy Individuals and institutions have different income streams and different intertemporal consumption preferences. Because of this, a market has arisen for money. The price of money is the interest rate.McGraw

4、-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.3-3The Financial Market Economy: Example Consider a dentist who earns $200,000 per year and chooses to consume $80,000 per year. He has $120,000 in surplus money to invest. He could loan $30,000 to each of 4 college sen

5、iors. They each promise to pay him back with interest after they graduate in one year.DentistStudent #1Student #2Student #3Student #4$30,000$30,000$30,000$30,000$30,000(1+r)$30,000(1+r)$30,000(1+r)$30,000(1+r)McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.3-4T

6、he Financial Market Economy: Example Rather than performing the credit analysis 4 times, he could loan the whole $120,000 to a financial intermediary in return for a promise to repay the $120,000 in one year with interest. The intermediary in turn loans $30,000 to each of the 4 college seniors. Stud

7、ent #1Student #2Student #3Student #4$30,000$30,000$30,000Bank$120,000Dentist$30,000$30,000(1+r)$30,000(1+r)$30,000(1+r)$30,000(1+r)$120,000(1+r)McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.3-5The Financial Market Economy: Example Financial intermediation can

8、 take three forms: Size intermediation In the example above, the bank took a large loan from the dentist and made small loans to the students. Term intermediation Commercial banks finance long-term mortgages with short-term deposits. Risk intermediation Financial intermediaries can tailor the risk c

9、haracteristics of securities for borrowers and lenders with different degrees of risk tolerance.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.3-6Market Clearing The job of balancing the supply of and demand for loanable funds is taken by the money market. Whe

10、n the quantity supplied equals the quantity demanded, the market is in equilibrium at the equilibrium price. The price of money is the interest rate.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.3-73.2 Making Consumption Choices over Time An individual can al

11、ter his consumption across time periods through borrowing and lending. We can illustrate this by graphing consumption today versus consumption in the future. This graph will show intertemporal consumption opportunities.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights res

12、erved.3-8Intertemporal Consumption Opportunity Set$0$20,000$40,000$60,000$80,000$100,000$120,000Consumption todayA person with $95,000 who faces a 10% interest rate has the following opportunity set.One choice available is to consume $40,000 now; invest the remaining $55,000; consume $60,000 next ye

13、ar.1)10. 1 (000,55$000,60$0$20,000$40,000$60,000$80,000$100,000$120,000Consumption at t+1McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.3-9Intertemporal Consumption Opportunity Set$0$20,000$40,000$60,000$80,000$100,000$120,000$0$20,000$40,000$60,000$80,000$100

14、,000$120,000Consumption todayConsumption at t+1Another choice available is to consume $60,000 now; invest the remaining $35,000; consume $38,500 next year.1)10. 1 (000,35$500,38$McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.3-10Taking Advantage of Our Opportu

15、nities$0$20,000$40,000$60,000$80,000$100,000$120,000$0$20,000$40,000$60,000$80,000$100,000$120,000Consumption todayConsumption at t+1A persons preferences will tend to decide where on the opportunity set they will choose to be.Ms. PatienceMs. ImpatienceMcGraw-Hill/IrwinCopyright 2002 by The McGraw-H

16、ill Companies, Inc. All rights reserved.3-11Changing Our Opportunities$0$20,000$40,000$60,000$80,000$100,000$120,000$0$20,000$40,000$60,000$80,000$100,000$120,000Consumption todayConsumption at t+1A rise in interest rates will make saving more attractive and borrowing less attractive.Consider an inv

17、estor who has chosen to consume $40,000 now and to consume $60,000 next year.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.3-123.3 The Competitive Market In a competitive market: Trading is costless. Information about borrowing and lending is available There

18、are many traders; no individual can move market prices. There can be only one equilibrium interest rate in a competitive marketotherwise arbitrage opportunities would arise.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.3-133.4 The Basic Principle The basic fi

19、nancial principle of investment decision making is this: An investment must be at least as desirable as the opportunities available in the financial markets.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.3-143.5 Practicing the Principle: A Lending ExampleConsi

20、der an investment opportunity that costs $50,000 this year an provides a certain cash flow of $54,000 next year.Is this a good deal?It depends on the interest rate available in the financial markets.The investment has an 8% return, if the interest rate available elsewhere is less than this, invest h

21、ere.Cash inflowsTimeCash outflows01-$50,000$54,000McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.3-153.6 Illustrating the Investment Decision Consider an investor who has an initial endowment of income of $40,000 this year and $55,000 next year. Suppose that h

22、e faces a 10-percent interest rate and is offered the following investment.Cash inflowsTimeCash outflows01-$25,000$30,000McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.3-163.6 Illustrating the Investment Decision$0Consumption todayOur investor begins with the

23、following opportunity set: endowment of $40,000 today, $55,000 next year and a 10% interest rate.One choice available is to consume $15,000 now; invest the remaining $25,000 in the financial markets at 10%; consume $82,500 next year.$0$99,000Consumption at t+1$55,000$82,500$40,000$15,000$90,000McGra

24、w-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.3-173.6 Illustrating the Investment Decision$0Consumption todayA better alternative would be to invest in the project instead of the financial markets.He could consume $15,000 now; invest the remaining $25,000 in the p

25、roject at 20%; consume $85,000 next year.$0$99,000Consumption at t+1$55,000$82,500$40,000$85,000$15,000$90,000With borrowing or lending in the financial markets, he can achieve any pattern of cash flows he wantsany of which is better than his original opportunities. McGraw-Hill/IrwinCopyright 2002 b

26、y The McGraw-Hill Companies, Inc. All rights reserved.3-183.6 Illustrating the Investment Decision$0Consumption todayNote that we are better off in that we can command more consumption today or next year.$0$99,000Consumption at t+1$55,000$82,500$40,000$85,000$15,000$101,500$101,500 = $15,000(1.10) +

27、 $85,000$92,273 = $15,000 + $85,000(1.10) $90,000 $92,273McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.3-19Net Present Value We can calculate how much better off in todays dollar the investment makes us by calculating the Net Present Value:.Cash inflowsTimeCa

28、sh outflows01-$25,000$30,00073.272, 2$10. 1000,30$000,25NPVMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.3-203.7 Corporate Investment Decision Making Shareholders will be united in their preference for the firm to undertake positive net present value decision

29、s, regardless of their personal intertemporal consumption preferences.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.3-21Corporate Investment Decision MakingConsumption todayConsumption at t+1Positive NPV projects shift the shareholders opportunity set out, wh

30、ich is unambiguously good.All shareholders agree on their preference for positive NPV projects, whether they are borrowers or lenders.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.3-223.7 Corporate Investment Decision Making In reality, shareholders do not vote on every investment decision faced by a firm and the managers of firms need decision rules to operate by. All