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Chapter One Chapter Two 3.1 Time Value Of Money 3.2 Discounted Cash Flow Valuation 3.3 Loans And Amortization 3.4 Bonds 3.5 Stock Valuation Chapter Three Chapter Four Chapter Five 3.2.1 Introduction To Discounted Cash Flow Valuation 3.2.2 Annuities And The Future Value And Present Value Of Multiple Cash Flows 3.2.3 Perpetuities 3.2.4 The Effect Of Compounding

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Discounted Cash Flow Valuation ­ The Effect Of Compounding
Compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings. Suppose you invest $10,000 into Cory's Tequila Company (ticker: CTC). The first year, the shares rises 20%. Your investment is now worth $12,000. Based on good performance, you hold the stock. In Year 2, the shares appreciate another 20%. Therefore, your $12,000 grows to $14,400. Rather than your shares appreciating an additional $2,000 (20%) like they did in the first year, they appreciate an additional $2,400, because the $2,000 you gained in the first year grew by 20% too. If you extrapolate the process out, the numbers can start to get very big as your previous earnings start to provide returns. In fact, $10,000 invested at 20% annually for25 years would grow to nearly $1,000,000 ­ and that's without adding any money to the investment! Interest

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