Business Finance Ch. 10

Business Finance Ch. 10 - 1. Influenced by three factors a....

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March 5, 2008 Ch. 10 I. Valuation concept A. The value of an asset is: 1. The present value of the expected cash flow associated with the asset. 2. An investor must know a. The expected cash flows b. Timing of the cash flows c. Characteristics B. Price – based on the collective assessment of the asset cash flow characteristics by the market participants. II. Valuation of Bond+ Pn/(1+y)^n $1000 Par Value 6% 3% 5yrs 10x Semiannual interest I – promised interest Pn = par value of the bond Pb= price Y = yield to mature by C. Bonds will sell at par when I =y D. Bonds will sell at a discount (less than par) I< Y
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E. Bonds will sell at a premium (greater than par) I>Y F. Yield to maturity
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Unformatted text preview: 1. Influenced by three factors a. Required real rate of return (interest not adjusted for inflation) b. Inflation c. Risk premium 1. Possibility of the firm not being able to sustain growth 2. Financial risk possibility of the firm not meeting its debt service obligations Bond prices vary inversely with interest rates. Bond prices go down, interest rates go up. Semi-annual interest you have the rate and double the periods. 6% for five years or 3% for 10 interest periods. III. Preferred stock Pp = Dp/Kp $100 7.5% $7.50 / yr dividend IV. Common stock A. No growth Po = Do/Ko B. Constant growth Po = D1/(Ke-g)...
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Business Finance Ch. 10 - 1. Influenced by three factors a....

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