Chapter3a+notes

Chapter3a+notes - Chapter 3 Valuation Principle Focusing...

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Chapter 3 Valuation Principle
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2 Spring 2009 Focusing Question ± Suppose you own 1000 shares in PCCW. Would you accept the new offer price and vote for the privatization? Why?
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3 Spring 2009 Managerial Decision Making ± Key for decision-making: maximize value ± Step: 1. Identify its costs and benefits. 2. Quantify the costs and benefits in equivalent terms. ± Convert them to a common unit – in today’s cash . ± Determine cash values using market prices. 3. Compare the quantified costs and benefits. Æ accept if the benefits exceeds the costs .
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4 Spring 2009 Your Personal Financial Decisions ± As a normal part of life, we all make decisions that trade off benefits and costs across time. ² Attending a local university or studying abroad ² Saving for a new car or down payment for home ² Taking out a car loan or home loan ² Buying shares of stock ² Deciding between jobs
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5 Spring 2009 Course Plan Financial Management Foundation and Tools Valuation Short-term Financial Management Risk and Return Long-term Financing Decisions Financial Statement Analysis Capital Budgeting Working Capital Management Cost of Capital Capital Structure Valuation Principle Time Value of Money Bonds and Stocks Payout Policy Investment Decision Rules
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6 Spring 2009 Outline Valuation Principle Cost- Benefit Analysis Time Value of Money NPV Decision Rule Law of One Price Competitive Market Prices
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7 Spring 2009 Learning Objectives 1. Identify the costs and benefits when making investment decisions. 2. Define the term “competitive market,” and discuss the importance of a competitive market in determining the value of a good. 3. Convert values at different points in time using the risk-free interest rate.
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8 Spring 2009 Example: Valuing Costs and Benefits ± Suppose a jewelry manufacturer has the opportunity to trade 200 ounces of silver for 10 ounces of gold today. Should he take the trade? ± Market Conditions: ² Suppose silver can be bought and sold for a current market price of $10 per ounce. Similarly, assume the current market price for gold is $500 per ounce.
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9 Spring 2009 Example: Solution 1. Plan Find the values of gold and silver using the market prices. 2.
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This note was uploaded on 04/03/2010 for the course FINA FINA111 taught by Professor Lynnpi during the Spring '09 term at HKUST.

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Chapter3a+notes - Chapter 3 Valuation Principle Focusing...

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