6273.ch03.p061-085.Fv1

6273.ch03.p061-085.Fv1 - FINAL UNPROOFED Final Check...

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2 Valuation Principle Connection. In this part of the text, we introduce the basic tools for making financial decisions. Chapter 3 presents the most important idea in this book, the Valuation Principle. The Valuation Principle states that we can use market prices to determine the value of an investment opportunity to the firm. As we progress through our study of Corporate Finance, we will demonstrate that the Valuation Principle is the one unifying principle that underlies all of finance and links all of the ideas throughout this book. For a financial manager, evaluating financial decisions involves computing the net present value of a project’s future cash flows. We use the Valuation Principle’s Law of One Price to derive a central concept in financial economics—the time value of money. In Chapter 4, we explain how to value any series of future cash flows and derive a few useful shortcuts for valuing various types of cash flow patterns. Chapter 5 discusses how interest rates are quoted in the market and how to handle interest rates that compound more frequently than once per year. We apply the Valuation Principle to demonstrate that the return required from an investment will depend on the rate of return of investments with maturity and risk similar to the cash flows being valued. This observation leads to the important concept of the cost of capital of an investment decision. In Chapter 6, we demonstrate an application of the time value of money tools using interest rates: valuing the bonds issued by corporations and governments. Interest Rates and Valuing Cash Flows Chapter 3 The Valuation Principle: The Foundation of Financial Decision Making Chapter 4 NPV and the Time Value of Money Chapter 5 Interest Rates Chapter 6 Bonds PART 61
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The Valuation Principle: The Foundation of Financial Decision Making Identify the role of financial managers in decision making Recognize the role competitive markets play in determining the value of a good Understand the Valuation Principle, and how it can be used to identify decisions that increase the value of the firm 3 LEARNING OBJECTIVES Assess the effect of interest rates on today’s value of future cash flows Use the Net Present Value Rule to make investment decisions Understand the Law of One Price r interest rate NPV net present value notation PV present value 62
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Terry School of Business, University of Georgia, 2005 “We weighed the high cost of getting EPA registration now against its future benefits and decided the revenues and earnings potential made it a good investment.” INTERVIEW WITH Matt Herriot, Oxford & Hill Home Products What do mothballs and finance have in common? Both are important to entrepreneur Matt Herriot, executive vice president of Oxford & Hill Home Products. The company’s innovative products, such as Moth Avoid, protect clothing, linens, collectibles and other natural fiber valuables from damage caused by moths, moisture, and mildew. “My finance courses at the University of Georgia’s Terry
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6273.ch03.p061-085.Fv1 - FINAL UNPROOFED Final Check...

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