03mtreview

03mtreview - Introduction to Finance Asset Valuation...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Introduction to Finance Asset Valuation Arbitrage Pricing Assets having same payoffs must have same prices Fixed-Income securities, Common Stocks, Forwards, Futures etc. Equilibrium Pricing Determinants of fundamentals Expectation of cash flows, investor preferences, discount rate etc. Market Function of Financial Market Allocate resources Communicate information Role of Manager Maximize current market value of the firm Household Optimze investments based on preferences. 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Present Value Components Expected Cash Flow Discount Rates * Compounding (1 + r EAR ) = (1 + APR k ) k * Nominal versus Real (1 + r real )(1 + inflation) = (1 + r nominal ) Investment Rule Take project: NPV > 0 Present Value Formula PV = X t CF t (1 + r t ) t Future Value FV t = PV 0 (1 + r t ) t Special equations perpetuity perpetuity with growth annuity annuity with growth Consistency Match characteristics of cash flows and discount rates Risk, Real, Nominal, Currency, tax etc. Remember to discount everything to the same point of time, and also note if inflation affect your results! 2
Background image of page 2
Fixed-Income Securities Spot rates, r t Term Structure Forward rates (1 + r t ) t = (1 + r s ) s (1 + f s,t ) t - s Bond Price B = T X t =1 C t (1 + r t ) t + P (1 + r T ) T Yield-to-maturity, y B = T X t =1 C t (1 + y ) t + P (1 + y ) T Duration D = 1 B X CF t × t (1 + y ) t Modified Duration MD = D 1 + y or MD = - 1 B d B d y Convexity CX = 1 2 1 B d 2 B dy 2 Price Approximation Δ B B ≈ - MD × y ) + CX × y ) 2 + ··· Hedging V P = V A + V B MD P = V A V P MD A + V B V P MD B Inflation Risk Default Risk Default Premium Risk Premium 3
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
General Pricing Formula P 0 = X t =1 E 0 (D t ) (1 + r t ) t + lim T →∞ E 0 (P T ) (1 + r ) T constant growth multiple stage growth Terminology Earnings per share (EPS) Payout ratio ( p ) Plowback ratio ( b ) b = 1 - p Dividends per share (DPS) DPS = (1 - b ) · EPS Return on Equity (ROE) Growth rate ( g ) g = ROE · b Book Value Dividend Yield
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 9

03mtreview - Introduction to Finance Asset Valuation...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online