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Week03_LectureNotes_ - Lectures so farWeeks 1 2 Lectures so far Week 2 How do we measure value(cont An assets value is the present value of the

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1 Lectures so far…Weeks 1 & 2 Firm’s objective = Maximise firm value How do we measure value ? Type of cash flow – Type of cash flow • Amount • Inflow or outflow • Single period or multi-period – Timing of the cash flow – Riskiness of the cash flow 1 FINS1613_s2_2010_L3 Lectures so far… Week 2 How do we measure value? (cont.) – An asset’s value is the present value of the future cash flows that an asset is expected to produce. – Single period Cash flows: – Multi-period cash flows • Annuity: t r C PV ) 1 ( FINS1613_s2_2010_L3 2 r r C PVIFA C PV t t r t ) 1 ( 1 ) ( , Lectures so far… Week 2 Multi-period cash flows: – Annuity due: – Deferred Annuity: ) 1 ( ) 1 ( 1 ) 1 )( ( , r r r C r PVIFA C PV t t r t – Perpetuity: r C PV 1 1 , ) 1 ( ) 1 ( 1 ) 1 ( ) ( k t k t r t r r r C r PVIFA C PV FINS1613_s2_2010_L3 3 FINS1613 Business Finance Lecture 3 Lecture 3: The Valuation of a Firm’s Securities Readings: RTBWJ Chapters 6 & 7 Lecture 3: Learning Objectives Understand the different approaches to valuing a firm. Recognise the main characteristics of debt and equity securities Understand the main features & determinants of bond and share values. Use financial mathematics to calculate the value of bonds and shares. 5 FINS1613_s2_2010_L3 How to value a Firm? A firm can be valued in two ways: PV of cash flows generated by the firm’s real (productive) assets OR 6 FINS1613_s2_2010_L3 Sum of the PV of cash flows generated by the firm’s individual securities (debt & equity)
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2 How to value a Firm? (cont. .) Figure 1.2 FINS1613_s1_2010_L3 7 How to value a Firm? (cont. .) This basic relationship can be stated as: where: E D V V = PV of cash flows generated by the firm D = PV of cash flows generated by debt securities E = PV cash flows generated by equity securities FINS1613_s2_2010_L3 8 Valuing a firm’s real asset cash flows The net cash flows from real assets, after reinvestment costs, are known as free cash flows If the firm is assumed to have an infinite life, the value of the firm is given by: where C refers to the free cash flows of the firm  1 1 t t t r C V FINS1613_s2_2010_L3 9 Debt vs Equity: Main Characteristics Debt (Creditors) Equity (Shareholders) No ownership interest Ownership interest No voting rights Voting rights Interest is a tax-deductible cost of doing business Dividends are not a cost of doing business and are not tax- 10 FINS1613_s2_2010_L3 business and are not tax deductible Legal recourse if interest or principal payments are missed No legal recourse if dividends are not paid Excess debt can lead to financial distress & bankruptcy An all–equity firm cannot go bankrupt First claim over assets in the event of bankruptcy Residual claim after all others have been repaid Bonds: What are they?
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This note was uploaded on 07/25/2011 for the course FINS 1613 taught by Professor Drkhshim during the Two '10 term at University of New South Wales.

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Week03_LectureNotes_ - Lectures so farWeeks 1 2 Lectures so far Week 2 How do we measure value(cont An assets value is the present value of the

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