Chapter+3b

Chapter+3b - Chapter 3 (contd) Valuation Principle Focusing...

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Chapter 3 (cont’d) Valuation Principle
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4 Spring 2011 Focusing Question Why is it possible for the Chinese companies to find arbitrage opportunities in yuan?
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6 Spring 2011 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 2011 Learning Objectives 1. Explain why maximizing NPV is always the best investment decision rule. 2. Define arbitrage and the Law of One Price. 3. Determine the no-arbitrage price of an investment.
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8 Spring 2011 NPV Decision Rule To accept or reject a project Accept positive NPV projects because accepting them is equivalent to receiving cash today in an amount equivalent to their NPV. Reject negative NPV projects because accepting them would reduce the wealth of investors. Accept zero-NPV projects because you will earn the required rate of return for the projects. You will not earn abnormal profit and thus it does not add value to the firm. But it does not reduce value either. To choose among alternatives Take the alternative with the highest NPV because it maximizes the value of the firm.
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9 Spring 2011 Choosing Among Alternatives Suppose you own a coffee stand across from campus and you hire someone to operate it for you. You will be graduating next year and have started to consider selling it. An investor has offered to buy the business from you for $20,000 whenever you are ready. Your interest rate is 10% and you are considering three alternatives: 1. Sell the business now.
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This note was uploaded on 07/30/2011 for the course FIN 111 taught by Professor Mark during the Spring '11 term at HKU.

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Chapter+3b - Chapter 3 (contd) Valuation Principle Focusing...

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