Chapter3a.ppt

Chapter3a.ppt - Chapter 3 Valuation Principle Focusing...

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Chapter 3 Valuation Principle
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4 Fall 2011 Focusing Question If you were the shareholders of Cadbury, at what price would you be willing to sell your shares to Kraft? Why?
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6 Fall 2011 Course Plan Financial Management Foundation and Tools Valuation Risk and Return Long-term Financing Decisions Financial Statement Analysis Capital Budgeting Cost of Capital Capital Structure Valuation Principle Time Value of Money Investment Decision Rules Bond Stock
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Outline 7 Fall 2011 Valuation Principle Cost- Benefit Analysis Time Value of Money NPV Decision Rule Law of One Price Competitive Market Prices
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8 Fall 2011 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. 4. Compute the NPV of an investment opportunity.
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9 Fall 2011 Valuation Principle 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. accept if the benefits exceeds the costs .
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10 Fall 2011 Example: Comparing Costs and Benefits Problem: Your company has the opportunity to purchase adjacent land and build a larger warehouse. Additional employees will need to be hired to work in the warehouse. The warehouse will also involve additional maintenance costs. However, by building this warehouse, the company will increase its sales and its profits. It will also be able to purchase products and supplies at lower prices due to larger discounts for buying more volume. How should the managers decide whether to proceed with building the warehouse?
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11 Fall 2011 Example: Comparing Costs and Benefits Solution: Plan: Identify the costs and benefits managers must consider. Determine which of the facts outlined in the problem refer to costs and which refer to benefits.
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12 Fall 2011 Example: Comparing Costs and Benefits Execute: Present Value Costs: Construction Increase in labor Additional maintenance Land purchase Present Value Benefits: Increased sales Increased profit/margins Greater volume discounts
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13 Fall 2011 Example: Comparing Costs and Benefits Evaluate: Compare costs and benefits If benefits > costs, build the warehouse Having costs and benefits in terms of “cash today” is essential.
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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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Chapter3a.ppt - Chapter 3 Valuation Principle Focusing...

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