Chapter3a notes

Chapter3a notes - Chapter 3 Valuation Principle 2 Spring...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 3 Valuation Principle 2 Spring 2010 Focusing Question If you were the shareholders of Cadbury, at what price would you be willing to sell your shares to Kraft? Why? 3 Spring 2010 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. Æ accept if the benefits exceeds the costs . 4 Spring 2010 Course Plan Financial Management Foundation and Tools Valuation Short-term Financial Management Risk and Return Long-term Financing Decisions Financial Statement Analysis Capital Budgeting Working Capital Management Cost of Capital Capital Structure Valuation Principle Time Value of Money Bonds and Stocks Investment Decision Rules 5 Spring 2010 Outline Valuation Principle Cost- Benefit Analysis Time Value of Money NPV Decision Rule Law of One Price Competitive Market Prices 6 Spring 2010 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. 7 Spring 2010 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? 8 Spring 2010 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. 9 Spring 2010 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 10 Spring 2010 Example: Comparing Costs and Benefits Evaluate:...
View Full Document

This note was uploaded on 08/10/2011 for the course FINA 101 taught by Professor X during the Spring '11 term at HKUST.

Page1 / 31

Chapter3a notes - Chapter 3 Valuation Principle 2 Spring...

This preview shows document pages 1 - 11. Sign up to view the full document.

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