Lecture_Week_03_6slides - Lectures so farWeeks 1 2 Firms...

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7/31/2011 1 Australian School of Business FINS1613 Business Finance Lecturer: Anh Tu Le FINS1613 – Semester 2, 2011 2 b Firm’s objective = Maximise firm value b How do we measure value ? s Type of cash flow b Amount b Inflow or outflow b Single period or multi-period s Timing of the cash flow s Riskiness of the cash flow FINS1613 – Semester 2, 2011 3 Lectures so far… Week 2 b How do we measure value ? (cont.) s An asset’s value is the present value of the future cash flows that an asset is expected to produce. s Single period Cash flows: s Multi-period cash flows b Ordinary Annuity: t r C PV ) 1 ( + = + - = = - r r C PVIFA C PV t t r t ) 1 ( 1 ) ( , FINS1613 – Semester 2, 2011 4 Lectures so far… Week 2 b Multi-period cash flows: s Annuity due: s Deferred Annuity: s Perpetuity: r C PV = ) 1 ( ) 1 ( 1 ) 1 )( ( , r r r C r PVIFA C PV t t r t + + - = + = - 1 1 , ) 1 ( ) 1 ( 1 ) 1 ( ) ( - - - + + - = + = k t k t r t r r r C r PVIFA C PV Lecture 3: The Valuation of a Firm’s Securities Lecturer: Anh Tu Le FINS1613 – Semester 2, 2011 6 Lecture 3: Learning Objectives b Understand the different approaches to valuing a firm. b Recognise the main characteristics of debt and equity securities b Understand the main features & determinants of bond and share values. b Use financial mathematics to calculate the value of bonds and shares.
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7/31/2011 2 FINS1613 – Semester 2, 2011 7 How to value a Firm? b A firm can be valued in two ways: PV of cash flows generated by the firm’s real (productive) assets OR Sum of the PV of cash flows generated by the firm’s individual securities FINS1613 – Semester 2, 2011 How to value a Firm? (cont. .) Figure 1.2 FINS1613 – Semester 2, 2011 9 b This basic relationship can be stated as: where: 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 How to value a Firm? (cont. .) E D V + = FINS1613 – Semester 2, 2011 10 b The net cash flows from real assets, after reinvestment costs, are known as free cash flows b 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 Valuing a firm’s real asset cash flows ( ) = + = 1 1 t t t r C V FINS1613 – Semester 2, 2011 11 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- deductible Legal recourse if interest or principal payments are missed No legal recourse if dividends are not paid Excess debt can lead to An all–equity firm cannot go bankrupt First claim over assets in the event of bankruptcy Residual claim after all others
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This note was uploaded on 10/20/2011 for the course COMMERCE 3502 taught by Professor All during the One '11 term at University of New South Wales.

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Lecture_Week_03_6slides - Lectures so farWeeks 1 2 Firms...

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