Topic Three - Valuation of Stocks and Bonds

# Topic Three - Valuation of Stocks and Bonds - BUSINESS...

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Unformatted text preview: BUSINESS SCHOOL Topic 3 Valuation of Stocks and Bonds Craig Mellare This Lecture What you should know by the end of this lecture- Application of financial mathematics- How to value a firm- How to value debt and equity securities- Share valuation models Valuation of a Firm Market Value of Firm- Two perspectives 1 . Present value of all future net (free) cashflows 2 . Present value of future cashflows to a firms securities (ie. shares + debt) (1) = (2) Why? Firm Value = Value of Securities Real assets Debtholders Shareholders Dividends Interest Reinvested Net cash flow + Principal Value of A Firm ie. the value of a firms net cashflows F t = net cashflows of firm (less re-investment costs) r = required rate of return (discount rate) for firm V = t=1 00 F t (1+r) t Value of a Firm V = D + E where: V = value of cashflows generated by the firm (Net present value of real asset cashflow) D = value of debt used by firm (Net present value of debt cashflows) E = value of equity used by the firm (Net present value of equity cashflows) Debt Versus Equity Characteristic Debt Equity Cashflow Interest Dividend Return Known Uncertain Life Fixed Indefinite Security (claim) First Residual Redemption Face value n/a Example Bonds Shares Debt Valuation Key Concept- value of debt is the present value of future cashflows stemming from the debt Cashflows stemming from debt:- Interest (F) = coupon which is the dollar amount of interest paid periodically- Face value (B) = lump sum paid at end of life of debt security Present Value of Debt (D) is ... but F is commonly an annuity, whose value: hence D = t=1 n F (1+r d ) t + B (1+r d ) n PV F = F ....
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## This note was uploaded on 03/23/2012 for the course FINC 5001 taught by Professor Reubensegara during the Three '12 term at University of New South Wales.

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Topic Three - Valuation of Stocks and Bonds - BUSINESS...

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