Where v0 value of the asset at time zero cft cash

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Unformatted text preview: given in Equation 4.19 is applied. cThis is a mixed stream of cash flows and therefore requires a number of PVIFs, as noted. dThis is a single-amount cash flow and therefore requires a single PVIF. where V0 value of the asset at time zero CFt cash flow expected at the end of year t k appropriate required return (discount rate) n relevant time period Using present value interest factor notation, PVIFk,n from Chapter 4, Equation 6.5 can be rewritten as V0 [CF1 (PVIFk,1)] [CF2 (PVIFk,2)] ... [CFn (PVIFk,n)] (6.6) We can use Equation 6.6 to determine the value of any asset. EXAMPLE Celia Sargent used Equation 6.6 to calculate the value of each asset (using present value interest factors from Table A–2), as shown in Table 6.5. Michaels Enterprises stock has a value of $2,500, the oil well’s value is $9,262, and the original painting has a value of $42,245. Note that regardless of the pattern of the expected cash flow from an asset, the basic valuation equation can be used to determine its value. Review Questions 6–12 Why is it important for financial managers to understand the valuation process? 284 PART 2 Important Financial Concepts 6–13 What are the three key inputs to the valuation process? 6–14 Does the valuation process apply only to assets that provide an annual cash flow? Explain. 6–15 Define and specify the general equation for the value of any asset, V0. LG5 LG6 6.4 Bond Valuation The basic valuation equation can be customized for use in valuing specific securities: bonds, common stock, and preferred stock. Bond valuation is described in this chapter, and valuation of common stock and preferred stock is discussed in Chapter 7. Bond Fundamentals Hint A bondholder receives two cash flows from a bond if it is held to maturity—interest and the bond’s face value. For valuation purposes, the interest is an annuity and the face value is a single payment received at a specified future date. EXAMPLE As noted earlier in this chapter, bonds are long-term debt instruments used by business and government to raise large sums of money, typically from a diverse group of lenders. Most corporate bonds...
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This document was uploaded on 01/19/2014.

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