This preview shows page 1. Sign up to view the full content.
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...
View Full Document