finance3030

pro formats  formal way/form to propose new projects  apply business expertise, financial expertise, and soft intuition ( art and science)  use of key and other assumptions  key assumptions are generally more sensitive to change since results when they change  elements include financial statements, comporable, capital budgeting, taxes, cost of capital, capital structure, etc/  goal and logic  estimates of value ( cash flows, projected financial statements  detailed and intergrated  different from business to business  recognize limitations ( varies with complexity and nature of activities  project the future  outsider user view  value of busness- market view  privately hel firms for sale without known market values  privately-held firms for sale without known market values  private equity buyers looking at a public companies to identify potnetial targets  inside view  tempelate...

market approach  valuation by market comparison approach  identical items must be the same price - law of one price  firms with the same attributes should have the same value  objective and observable transactions  valuation by cash flow ( NPV) approach P/E=1/(k-g)  E/P= earnings yield ....................................................... why P/E ratio are higher for more growth firms  pv go ( present value of growth oppurtunities)  PO=el/k+PVGO Valuation - market approach  P/E-Ratio- the 1/x domain problem  selection of comparable companies ( Hard to find suitable comps)  the p/e is an accounting number whereas the "p" is a market number  " non agregation" of comparable ratios  honest work when earnings are negative  other techniques to handlwe the 1/x domain problem  use median p/e instead of mean p/e ( the outliers issue) ignore non positive earnings of firms  average the e/p ...

annualized rates of return- standard practice to quote annual rate  time varying rates of return and the yield curve  present value with time-varying interest rate  based off us treasury  time varying rates of return and the yield curve  inflation  effect of rising prices without an increase in purchasing power  real term  actual increase in purchasing power  nominal term  nominal growth = (1+rate of inflation)* (1+real growth)-1 time-varying rates of return and the yield curve  treasury bills- maturities up to 1 year  treasury notes - maturities between 1 year to 10 years  treasury bonds - maturities greater than 10 years  yield curve shapes 

firm value = liabilities + equity  claims on firm ( liabilities+ equity) : capital structure  financial claims  debt liabilities  equity  non financial claims  other liabilites  liabilities have higher priority over equity  debt is cheaper than equity  corporate claims  cash flow rights of claim owners  describes how firm-generated cash will be allocated to claims  liabilities have higher claim priority over equity  control rights of creditors  force the firm into bankruptcy if firm doesn't pay obligations  covenants ( positive or negative) control rights of stockholders  vote new board of directors to replace old board  board of directors appoints managment team  corporate claims  financial claims - debt  straight - pays interest regularly and principal at maturity  convertible - right to exchange bonds for a number of shares  covenant - conditions...

Chapter 14 financial statements and economic cash flow  balance sheet effect on cash flow  inventories  accounts receivable  differed tax assets  accounts payable  differed tax liabilities  accrued expenses 

Treasury bills ( T-bills) - maturity within 1 year  spot prices are quoted at a discount to the maturity face value  treasury notes - between 1-10 years maturity  treasury bonds - longer than 10 years maturity  spot prices are at a yield to maturity  intra- period rate of return )1+ annual rate of return = 1+ intra period rate of return; such that n=number of periods n a year  According, annual rate of return = (1+ intraperiod rate of return)^ number of periods in a year-1

perfect market assumption  no difference in opinion  same relevant information is all know to market participants  certainty of facts or same opinion shared by all regarding uncertanties  no taxes  no taxes and no government/ regulatory interface  no transaction costs  zero costs in any market transaction  no big sellers/buyers no transaction is big enough to influence price  rate of return: cash flow and rate of return from 0 to period 1 - cash flow /cash flow  capital gains - cash flow 1- cash flow 0  compound rate of return: future value of period  n = present value of period n* present value = future value/ ( 1+ required rate of return per period)^number of periods net present value = present value + future valu / (1+ required rate of return)^n-1/ rquired rate of return per period  present value of unity  annuity payment *{1-1/(1+required rate of return per period)^number of periods}/ required ...

the law of one price - impact on local and global commerce  theory versus reality -  consequences of wrong prices  valuation practices ( highest and best use standard)  DCF ( expected cash flows, discount rates)  market comparisons( closeness of comparable, strengthen of attributes, etc.) asset or cost ( not visually applicable for most "going concern" entities  goal of finance : valuation  Valuation is forward looking ( prospective)  Today's price is dependent on future cash flows into infinity  historical performance guides our ability to predict future expectations  finance studies the measurment of values  limitation of finance  useful only when elements are quantifiable in monetary terms  inability to measure significant qualitative values ( e.g. internal, employee loyalty, etc.)