Finance School of management Chapter 7: Principles of asset Valuation Obiective Explain the principles of sset evaluation uesTc
1 Finance School of Management Objective Explain the principles of asset evaluation Chapter 7: Principles of Asset Valuation
Finance School of management Chapter 7 Contents The relationship between The law of one price an assets value price arbitrage Value maximization Interest rates the law financial decisions of one price Accounting measures of Exchange rates value triangular arbitrage How information is Ⅴ aluation using reflected in security comparables prices Valuation models The efficient markets hypothesis uesTc
2 Finance School of Management Chapter 7 Contents ❖ The relationship between an asset’s value & price ❖ Value maximization & financial decisions ❖ Accounting measures of value ❖ How information is reflected in security prices ❖ The efficient markets hypothesis ❖ The law of one price & arbitrage ❖ Interest rates & the law of one price ❖ Exchange rates & triangular arbitrage ❖ Valuation using comparables ❖ Valuation Models
Finance School of management The role of asset valuation The process of estimating how much an asset is worth At the heart of much of financial decision making Investing in securities Investing in real estate Wealth(value)maximization Venture capital Financing Mergers and acquisition(M&a) Others uesTc
3 Finance School of Management The Role of Asset Valuation ❖ The process of estimating how much an asset is worth. ❖ At the heart of much of financial decision making – Investing in securities – Investing in real estate – Wealth (value) maximization – Venture capital – Financing – Mergers and acquisition (M&A) – Others
Finance School of management The Principle of Asset valuation Arbitrage law of One Price: The prices of equivalent assets must be the same Use information about one or more comparables whose market prices we know Market price fundamental value: The price of well-informed investors must pay for it in a free and competitive market value maximization and irrelevance of risk preference, consumption and expectations uesTc
4 Finance School of Management The Principle of Asset Valuation ❖ Arbitrage & Law of One Price: The prices of equivalent assets must be the same. ❖ Use information about one or more comparables whose market prices we know. ❖ Market price & fundamental value: The price of well-informed investors must pay for it in a free and competitive market. ❖ Value maximization and irrelevance of risk preference, consumption and expectations
Finance School of management Market value book value You buy a house for ABC Realty Balance Sheet S100.000 on january 1 January 1, 19XO 19X0 and rent it out to Assets make a profit Land 25,000 Build 75000 You finance the purchase Liabilities with $20, 000 of your own Mortagage loan 80.000 money(equity financing Ownerd Equity(Net Worth)20,000 and an $80,000 mortgage loan from a bank(debt ABC Realty market-Value Balance sheet financing) January 2, 19X0 . On January 2, someone Assets makes you a bona fide Land building $150.000 offer of s150,000, which liabilities is the market value Mortagage Loan 80000 Oner口 equity△ Net Worth) 70,000 uesTc
5 Finance School of Management Market Value & Book Value ❖ You buy a house for $100,000 on January 1, 19X0 and rent it out to make a profit. ❖ You finance the purchase with $20,000 of your own money (equity financing) and an $80,000 mortgage loan from a bank (debt financing). ❖ On January 2, someone makes you a bona fide offer of $150,000, which is the market value. Assets Land $25,000 Building 75,000 Liabilities Mortagage Loan 80,000 Owner抯 Equity (Net Worth) 20,000 ABC Realty Balance Sheet January 1, 19X0 Assets Land & Building $150,000 Liabilities Mortagage Loan 80,000 Owner抯 Equity (Net Worth) 70,000 ABC Realty Market-Value Balance Sheet January 2, 19X0