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Summary Basic Valuation
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Summary of 4 pages for the course Corporate Financial Management at UCT (Complete summary)
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MODULE 7: BASIC VALUATIONSValuation
Process of estimating how much an asset is worth
Fair value/ price or intrinsic value/price
Market Price: observed from market; consensus price from all traders
Intrinsic Price: self-assigned value; varieties of models used for estimation
Efficient Markets Inefficient Markets
Low costs, easy to transact (operational Opposite
efficiency)
MP fully reflects all info (informational Opposite
efficiency)
MP = IP ; not exactly but close MP deviates from IP (results in
over/under-priced market instruments)
Efficient Capital Market: market where prices reflect the knowledge and expectations of
all investors
Levels of Market Efficiency
Strong-form efficiency
Theory that security prices reflect all available information
Semi-strong-form efficiency
Theory that security prices reflect all public information but not private
Weak-form efficiency
Theory that security prices reflect all information in past prices but not reflect all
private/public information
Valuing Financial Assets
1. Relative valuation
2. Discounted cash flow techniques
3. Net asset valuation
4. Liquidation valuation
Discounted Cash Flow Techniques
Finding the PV of all future benefits (cash flows) of asset
Steps
1. Determine future cash flows 𝑉0 =
𝐶𝐹1
+
𝐶𝐹2
+⋯
2. Determine discount rate (1 + 𝑟)1 (1 + 𝑟)2
3. Present value using discount rate
BONDS/DEBENTURES
Bond
Long term debt instrument used to raise finance
Fixed income security that pays constant stream of income (i.e. coupon, interest or
preferred dividend)
Borrower/Issuer Lender/Investor
Sells to lender Pays bond SP
Pays interest to lender
Repays principal at end
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