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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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  • August 17, 2016
  • 4
  • 2016/2017
  • Summary
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By: mthobisikwenzokuhle • 1 year ago

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By: maryamgopal • 3 year ago

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UCTstudent
MODULE 7: BASIC VALUATIONS
Valuation
 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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