Valuation of Corporate Securities

 Self-Paced Overview

General Valuation Model

In financial terms, the value of an asset flows derives from the cash flows associated with that asset. This applies whether the asset is a financial asset or a real asset. The cash flows must be evaluated on a present value basis. Thus the value of any asset at time 0 might be modeled in the following fashion.

V0 = C1 + C2 + . . . + Cn
(1 + i)1 (1 + i)2 (1 + i)n

where:  V0
C = 
i = 
n = 

Value at time 0 
Year's Cash Flow
Annual Interest Rate
Number of Years

For instance, a three-year asset with cash flows of $2000 in year one, $3000 in year two, and $5000 in year three would be valued at $9144 if interest is 4%.

Year Cash Flow × PVIF @ 4% = Discounted Cash Flow
1 $2000 × .962 = $1924
2 $3000 × .925 = $2775
3 $5000 × .889 = $4445

So the discounted value of the cash flows for this asset is $9144. Does this mean that the price of the asset at time 0 would be $9144? It does if the market for the asset is efficientEfficient Markets:Markets in which prices adjust quickly to new information and prices reflect the economic value of information.. So in an efficient market, V0 = P0. Thus to value or price an asset in an efficient market, simply identify the cash flows associated with the asset and discount them down to present value. is maintained by Dr. Sharon Garrison
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