## 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.

V_{0} = |
C_{1} |
+ | C_{2} |
+ . . . + | C_{n} |

(1 + i)_{1} |
(1 + i)_{2} |
(1 + i)_{n} |

where: V_{0} =

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 |

$9144 |

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 efficient*Efficient Markets:*Markets in which prices adjust quickly to new information and prices reflect the economic value of information.. So in an efficient market, V_{0} = P_{0}. 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.