© 2000 John Petroff
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© 2000 John Petroff |
As we saw, the concept of value is universal: it is the sum of future benefits. In the previous chapter we dealt with difficulties of predicting future benefits, adding up benefits over time, selecting an appropriate discount rate representative of available alternatives and adjusting it for risk. In this chapter we adapt the general formula of absolute or relative value described in the previous chapter to each type of financial asset given the type of expected benefits, and we derive a formula or concept for each. While the formulas or concepts are different, there are similarities in the information needed. Rates of return or dollar prices for stocks, bonds, derivatives and other assets will be offered as solutions when applying the formulas. Performing such calculations is usually straightforward. The demanding work is to put into the formulas appropriate numbers for coefficients and realistic estimates for variables. To this end is devoted the remaining of the manual.
Applying a formula and obtaining a number is also not the end of analytical work. Remember that all financial decisions are made by choosing the optimal alternative from a range of available choices. Each number that a formula generates must be compared to similar numbers for other stocks, bonds, derivatives, or other comparable financial assets. In other words, valuation of one financial asset is only part of the information needed for any financial decision. This is true for all decisions such as purchasing shares, issuing a loan, merging, entering into a major contract with the company, and so on. Each of these decisions aims at some strategic goal, and is affected by skills, attitudes and emotions of decision makers. These issues are the subject of next chapter. That is why in this chapter, the discussion focuses on individual financial assets and is somewhat conceptual and theoretical; whereas in the next chapter, the use of concepts is more practical and dynamic. The following sections make up this chapter:
A- Bond prices and yields
B- Short term securities and government securities
C- Pricing bank loan
D- Stock valuation methods
E- Pricing options, rights and warrants
F- Pricing an entire company
G- Capital budgeting
H- Foreign investments
I- Valuation of real and human assets
See review questions Q-3.1 and Q-3.2.
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