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Lecture Fundamentals of financial management (13/e) - Chapter 4: The valuation of long-term securities

After studying chapter 4, you should be able to: Distinguish among the various terms used to express value, including liquidation value, going-concern value; value bonds, preferred stocks, and common stocks; calculate the rates of return (or yields) of different types of long-term securities; list and explain a number of observations regarding the behavior of bond prices. | Chapter 4 The Valuation of Long-Term Securities © 2001 Prentice-Hall, Inc. Fundamentals of Financial Management, 11/e Created by: Gregory A. Kuhlemeyer, Ph.D. Carroll College, Waukesha, WI The Valuation of Long-Term Securities Distinctions Among Valuation Concepts Bond Valuation Preferred Stock Valuation Common Stock Valuation Rates of Return (or Yields) What is Value? Going-concern value represents the amount a firm could be sold for as a continuing operating business. Liquidation value represents the amount of money that could be realized if an asset or group of assets is sold separately from its operating organization. What is Value? (2) a firm: total assets minus liabilities and preferred stock as listed on the balance sheet. Book value represents either (1) an asset: the accounting value of an asset -- the asset’s cost minus its accumulated depreciation; What is Value? Intrinsic value represents the price a security “ought to have” based on all factors bearing on valuation. Market value represents the market price at which an asset trades. Bond Valuation Important Terms Types of Bonds Valuation of Bonds Handling Semiannual Compounding Important Bond Terms The maturity value (MV) [or face value] of a bond is the stated value. In the case of a U.S. bond, the face value is usually $1,000. A bond is a long-term debt instrument issued by a corporation or government. Important Bond Terms The discount rate (capitalization rate) is dependent on the risk of the bond and is composed of the risk-free rate plus a premium for risk. The bond’s coupon rate is the stated rate of interest; the annual interest payment divided by the bond’s face value. Different Types of Bonds A perpetual bond is a bond that never matures. It has an infinite life. (1 + kd)1 (1 + kd)2 (1 + kd)¥ V = + + . + I I I = S ¥ t=1 (1 + kd)t I or I (PVIFA kd, ¥ ) V = I / kd [Reduced Form] Perpetual Bond Example Bond P has a $1,000 face value and provides an 8% coupon. The appropriate discount rate is . | Chapter 4 The Valuation of Long-Term Securities © 2001 Prentice-Hall, Inc. Fundamentals of Financial Management, 11/e Created by: Gregory A. Kuhlemeyer, Ph.D. Carroll College, Waukesha, WI The Valuation of Long-Term Securities Distinctions Among Valuation Concepts Bond Valuation Preferred Stock Valuation Common Stock Valuation Rates of Return (or Yields) What is Value? Going-concern value represents the amount a firm could be sold for as a continuing operating business. Liquidation value represents the amount of money that could be realized if an asset or group of assets is sold separately from its operating organization. What is Value? (2) a firm: total assets minus liabilities and preferred stock as listed on the balance sheet. Book value represents either (1) an asset: the accounting value of an asset -- the asset’s cost minus its accumulated depreciation; What is Value? Intrinsic value represents the price a security “ought to have” based on all factors bearing on valuation. .