Chapter 4 The valuation of Long-Term Securities 4-1
4-1 Chapter 4 The Valuation of Long-Term Securities
The valuation of Long-Term Securities n Distinctions Among Valuation Concepts a Bond valuation o Preferred stock valuation Common stock valuation n Rates of Return(or Yields) 4-2
4-2 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? o 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 o Going-concern value represents the amount a firm could be sold for as a continuing operating business. 4-3
4-3 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? o Book value represents either (1)an asset; the accounting value of an asset a the asset's cost minus its accumulated depreciation (2)a firm: total assets minus liabilities and preferred stock as listed on the balance sheet 4-4
4-4 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? o Market value represents the market price at which an asset trades D Intrinsic value represents the price a security ought to have ?based on al factors bearing on valuation 4-5
4-5 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 o Important Terms n Types of Bonds a Valuation of Bonds n Handling semiannual Compounding 4-6
4-6 Bond Valuation Important Terms Types of Bonds Valuation of Bonds Handling Semiannual Compounding
Important Bond Terms n a bond is a long-term debt instrument issued by a corporation or government n The maturity value(MV)Tor face value] of a bond is the stated value. In the case of a u.s. bond the face value is usually $1,000 4-7
4-7 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 o The bond's coupon rate is the stated rate of interest: the annual interest payment divided by the bonds face value n 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 4-8
4-8 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. t has an infinite life (1+k)1 (1+k)2+…+ (1+k)o ∑ (1+k or (PVIFA K 1 ka [Reduced Formi 4-9
4-9 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 = t=1 (1 + kd ) t I or I (PVIFA kd , ) = 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 10%. What is the value of the perpetual bond? 1=$1,000(8%)=$80 d=10% V =l/kd [Reduced Form =$80/10%〓$800 4-10
4-10 Perpetual Bond Example Bond P has a $1,000 face value and provides an 8% coupon. The appropriate discount rate is 10%. What is the value of the perpetual bond? I = $1,000 ( 8%) = $80. kd = 10%. V = I / kd [Reduced Form] = $80 / 10% = $800
