Chapter 6 Principles of Market Valuation.pptVIP

Chapter 6: Principles of Market Valuation Chapter 6 Contents The relationship between an asset’s value price Value maximization financial decisions Accounting measures of value The law of one price arbitrage Interest rates the law of one price Exchange rates triangular arbitrage Valuation using comparables Valuation Models How information is reflected in security prices The efficient markets hypothesis The Role of Asset Valuation The process of estimating how much an asset is worth. At the heart of much of financial decision making: Investing in securities Investing in real estate Wealth (value) maximization Venture capital Financing Mergers and acquisition (MA) Others Market Value Book Value You buy a house for $100,000 on January 1, 2009 and rent it out to make a profit. finance the purchase with $20,000 of your own money (equity financing) an $80,000 mortgage loan from a bank (debt financing). On January 2, someone makes you a bona fide offer of $150,000, which is the market value. Principles of Asset Valuation Fundamental value : The price of well-informed investors must pay for it in a free and competitive market. Arbitrage Law of One Price: The prices of equivalent assets must be the same. Use information about one or more comparables whose market prices we know. Value maximization and irrelevance of risk preference, consumption and expectations. The Law of One Price and Arbitrage The Law of One Price In a competitive market, if two assets are equivalent, they will tend to have the same market price. Arbitrage: The Price of Gold The price of gold in New York City is $300 per ounce. Suppose that the price of gold in Los Angeles was only $250. It takes a day to ship the gold by air from Los Angels to New York. The transaction costs of buying gold in Los Angels and selling it in New York include the costs of shipping, handling, insuring, and broker fees, which account for $2 per ounce. Arbitrage: The Price of Gold Arbitrage: The Price of G