Principles of Managerial Finance, 15th Edition

6.3 Valuation Fundamentals

1. LG4

Valuation is the process that links risk and return to determine the worth of an asset. It is a relatively simple process that investors and managers apply to expected streams of cash flows from bonds, stocks, income properties, oil wells, and so on. To determine an asset’s value, a financial manager uses the time-value-of-money techniques presented in Chapter 5 and the concepts of risk and return that we will develop in Chapter 8.

For two major reasons, understanding the valuation process is crucial for financial managers. First, firms often issue securities such as bonds and stocks to investors, so managers must grasp how investors will value those securities. Second, financial managers must often decide ...