♣30♣Asset Valuation Basics
In previous chapters – Chapter 28 “Financial Accounting (FA)” on page 567 and Chapter 29 “Management Accounting” on page 583 – we discussed how a company creates snapshots of the reality with financial accounting and how management accounting is used to gain actionable insight for driving the value of the company. But what is the value of a company? It is easy to reply that the value of a company equals its market capitalization. At least for quoted companies this is a practical definition, but still then someone needs to be able to calculate a fundamental value in order to assess if the market is right or if there is an arbitrage opportunity.
We will build up this chapter towards some ways to calculate the value of a company and along the way introduce some other financial instruments that might be of interest such as cash, bonds, equities, and some derivatives.
30.1 Time Value of Money
Financial instruments typically deliver future cash-flows for the owner, hence before we can start we need some idea how to calculate the value of a future cash flow today.
30.1.1 Interest Basics
Lending an asset holds risk for the lender and is therefore, compensated by paying interest to the lender. If the asset has a value V0 today and r is the unit interest rate over a unit period (e.g. one year), then the interest due over one period is
So, lending an asset over one period and giving it back at the end of that ...
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