CHAPTER 7
PRINCIPLES OF ASSET VALUATION
Objectives
∙Understand why ast valuation is important in finance.
∙Explain the Law of One Price as the principle underlying all ast-valuation procedures.
公正的人护眼色∙加减法算式Explain the meaning and role of valuation models.
∙就去爱Explain how information gets reflected in curity prices.
Outline
7.1 The Relation Between an Ast’s Value and Its Price
感恩节在什么时候7.2 Value Maximization and Financial Decisions
7.3 The Law of One Price and Arbitrage
7.4 Arbitrage and the Prices of Financial Asts
7.5 Exchange Rates and Triangular Arbitrage
7.6 Interest Rates and the Law of One Price
黑蝙蝠
7.7 Valuation Using Comparables
7.8 Valuation Models
7.9 Accounting Measures of Value
7.10 How Information Gets Reflected in Security Prices
7.11 The Efficient Markets Hypothesis
Summary
∙In finance the measure of an ast’s value is the price it would fetch if it were sold in a competitive market. The ability to accurately value asts is at the heart of the discipline of finance becau many personal and corporate financial decisions can be made by lecting the alternative that maxi
mizes value.
∙The Law of One Price states that in a competitive market, if two asts are equivalent they will tend to have the same price. The law is enforced by a process called arbitrage, the purcha and immediate sale of equivalent asts in order to earn a sure profit from a difference in their prices.
∙Even if arbitrage cannot be carried out in practice to enforce the Law of One Price, unknown ast values can still be inferred from the prices of comparable asts who prices are known.
∙The quantitative method ud to infer an ast’s value from information about the prices of comparable asts is called a valuation model. The best valuation model to employ varies with the information available and the intended u of the estimated value.
∙The book value of an ast or a liability as reported in a firm’s financial statements often differs from its current market value.
∙In making most financial decisions, it is a good idea to start by assuming that for asts that are bought and sold in competitive markets, price is a pretty accurate reflection of fundamental value. This assumption is generally warranted precily becau there are many well-informed professional
s looking for mispriced asts who profit by eliminating discrepancies between the market prices and the fundamental values of asts. The proposition that an ast’s current price fully reflects all publicly-available information about future economic fundamentals affecting the ast’s value is known as the Efficient Markets Hypothesis.
∙The prices of traded asts reflect information about the fundamental economic determinants of their value. Analysts are constantly arching for asts who prices are different from their fundamental value in order to buy/ll the “bargains.” In deciding the best strategy for the purcha/sale of a “bargain,” the analyst has to evaluate the accuracy of her information. The market price of an ast reflects the weighted average of all analysts opinions with heavier weights for analysts who control large amounts of money and for tho analysts who have better than average information.
描写云的成语
Solutions to Problems at End of Chapter
Law of One Price and Arbitrage
1. IBX stock is trading for $35 on the NYSE and $33 on the Tokyo Stock Exchange. Assume that the costs of buying and lling the stock are negligible.
a. How could you make an arbitrage profit?
b. Over time what would you expect to happen to the stock prices in New York and Tokyo?
c. Now assume that the cost of buying or lling shares of IBX is 1% per transaction. How does this affect your answer?
SOLUTION:
a. Buy IBX stock in Tokyo and simultaneously ll them in NY. Your arbitrage profit is $2 per share.
b. The prices would converge.
c. Instead of the prices becoming exactly equal, there can remain a 2% discrepancy between them, roughly $.70 in this ca.
2. Suppo you live in the state of Taxachutts which has a 16% sales tax on liquor. A neig
hboring state called Taxfree has no tax on liquor. The price of a ca of beer is $25 in Taxfree and it is $29 in Taxachutts.
a. Is this a violation of the Law of One Price?
b. Are liquor stores in Taxachutts near the border with Taxfree going to prosper?
SOLUTION:
a.This is not a violation of the Law of One Price becau it is due to a tax impod in one state but not in the other. Illegal arbitrage will probably occur, with lawbreakers buying large quantities of liquor in Taxfree and lling it in Taxachutts without paying the tax.
b.It is likely that liquor stores will locate in Taxfree near the border with Taxachutts. Residents of both states will buy their liquor in the stores located in Taxfree, and liquor stores in Taxachutts will go out of business.
Triangular Arbitrage
3. Suppo the price of gold is 155 marks per ounce.
a. If the dollar price of gold is $100 per ounce, what should you expect the dollar price of a mark to be?
