BUSI 4940 Eco value and Finance PPT

What is valuation

analytical process of estimating the current ( or projected) worth of an asset or a company

Value only exists if what

a voluntary transaction occurs

there is ____ until a transaction takes place

value

What is the best approach ( if data is available) for project valuation 

Fundamental analysis and discounted cash flows 

Utility drives behavior for demand→ prices→ which then leads to

value and valuation

What is economics

the study of human behavior as it relates to the allocation of scarce resources

What is economics driven by 

laws of human nature, often highlights the differences between what people SAY from how they ACT 

What is utility

the total satisfaction received from consuming a good or service

What is price theory

understanding supply and demand and therefore prices

What is the law of diminishing marginal utility 

as consumption of a good or service increases (usually within a limited period of time) the marginal utility derived from each additional unit declines 

What are free market conditions

prices are set by supply and demand once a minimum cost is covered

What reduces the optimal balance to supply and demand and, by definition lowers the total utility

interventions by third parties

What is a public good 

product or service that is non-excludable and nondepletable 

What are the four conditions that involve a free market system

1. voluntary transactions

2. private property

3. competition

4. laws against fraud and theft

What is economic valu e

maximum amount of money or resources an economic agent will pay for a good or service in a VOLUNTARY transaction

What is true regarding the relationship between the discount rates and the present value 

the larger the discount rate the lower the pv of future cash flows 

What does the WACC do

sets the bar for the worst-case minimum return needed from an investment

What is the difference between the WACC and the hurdle rate

WACC→investment level focused

Hurdle→ company level focused

What does an NPV calculation do 

simply measures the difference between the pv of future cash inflows over a period of time minus the initial outlay of investment capital 

When using the WACC as disc rate and NPV is below zero

DO NOT INVEST

When using hurdle rate as disc rate

positive→INVEST

negative→ most likely NO but can be possibility of yes

What is the IRR?

the discount rate that makes the npv of all cash flows from a particular project investment equal to zero

What is the conclusion of IRR > WACC

no economic value lost

What is the conclusion of IRR> hurdle rate

investors should be happy