chapter 3 Flashcards
Marketing
– to forecast the increase in revenue resulting from an advertising campaign.
Accounting
to estimate the tax savings from a restructuring.
Economics
– to determine the increase in demand from lowering the price of a product.
Competitive market
where goods can be bought and sold at the same price – price determines the cash value of the good.
Valuation principle
– the value of an asset to the firm/investors is determined by its competitive market price.
Cost and benefits should determine the decision using competitive market value.
Thus when Benefits exceed cost increases value of firm.
Risk-free interest rate
–(rf) the interest rate at which money can be borrowed/lent without risk over a period of time.
Interest rate factor
(1+rf) the exchange rate across time.
Present value (PV)
value of future money in today’s terms
Future value (FV)
value of present money in the future.
Net present Value –
the difference between the PV of benefit and cost.
Separation principle
– separating its financial decision from its financing choice. Focusing on real components rather than financial ones.
Value Additively
The law of one price but with multiple securities.
P(C)=P(A+B)=P(A)+P(B)
