FINE 434 Lecture Notes - Lecture 8: Cash Flow, Opportunity Cost, Net Present Value
Document Summary
Focus on the future, not the past. Focus on economic reality: cash flow, not earnings. Get paid for the risks you take. Remember opportunity cost: alternative deals or actions. Private information is the main source of advantage. Take into account diversification: evaluate deals in terms of portfolio risk. The aim of valuation is to assess the true or intrinsic value of an asset. The results of valuation analysis are estimates, measured with error. The process of valuation analysis should be structured as a triangulation from several points. Do not work with point estimates of value, but with ranges. Rule 3: opportunity is price does not equal intrinsic value. Rules for creating value (and avoiding value destruction): Accept if: intrinsic value of target to buyer is greater than price. Accept if: intrinsic value of target to seller is less than price. There are many approaches to valuing a firm, but:
