Week 3

Question 1

Price

Answer 1

What a financial product or real asset trades at in a market as a function of its supply and demand.

Question 2

Value

Answer 2

The worth of an asset, the total of what the asset can earn over the period held.

Question 3

Where does the value of an asset come from?

Answer 3

Net income (what you earn from the normal operation of the asset) in the future and terminal value.

Question 4

Holding period

Answer 4

How long you hold the asset for to earn money.

Question 5

What is the term for when assets are held forever?

Answer 5

Holding into perpetuity.

Question 6

Terminal value

Answer 6

What the asset is worth at the end of the holding period. (It is not the sale price of the asset).

Question 7

What is the 1st step in establishing value?

Answer 7

Estimating the components of cash flow streams (money streams) that arise from financial products and real assets.

Question 8

Examples of financial products (3)

Answer 8

Loans, shares, bonds.

Question 9

2 examples of real products

Answer 9

Real = (tangible - can touch/feel).

Real estate and equipment (that represent investable, tangible projects).

Question 10

Present value

Answer 10

When money is discounted, a present value (PV) is obtained.

Question 11

Future value

Answer 11

When money is compounded by periodic growth rate, a future value (FV) is obtained.

Question 12

3 factors that affect supply and demand

Answer 12

The value of an asset, financial regulation & market sentiment.

Question 13

Market sentiment

Answer 13

The “emotion” of buyers and sellers at the time.

Question 14

If price is greater than value, what is the asset termed?

Answer 14

Over-priced.

Question 15

If an asset is ‘over-priced’ what would buyers and sellers do?

Answer 15

A buyer wouldn’t buy (they would pay more than what the asset can earn) a seller would sell (they receive more than the asset could earn if kept).

Question 16

If value is greater than price, the asset can be termed …

Answer 16

Under-priced.

Question 17

Why is valuation important in finance? (for buyers) (2)

Answer 17

It enables a buyer to work out what price to pay for an investment; a price not over the asset’s value. Value helps set a price ceiling.

Question 18

Why is valuation important in finance? (for sellers) (2)

Answer 18

It enables a seller to determine what price they should sell assets for; a price over the assets value. Value helps set a price floor.

Question 19

Money received or earned today is ______ in value to the recipient than if received at a later date.

Answer 19

Greater

Question 20

Money paid today is ______ in cost to the payer, than if paid at a later date.

Answer 20

Greater

Question 21

Asset holder is ______ money.

Answer 21

Receiving.

Question 22

Liability holder is _______ money.

Answer 22

Paying

Question 23

1st money value rule

Answer 23

Money can only be combined and compared if earned at the same time period (as they have the same time value).

Question 24

2nd money value rule

Answer 24

Calculating a Future Value (FV) given periodic growth on an investment is called compounding.

Question 25

3rd money value rule

Answer 25

3. Calculating a present value (PV) by diminishing money earned in the future to reflect its lower time value of money and is called discounting.

Question 26

Why discount?

Answer 26

In capital budgeting, we discount the cash flows of assets to establish PV today so as to compare value with today's price.

Question 27

What does the yield of return express?

Answer 27

It expresses the money earned by the asset as a percentage of the price paid for the asset.

Question 28

Money earned by an asset can include? (2)

Answer 28

income, capital gains (increase in value of an asset that is realised once sold) or a combination of both.

Question 29

Commonly used discount rate in budgeting is _____

Answer 29

WACC