Corporate Valuation ­ Risk

UNIT 6: Corporate Valuation ­ Risk

In this unit, some real-world complications, including risk and uncertainty, are applied to some of the simple ideas presented earlier. More specifically, you will see how an analyst may make assumptions concerning the future operations of a firm in order to estimate future cash flows. From these estimates, a value can be placed upon the firm or project. Some key statistical terms are presented. These ideas and terms are used to build the foundation for the capital asset pricing model (CAPM). This model is the most widely-used method for calculating the value of a firm. The unit has many calculations and you should feel comfortable identifying the key variables needed to use the CAPM.

UNIT 7: Corporate Valuation ­ Cost of Capital

The main focus of this unit is a discussion of each component of capital and the costs associated with the use of each component. You will see how these costs are combined in the proper proportions to find the weighted-average cost of capital (WACC). This is the appropriate rate to be used to discount a set of future cash flows. This unit contains both key terms and important computations used later in the course.

UNIT 8: Corporate Valuation ­ Estimating Corporate Value

The ideas presented in Units Six and Seven are brought together in this unit. An estimate of corporate value can be found by forecasting a set of cash flows and discounting them at the weighted average cost of capital. You will be introduced to a relatively simple method for forecasting cash flows based on a set of assumptions concerning the future operations and finances of a company. Other methods for estimating corporate value are presented and the relative strengths and weaknesses of each are discussed. The unit requires some simple calculations, including applications of the WACC and present value.

UNIT 9: Fixed Income Securities

In this unit you will revisit the debt markets discussed briefly in Units Two and Four through the introduction of the mathematics which surround fixed income securities (bonds). The calculations of yield and rate of return concerning bonds making fixed interest payments are introduced and the relationship between the yield and the price of a bond are discussed. The unit also includes a discussion of duration and its calculation. All of the computations are relatively straightforward; many financial calculators can perform most of the calculations.