上海交通大学：《金融学原理 Financial Economics》教学资源（课程讲义PPT）Lecture 07 Principles of Market Valuation

Lecture 7:Principles of Market Valuation refer to chapter THE COURSE OF FINANCE 2017 SPRING SJTU

Lecture 7: Principles of Market Valuation refer to chapter 7 THE COURSE OF FINANCE 2017 SPRING SJTU 1

Objectives Understand why valuation is important? Explain the law of one price! Understand valuation models! Explain efficient market! THE COURSE OF FINANCE 2017 SPRING SJTU 2

Objectives  Understand why valuation is important?  Explain the law of one price!  Understand valuation models!  Explain efficient market! THE COURSE OF FINANCE 2017 SPRING SJTU 2

Chapter 7 Contents 7.1 The relationship between 7.6 Exchange rates an asset's value its price triangular arbitrage 7.2 Value maximization 7.7 Valuation using financial decisions comparables 7.3 The law of one price 7.8 Valuation Models arbitrage 7.9 Accounting measures of 7.4 Arbitrage the law of value one price 7.10 How information is 7.5 Interest rates the law reflected in security prices of one price 7.11 The efficient markets hypothesis THE COURSE OF FINANCE 2017 SPRING SJTU

Chapter 7 Contents  7.1 The relationship between an asset’s value & its price  7.2 Value maximization & financial decisions  7.3 The law of one price & arbitrage  7.4 Arbitrage & the law of one price  7.5 Interest rates & the law of one price  7.6 Exchange rates & triangular arbitrage  7.7 Valuation using comparables  7.8 Valuation Models  7.9 Accounting measures of value  7.10 How information is reflected in security prices  7.11 The efficient markets hypothesis THE COURSE OF FINANCE 2017 SPRING SJTU 3

Introduction Recall that the three pillars of finance are time value of money risk management asset valuation Many financial decisions are,in essence,the determination of an asset's value THE COURSE OF FINANCE 2017 SPRING SJTU

Introduction  Recall that the three pillars of finance are  time value of money  risk management  asset valuation  Many financial decisions are, in essence, the determination of an asset’s value THE COURSE OF FINANCE 2017 SPRING SJTU 4

Introduction (Continued) The key to asset valuation is comparison of the asset to be valued with a set of assets with similar characteristics and known values By the law of one price,the price of all equivalent assets must be the same THE COURSE OF FINANCE 2017 SPRING SJTU

Introduction (Continued)  The key to asset valuation is comparison of the asset to be valued with a set of assets with similar characteristics and known values  By the law of one price, the price of all equivalent assets must be the same THE COURSE OF FINANCE 2017 SPRING SJTU 5

7.1 Relationship between Asset's Value and Its Price Definition: An asset's fundamental value is the price well informed investors must pay to purchase it in a free and competitive market THE COURSE OF FINANCE 2017 SPRING SJTU 6

7.1 Relationship between Asset’s Value and Its Price Definition: An asset’s fundamental value is the price well informed investors must pay to purchase it in a free and competitive market THE COURSE OF FINANCE 2017 SPRING SJTU 6

Relationship between Asset Value and Price There can exist temporary differences between the market price of an asset and its fundamental value(Reasons:incomplete competitive market and asymmetric information) Security analysts make their living by discovering these aberrations Many well-informed professionals are looking for these aberrations.A reasonable initial assumption is that aberrations are small THE COURSE OF FINANCE 2017 SPRING SJTU

Relationship between Asset Value and Price  There can exist temporary differences between the market price of an asset and its fundamental value(Reasons: incomplete competitive market and asymmetric information)  Security analysts make their living by discovering these aberrations  Many well-informed professionals are looking for these aberrations. A reasonable initial assumption is that aberrations are small THE COURSE OF FINANCE 2017 SPRING SJTU 7

7.2 Value Maximization and Financial Decisions Financial decisions can be made rationally purely on the basis of value maximization,and without regard to risk preferences and expectations Markets for financial assets provide the information needed to choose between some alternatives Example:You win a contest,and the prize is a choice between a ticket to the opera and a ticket to the ball game.The opera ticket has a price of $100 and the ticket to the ball game has a price of $25.Assuming you prefer ball games to opera,which ticket should you choose? THE COURSE OF FINANCE 2017 SPRING SJTU

7.2 Value Maximization and Financial Decisions  Financial decisions can be made rationally purely on the basis of value maximization, and without regard to risk preferences and expectations  Markets for financial assets provide the information needed to choose between some alternatives  Example: You win a contest, and the prize is a choice between a ticket to the opera and a ticket to the ball game. The opera ticket has a price of $100 and the ticket to the ball game has a price of $25. Assuming you prefer ball games to opera, which ticket should you choose? THE COURSE OF FINANCE 2017 SPRING SJTU 8

Value maximization and financial decisions 1. The markets for financial assets provide the information needed to value the alternatives 2. The financial decision can rationally be made purely on the basis of value maximization,regardless of the stranger's risk preferences or expectations about the future. Ex.The management should choose investment to maximize current shareholders'wealth. THE COURSE OF FINANCE 2017 SPRING SJTU

Value maximization and financial decisions 1. The markets for financial assets provide the information needed to value the alternatives 2. The financial decision can rationally be made purely on the basis of value maximization, regardless of the stranger’s risk preferences or expectations about the future. Ex. The management should choose investment to maximize current shareholders’ wealth. THE COURSE OF FINANCE 2017 SPRING SJTU 9

7.3 The Law of One Price and Arbitrage Law of One Price: In a competitive market,if two assets are equivalent,they will tend to have the same price Ex.In the super market,water with similar ingredients are sold at the similar price THE COURSE OF FINANCE 2017 SPRING SJTU 10

7.3 The Law of One Price and Arbitrage  Law of One Price:  In a competitive market, if two assets are equivalent, they will tend to have the same price  Ex. In the super market, water with similar ingredients are sold at the similar price THE COURSE OF FINANCE 2017 SPRING SJTU 10