MBA@UNC | Introduction to Finance

gives you a way to sling cash flows back and forth on the timeline because in the end to value assets what we’ll need to be able to do is to take an asset whose cash flows occur in the future and bring them back to an equivalent value today and once we’ve developed that skill set we take it to different asset classes and in particular what we do in the first part of class is we take a look at how to value bonds and how to value stocks and what you’ll see is that even though each of those asset classes has different language attached to it and has different institutional quirks associated with it that the skill of how to value them looks very similar the second method that we introduced early in the class to value assets is called no arbitrage valuation and the intuition behind no arbitrage it’s very simple and that is that identical assets or identical cash flows should have the same price in a market that’s in equilibrium and we take a look at that and examples of it both with bonds and with stocks the next thing that we do in class is to take a look at the denominator part of this valuation problem because one of the things that will see is that to value assets we want to take account of the differences in the risks associated with those assets now here we’ll take a little bit of a detour and discuss portfolio theory and so there’ll be a time in the class when we look more like a statistics class than a finance class but when we get done with that we’re able to derive a model of risk and return so that if we have an estimate of the risk of a particular asset we can turn that into an appropriate risk adjusted discount rate and use it again in our time value money skill to value assets when we get done with all those valuation problems one of the interesting things that we’re going to want to discuss is how good of a job the market does in valuing assets and so we stop here and we discuss the efficient market hypothesis which is a fancy way of saying how good a job the market does at keeping score in terms of valuing assets and we discuss the evidence for whether the market is efficient and finally for fun we take a look at option valuation we take a look at calls and puts we define their payoffs we look at payoff diagrams and then we talk about the ways that people value options and here we revert back to our no arbitrage valuation and the other nice thing about options is so many things can be considered as options that there are some really interesting applications that we can talk about here examples like deposit insurance which is a particularly timely example given the economic environment over the last four years what I think you get out of this class is a good introduction that will let you look at your next finance class with better eyes what you’ll see in that class is that you continue your discussion evaluation you take a look at the numerator part of the valuation problem and you discuss how cash flows to particular projects and two firms can be constructed and so you’ll spend more time discussing how to value projects and how to value firms and so in the end out of both classes what you’ll get is a better appreciation of what both markets do and what corporate financial managers inside firms do to generate value you

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