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Present Value Analysis - Efficient Market Hypothesis

Present Value Analysis

1) What is your opinion to the questions below?

Valuation is a key area in finance. Time value of money techniques are used in valuation. That is, present value and future value are used in valuation. Present value involves discounting, whereas future value involves compounding. Investors want to know if they should buy, sell, or hold a company. Investors compare the intrinsic value of the company to the market price of the company. If the intrinsic value of the company is more than the market value of the company, the investor will likely buy the company because it's considered undervalued. If the intrinsic value of the company is less than the market value of the company, the investor will likely sell the company if the investor currently owns the company since the company is considered overvalued. If the intrinsic value of the company equals the market value of the company, the company is considered fully valued. A fully valued company wouldn't be purchased by an investor; however, it may be sold by an investor who purchased the company at a lower price.

References:

Fernandez, P. (2007, February 28). Company valuation methods. Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=274973

Penman, S.H., and Sougiannis, T. (1997, March 31). A comparison of dividend, cash flow, and earnings approaches to equity valuation. Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=15043

Required:

Below are some questions for discussion.

1. What are three methods of determining the value of a company? Compare and contrast these different methods.

2. What are the three forms of the Efficient Markets Hypothesis and what are three anomalies to the Efficient Markets Hypothesis?

3. How do compounding periods impact present value? Illustrate this with three numerical examples of different compounding periods.

You do not need to answer all three questions. You must also respond to at least two peers' posts over two separate days. Please try to add information not previously discussed by others. Please provide factual information (not merely opinions) backed up by details or examples. Your comments should be in your own words and include references in APA format.

Solution Preview

Present Value Analysis

1. What are three methods of determining the value of a company? Compare and contrast these different methods.

- The three most common methods used for business valuation include the cash method, an asset valuation method and a comparable business method. The cash method analyzes the total cash coming into and out of the business and also measures the amount of cash in various investments, accounts, and the total of all company portfolios. A amount is then determined as the current value of the business. In the asset valuation method, all of a company's assets are given a current market value. Note that this is different from the amount of assets listed on the balance sheet. Assets on the balance sheet are listed at historical cost (purchase price).

The comparable value method is based on an analysis of the current value of similar businesses. This is a common method that is used in business valuation. The company is then weighed against ...

Solution Summary

This solution discusses the most common methods of business valuation. The efficient market hypothesis, market anomalies, and compounding interest are also discussed. References are provided for further student expansion.

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