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Finance Terms - Valuation of Bonds and Shares

Valuation of Bonds and Shares

Valuation is the procedure of linking risk with returns to determine the worth of an asset. Assets can be financial or real and securities are called  financial assets.  Physical assets are  considered as real assets. The main goal of any  individual  investor  is maximization of profits.  Investment management  is a  uninterrupted process requiring constant monitoring. The value of an asset is based on the cash flow it is countered to rendered over  the holding period. The  fact  that as on date  there  is no method by which prices of shares  and  bonds  can  be  accurately  countered should  be  kept  in mind  by  an  investor  before an  investor

decides  to  take  an  investment  decision. We can formulate our  investment  system by employing  the variables to maximize our returns. Ordinary shares are more high-risk  than bonds or debentures and some shares are more risky than others. The investor would thus commit funds on a share only if he is convinced about the rate of return being coextensive with risk.

Intrinsic  value Concept:

A  security  can  be  measured  by  the  group  of  dividends  or  interest payments due over a period of time. In other sense, a security can be outlined as the present value of the future cash streams  the intrinsic value of an asset is equal to the present value of the

benefits linked with  it. The countered returns are discounted using  the  requisite

return commensurate with the risk, it can be mathematically formulated as:

V0=C1/(1+i) 1 + C2/(1+i) 2 + C3/(1+i) 3 + Cn/(1+i) n = Cn/(1+i) n

Here V0= Value of the asset at time zero (t=0)

P0= Present value of the asset

Cn= anticipated cash flow at the end of period n

i= Discount rate or requisite rate of return on the cash flows

n= anticipated life of an asset.

Concepts of Value

Replacement Value

Replacement value  is  the amount a company  is  requisite  to expend  if  it were  to  exchange its existing assets in the present condition. It is hard to search for the cost of assets currently employed by the company.

Liquidation value

Liquidation value is the sum a firm can actualize if it sold the assets after the winding up of its business.  It will not  admit intangibles value as  the operations of  the company will cease  to exist.  Liquidation  value  is  in general  the  minimum  value  the  company  might  admit  if  it  sold  its business.
Book value 

Book value is an accounting conception. Value is an asset is deserving today in terms of their possible benefits. Assets are showed at historical cost and  these are evaluated over years. Book value may let in non physical assets at acquisition cost minus amortized value. The book value of a debt is shown at the outstanding amount. The difference amongst the book value of assets and liabilities  is equal  to  the net worth of shareholders.  Net worth  is  the sum  total of compensated up capital, surplus and reserves. Book value of a share is computed by dividing the net worth by the number of shares outstanding.

Going Concern value

Going concern value  is  the sum a firm can  actualize  if  it sells  its business as an operating  one. This value is greater than the liquidation value. Market value is the current price at which the security  or asset is being bought or sold in the market. Market value per share is in general higher than the book value per share for growing and profitable business firms.

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