course hero the present value of what determines the basis of a firm's value

When will compound interest exceed future value?

After the end of the second year and all other factors remaining equal, a future value based on compound interest will exceed a future value based on simple interest. (T/F?)

When to use constant growth model?

The constant growth model can be used if a stock's expected constant growth rate is less than its required return.

What is a nexus of contracts?

A nexus of contracts, A collection of contracts between various parties.

Why do long run earnings grow?

Long-run earnings growth occurs primarily because firms retain earnings and reinvest them in the business.

Do investments paying simple interest have to pay higher interest rates?

All other variables held constant, investments paying simple interest have to pay significantly higher interest rates to earn the same amount of interest as an account earning compound interest. (T/F?)

What is firm value?

A firm’s value, also known as Firm Value (FV), Enterprise Value (EV) is an economic concept that reflects the value of a business. It is the value that a business is worthy of at a particular date. Theoretically, it is an amount that one needs to pay to buy/take over a business entity. Like an asset, the value of a firm can be determined on ...

How to measure the value of a firm?

Therefore, one of the simplest ways to measure the value of a firm is by adding the market value of its debt, equity, and minority interest. Cash and cash equivalents would be then deducted to arrive at the net value. Table of Contents.

What would a buyer have to pay off when taking over a firm?

A buyer would have to pay off a firm’s debt when taking over the firm and the same could be netted off from the cash and cash equivalents available with the firm. Another sound approach towards computing the value of a firm is to determine the present value of its future operating free cash flows.

Why is EV more important than market capitalization?

One of the reasons why the concept of EV has gained more importance than market capitalization is because the former is more inclusive. Besides equity, it includes the value of debt as well as cash reserves which have an important role to play in a corporation ’s valuation.

What is the value obtained from the books of a company?

The value obtained from the books of the company is the book value of the firm.

How to calculate market value of a company?

It is calculated by multiplying a company’s outstanding share by its current market price.

Is book value the same as market value?

Market value and the book value of the firm are two different concepts. There is quite a possibility of a huge difference between the book and market value of a company at a given point of time.