Traditional approach to valuation, Financial Management

Under this approach of Valuation, all cash flows are discounted using single interest rate (discount rate).  For example: Consider the 5-year (7.00 percent) Treasury Security (maturing in 2010). Under this approach, all cash flows of this bond will be discounted by the same discount rate to calculate the present value of the cash flow. The discount rate used is the yield for the on-the-run issue obtained from the Treasury yield curve. For example, assume that yield for 7-year Treasury bill is 9%. Then, the practice is to discount each cash flow of each bond using a discount rate of 9%.

In the case of non-Treasury securities, a premium or yield is added to the on-the-run Treasury yield. For example, assume that non-treasury securities the appropriate yield spread is 175 basis points. In such a case, all cash flows will be discounted at the yield for the on-the-run 7-year Treasury bill issue of 9% plus 175 basis points.

On-the-Run Issue is the most recent issue of a security. As an issue ages its liquidity decreases and the spread tends to widen.

Posted Date: 9/10/2012 6:05:18 AM | Location : United States







Related Discussions:- Traditional approach to valuation, Assignment Help, Ask Question on Traditional approach to valuation, Get Answer, Expert's Help, Traditional approach to valuation Discussions

Write discussion on Traditional approach to valuation
Your posts are moderated
Related Questions
Operating profit margin Operating profit margin    =   (PBIT / Turnover) x 100% This is the ratio of operating profit to turnover or sales. A high operating profit margin is

The Beta Corporation has an optimal debt ratio of 40%. Its cost of equity capital is 12% and its before-tax borrowing rate is 8%.  Given a marginal tax rate of 35%, calculate (

Introduction to financial management: Meaning and defecation of the financial management Finance function Scope and content of financial function Functions and

What does the “weight” refer to in the weighted average cost of capital? The weight considered to in weighted average cost of capital consider the portion of the total capital in

Question 1: (a) Discuss the main limitations of using changes in national income as an index of economic welfare. (b) What are the alternatives measures and issues that sho

Traditional   Capital Budgeting Techniques These techniques are usually very simple and easily catchable. But the fundamental drawback of these methods is that they don't cons

Describe how society's interests can influence financial managers. Sometimes the interests of a business firm's owners aren't the same as the interests of society.  For illustr

Value of a Warrant: The market price of a warrant fluctuates between minimum and maximum limits. When the current market price of the stock Ps is greater than the exercise pri

Q. Explain demerits of accept-reject criteria? Demerits of ARR:- (i) It utilizes accounting income rather than cash flows: - The principal short coming of ARR schema is th

State the Examples of tests of controls: Check bank reconciliation has been reconciled as approved by chief accountant. Observe buyer checking the goods received note a