One Period Valuation Model

3 Key excerpts on "One Period Valuation Model"

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  The Cost of Capital

  Theory and Estimation

  • Cleveland S. Patterson(Author)
  • 1995(Publication Date)
  • Praeger

    (Publisher)

  Finally, Section V discusses the proper method to calculate net present val- Issues of WACC Estimates 197 ues (NPVs) when discount rates are affected by inflation expectations. The section discusses consistent adjustments to cash flows under such circum- stances, and also investigates the impact of inflation expectations and uncer- tainty on the magnitude of the cost of capital. I. APPLICABILITY OF THE SINGLE-PERIOD CAPM TO MULTI-PERIOD VALUATION The CAPM is a single-period model of equilibrium pricing that assumes that the risk-free rate, R f , and the market risk premium, (E[R m ]-R f ), are given and are constant during the period. Within this framework, the model determines expected returns on an asset as a function of the covariance of its uncertain value at the end of the period with the uncertain value of the market portfolio. A period in this context is defined as an interval of time during which there are no opportunities for investors to revise their portfolio holdings. Most capital budgeting problems, however, require the valuation of uncertain cash flows over more than one future period. The usual method for finding the present value (PV) of these expected cash flows is to discount them using a single value of the discount rate, K, that is, E[C X ] E[C 2 ] E[C N ] P V = ^ W ? + ' ' ' W ) * (81) Depending on the circumstances, K may be the required return on levered eq- uity, k e , the unlevered required return, k u , or the weighted average cost of capital, AT(WACC).

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  21st Century Economics: A Reference Handbook

  • Rhona C. Free(Author)
  • 2010(Publication Date)
  • SAGE Publications, Inc

    (Publisher)

  Then, some specific asset pricing models, the capital asset pricing model, the intertemporal capital asset pricing model, and the consumption-based asset pricing model, are described. This is followed by a brief review of the empirical performance of the asset pricing models. This chapter con-cludes with some practical implications, some guidelines for future research, and a summary section. A list of fur-ther readings is also provided. Understanding Risk and Return We start the analysis by assuming a single-period economy, starting at Date 0 and ending at Date 1. For simplicity, we refer to Date 0 as today and Date 1 as tomorrow. The 203 204 · MICROECONOMICS analysis can easily be extended to multiple periods, but the simplified valuation framework considered here is sufficient for deriving the general asset pricing results. A representative 1 investor living in our simplified econ-omy is faced with the problem of choosing how much of his or her wealth he or she will allocate for consumption today and how much he or she will save and allocate for consumption tomorrow. The allocation of consumption between today and tomorrow is facilitated by the existence of an asset market. An asset is a financial contract that requires a cash outlay today from the buyer and that pro-vides a payoff to the buyer in the future. The payoff pro-vided by the asset can then be used for consumption—that is, for buying some units of a consumption good in the future. The investor makes his or her investment decisions today, at Date 0, and receives a payoff from his or her investments tomorrow, at Date 1. The fact that the invest-ment is made today and the payoff is obtained in the future reflects the time dimension of asset pricing. However, to generate some relevant predictions for asset prices, we must also incorporate uncertainty about the future into the analysis. This can easily be done by assuming that there are different states of nature that can occur tomorrow.

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  Aspects of the Economic Implications of Accounting

  • Gerald H. Lawson(Author)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  ex post periodic income when it is not possible to obtain the necessary market values. The only justification for using a DCF valuation is that, in the present state of knowledge, it probably represents the most theoretically-defensible basis for simulating the market capitalization process which generates market values. If such values can be more accurately and conveniently estimated from some alternative information source, that source should generally be preferred to DCF estimates.

  The periodic income measure implicit in the ex post (single-period) normative valuation model can be derived as follows:

  whence, and, The latter measure can, in turn, be partitioned into measures of periodic equity, lender and minority interest income. Thus,

  As indicated by equations (7) and (8), the single-period rate of return is directly related to periodic income. The former is equal to the latter divided by the beginning of period value of the business. Half-matrices of multiperiod (market-based) rates of return which measure multiperiod rates of profitability from both entity and ownership standpoints can obviously be derived from the multiperiod version of equation (7).12

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