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1、Lecture2:ToolsReference:Berk,DeMarzo,Ch.3-51ArbitrageandFinancialDecisionMakingINTRODUCTIONTheanalysisofcostsandbenefitsallowsfordetermininghowtomaketherightdecisionstoincreasethevalueofthecompany.Theanalysisinvolvesmanysectors:Marketing:toforecastincreaseinrevenuesresultingf
2、romadvertisementAccounting:toestimatecostsavingsfromarestructuringEconomics:todeterminetheincreaseindemandfromloweringproductpriceOrganizationalbehavior:toestimateproductivitygainsfromachangeinmanagementstructureStrategy:topredictacompetitor’sresponsetoapricechangeOperatio
3、ns:toestimatecostsavingsfromaplantmodernizationCorporateFinance–AngeloCorelli-ProductionEconomics,IEI,LiU–20102ArbitrageandFinancialDecisionMakingVALUINGDECISIONSIdentifycostsandbenefitsassociatedwithadecision.Thenquantifyitvaluingthemintermsofcashtoday.Wheneveragoodtradesina
4、competitivemarket,inwhichcanbeboughtandsoldatthesameprice,thepricedeterminesthecashvalueofthegoodValuingcostsandbenefitsusingcompetitivemarketprices,wecandeterminewheteradecisionwillmakethefirmanditsinvestorswealthier.CorporateFinance–AngeloCorelli-ProductionEconomics,IEI,LiU–
5、20103ArbitrageandFinancialDecisionMakingVALUATIONPRINCIPLEValuationprincipleprovidesthebasisfordecisionmaking,whencostsandbenefitsoccuratdifferenttimes.Thevalueofanassettothefirmoritsinvestorsisdeterminedbyitscompetitivemarketprice.Thebenefitsandcostsofadecisionshouldbeevalua
6、tedusingthesemarketprices,andwhenthevalueofthebenefitsexceedsthevalueofthecosts,thedecisionwillincreasethemarketvalueofthefirmCorporateFinance–AngeloCorelli-ProductionEconomics,IEI,LiU–20104ArbitrageandFinancialDecisionMakingINTERESTRATESANDTHETIMEVALUEOFMONEYRisk-freeinterest
7、rate:interestrateforlending-borrowingmoneywithoutriskoveracertaintimeperiodInterestratefactor:(1+interestrate)definetheexchangerateacrosstime.Let’sconsidernowandinvestmentof100.000today,givingapayoutof105.000in1year.Apparentlywehaveagainontheinvestmentof5.000,butconsideringan
8、interestrateof7%forexample,wecalculatethefuturevalueof
