WFU Law School
Law & Valuation
Chapter 3 - Accounting Basics

Chapter 4 - Securities Valuation

You have earned the price of admission. Now that you have an understanding of the time value of money, the risk/return relationship, and basic accounting notions, we are ready to value investments in a business. Sometimes the return from these investments is fixed (as with bonds) and sometimes variable (as with stock).

No matter the type of investment you are examining, the value depends on the same fundamental question: How much would an investor be willing to pay for the assets' income-producing potential? Given that the question is always the same, you would think that the method for calculating the value would be the same -- and, for the most part, it is!

This chapter begins with a review of the basic DCF method, and its importance in investment valuation. Next, we examine some characteristics debt investments, particularly bonds, that provide the most straightforward valuation of any type of investment. Then we turn our attention to the equity investments in a company--the glamorous world of stocks. Finally, we look at the valuation of options - a bet placed on another security, typically common stock.

Looking ahead. This chapter is a precursor to chapter 5, in which we consider valuation of an entire business, rather than discrete investment interests. We will also look at how the DCF model is related to the three principal business valuation methods: asset, income/investment and market/comparables.

Chapter Subsections



Chapter 3 - Accounting Basics

©2003 Professor Alan R. Palmiter

This page was last updated on: April 6, 2005