Valuation Concepts

Terms to remember:-

Time value of money:- 

     The sum of money to be received in future is less valuable than it is today. the reason for the time preference is the benefits from reinvestment that could be leveraged early. For example if somebody gives you Rs 100  now or he would offer you to give it after 5 years ,its always better to take it now.The money in hand could be invested  and with a good annual rate of return it could yield much higher value after 5 years instead of just Rs 100.

Discount rate:-

    The rate of return by which the time value of money is expressed is known as discount rate.

Techniques of Valuation

   The two techniques of valuation are :-

• Compounding Technique:-Here the interest is compounded on the initial principle amount at the end of compounding period.Compounding period could be Annual, Semi-annual, Quarterly compounding, Monthly compounding or Compounding 'n' times in a year.                                   
  

{Here for example if the interest is calculated quarterly then in place of n we will take 4 and it its for say 3 years then we will write 3 in place of t and the calculation will follow. The greater the number of times compounding is done in a year,higher will be the future value or the yield.}

• Discounting technique:-It is reverse of the compounding technique.it calculates the presnet value from the given future cash  flows.