[MUSIC] Hi everyone, my name is Philip Valta and I'm an assistant professor of finance. So in this session we're going to talk about how much a company is worth on the stock market. There are two main objectives of this session. First, I would like to talk about how we can value simple investment projects using the Net Present Value tool. In the second step I would like to go further and try to understand how we can value shareholders equity. But let's first start with project valuation. Have you ever thought about how financial managers decide in which project to invest or not? Or maybe you yourself were in a situation in which you had to decide whether or not to invest in a project. Well the most common rule that people are using is the so called net present value rule. Or if we have projects, they typically generate benefits and costs, and what this decision rule does, it simply compares the present values of the benefits and costs. Aren't the benefits and the costs are typically positive or negative cash flows. So what we need to do is we need to compute the present value of these positive and negative cash flows, we need to sum those present values and then we have the so called net present value of an investment product. And then the net present value rules simply states that we should invest in projects that have a positive net present value and we should not invest in projects that have a negative net present value. Now let's look at two simple examples that help us illustrate this concept. So suppose that we have the following investment project with a cash flow or characteristics outline on this slide. So first we have a cash outflow of 100, a 50. That could correspond to the initial investment. And then we have some future cash inflows. So we have a cash inflow of 20, 50, 70, and 70. Now, in order to make those cash inflows and outflows comparable. We need to compare them in similar quantities, in cash values today. So what we need to do is, we need to discount the future cash flows to the present. If you assume that the correct discount rate is 10% in this case, what is going to be the net present value of this project? Well, let's compute them. We don't need to do anything with the 150 because the cash outflow 150 is in cash today. So we just need to discount the future cash inflows. And when we do this, we get a net present value, which is positive in this case. And that means that this project creates value for the firm, and hence, we should invest in this project. Now let's look at a second simple example. In this case, the cash flow pattern is slightly different. We have a cash inflow at time 0, and a first cash outflow occurs at time 1. But in this case, we could proceed with the exact same technique as we just did. We just need to compute the present value of all those cash inflows and outflows, we take the sum of those present values and then we have the net present value. If you again assume a current discount rate of 10% then that present value in this case is going to be negative. This means that this project would destroy value for the firm and hence we should not invest in this project. So what have you learned in this session? Well, we have learned that if we need to make investment decisions, a simple rule to use is the Net Present Value rule, which simply states that we should invest in projects with a positive NPV and not invest in projects with a negative NP. [SOUND]