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1、FinancialDecisionCHAPTERMakingandtheLaw3ofOnePriceNMID-2007,MICROSOFTDECIDEDTOENTERABIDDINGWARwithNOTATIONcompetitorsGoogleandYahoo!forastakeinthefast-growingsocialINPVnetpresentvaluenetworkingsite,Facebook.HowdidMicrosoft’smanagersdecidethatthiswasagooddecision?rfrisk-freeinterestrateEver
2、ydecisionhasfutureconsequencesthatwillaffectthevalueofPVpresentvaluethefirm.Theseconsequenceswillgenerallyincludebothbenefitsandcosts.Forexample,afterraisingitsoffer,Microsoftultimatelysucceededinbuyinga1.6%stakeinFacebook,alongwiththerighttoplacebanneradsontheFacebookWebsite,for$240millio
3、n.Inadditiontotheupfrontcostof$240million,Microsoftalsoincurredongoingcostsassociatedwithsoftwaredevelopmentfortheplatform,networkinfrastructure,andinternationalmarketingeffortstoattractadvertisers.ThebenefitsofthedealtoMicrosoftincludedtherevenuesassociatedwiththeadvertisingsales,together
4、withtheappreciationofits1.6%stakeinFacebook.Intheend,Microsoft’sdecisionappearedtobeagoodone—inadditiontoadvertisingbenefits,bythetimeofFacebook’sIPOinMay2012,thevalueofMicrosoft’s1.6%stakehadgrowntoover$1billion.Moregenerally,adecisionisgoodforthefirm’sinvestorsifitincreasesthefirm’svalue
5、byprovidingbenefitswhosevalueexceedsthecosts.Butcomparingcostsandbenefitsisoftencomplicatedbecausetheyoccuratdifferentpointsintime,maybeindifferentcurrencies,ormayhavediffer-entrisksassociatedwiththem.Tomakeavalidcomparison,wemustusethetoolsoffinancetoexpressallcostsandbenefitsincommonterm
6、s.Inthischapter,weintroduceacentralprincipleoffinance,whichwenametheValuationPrinciple,whichstatesthatwecanusecurrentmarketpricestodeterminethevaluetodayofthecostsandbenefitsassociatedwithadecision.Thisprincipleallowsustoapplytheconceptofnetpresentvalue(NPV)asawaytocomparethecostsandbenefi
7、tsofaprojectintermsofacommonunit—namely,dollarstoday.Wewillthenbeabletoevaluateadecisionbyansweringthisquestion:Doesthecashvaluetodayofits595960Chapter3FinancialDecisionMakingandtheLawofOnePricebenefitsexceedthecashvaluetodayofitscosts?Inaddition,wewillseethat
