Welcome. In this part of the class, we want to talk about why firms have value, and how to determine that value. Often in news or in casual conversations, the issue of value will often come up. We know that the stock market in particular sometimes goes up, sometimes it comes down. You may have read about the valuation of Uber being $60 billion or more recently $90 billion. You may have even had a conversation with someone who was raising capital for their startup, and they may have told you that the valuation of that firm was five million dollars or $10 million. What we want to do here is think about where those numbers come from. How do markets and investors determine the valuation of a company? Over in the next set of videos, and after you finished our set of exercises, you should have a good understanding of a very general framework that financial markets used to think about value, and that form the basis of all modern financial markets. Let's start with a simple and intuitive formula for the price of an asset. For the purposes of what will follow, we will think of the price of an asset as being given by the present value of all of the future cash flows that are generated by that asset. So in the particular case of a firm, what we mean is the market value of all of the assets that make up that firm, be it machinery, buildings, intangible capital, organizational capital, all of those together produce cash flows. So the overall value or market value of those assets will be given by the present value of the cash flows that those assets are able to generate. So what are the main ingredients that go into this formula? The first thing we will have to think about is, what are the current cash profits that the firm generates? That will occupy us in the next video, where we will think about how to start with revenues, deduct costs, deduct investments to obtain the current cash profits of the firm. Now next, I just said that the value of a firm is given by all of the future cash flows that this firm will generate. So the second component or the second ingredient is the growth of those profits over time. So if a firm has low current cash profits, but will grow a lot in the future that firm may still be worth a lot of money. The final component that we will consider is how risky are these cash flows and when will they occur? Riskier cash flows will tend to be less valuable. Similarly, cash flows that happen very far in the future are less valuable to investors than cash profits that happen immediately. In fact, in order to obtain the value of a firm, we will have to be able to sum cash flows today, cash flows tomorrow, and cash flows that happen 10 years from now. So we will have to convert future cash into dollars that can be added with cash profits produced today.