Question

Briefly discuss the importance of using mathematical calculations and formulas into financial projections used by analysts to value an asset. You can also introduce any other field that the the Black-Scholes Formula plays a role in valuation. So you can approach this discussion from either a mathematical or financial perspective. Try to provide a real world example.

Answer 1

There are many formulas used in finance to vlaue an asset one of them is discounted cashflow model or free cash flow to firm model to value stock price. In these formulas there is financial projections ans assumption involved related to the variables.

If we talk about dividend discount model where there are many variables like dividend at respective year, growth rate of devidend, expected return which help in finding stock price this mathematics can be look into below formula where stock price is given as below:

stock price of an asset = dividend in year1/( required return - growth rate of dividend)

as we can see that the using mathmatical formula one can determine the price of stock.

In real world lets take Microsft is given dividend of $3 in year 1 and grwoth rate is 10% and required return is 12% then one can find the value of Microsoft stock using this formula

value of stock = $3/(.12 - .1)

= $3/.02

= $150