In topic 1 we looked at the goal of a financial manager, ie to maximize the value of the firm. This is an extension to the previous goal of maximizing shareholders’ wealth which is a narrower viewpoint then that of maximizing the value of the firm. Since the firm is made up of assets, liabilities and equity, then the value of the firm should be the sum of the parts. Since there are many different types of assets we will concentrate on the value of the liabilities and equity. The number of items within these two categories is usually smaller than the amount of assets. For the liabilities the main item is bonds and for equity it is ordinary (common stock) shares. In this topic we will look at valuing debt, equity and then look at some of the different ways
The Corporate Bonds and risk of default
Reading
Brealey et al. 2011, 3-6 Corporate Bonds and risk of default, pp.65-8
The risk of default is real for corporate bonds. That risk attaches an interest rate premium. The amount of the risk premium originates from the rating assigned to the bond by a variety of firms. This section of the chapter focuses on the concepts related to risk and bond ratings.
Problem 2.5
Complete Problem Set question 29 page 72 of Brealey et al. 2011
The value of Common stock
Reading
Brealey et al. 2011, 4-1 How common stocks are traded, 4-2 How common stocks are valued , pp.75-81
Very briefly introduces the concepts of primary and secondary markets, organized exchanges, and the over-the-counter market. It also provides a sample of The Wall
Street Journal Quotation for GE.
This section begins by showing that the start-of-period (present) value of a common stock equals the present value of dividends expected during the period plus the present value of the expected end-of-period price for a single period investment. The current price is the present value of the stream of