文档介绍：NEW YORK UNIVERSITY
FINANCIAL ECONOMICS II
Spring 2003
Franklin Allen and Douglas Gale
January 24, 2003

Topic 1: What is Corporate Finance? (cont.)
2 Financing Decisions
In the previous section the focus was on investment decisions. It was assumed
throughout that the firm was financed with equity. In this section we discuss financing
decisions. As a prelude to this we will briefly discuss the notion of efficient markets and
some of it’s implications for corporate financing decisions. After that we will briefly
mention some of the securities that are issued. Then we will consider the main financial
decisions of the firm, capital structure and payout policy. We will apply these ideas to
valuation. Finally we will discuss real options very briefly.

Efficient Markets and Corporate Finance
We have argued that all shareholders should agree if a firm uses present value
rule to make capital budgeting decisions. How does the stock market view such decisions?
What is the relationship between a firm's stock market value and its use of the NPV rule?

Efficient Markets Hypothesis:
A firm's stock market value is determined by the discounted value of its cash flows.
1
This is based on stock markets petitive and having many profit-seeking
investors. The following example illustrates the basic idea.

Example
Consider a firm which for simplicity only lasts for two periods and that has per share
cash flows which are paid out to shareholders as follows:
C1 C2

The opportunity cost of capital is 10 percent.

Discounted cash flow = + =
2

What would happen if the stock was selling in the market at ? How could
investors make money? Suppose an investor borrowed and bought one share. Since the
discounted present value of the payments on the stock is the investor will be able to pay
back the loan and make a profit in term's of today's dolla