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Corporate Financial Management 3e
Emery Finnerty Stowe
Valuing Bonds and Stocks
Learning Objectives
Understand typical features of bonds & stocks.
Learn how to obtain information about bonds and stocks.
Identify the main factors that affect the value of these securities.
Learn how to value these securities.
Understand how changes in the underlying factors affect the value of these securities.
Chapter Outline
Bonds
Bond Valuation
Bond Riskiness
Stock Valuation
Applying the Dividend Valuation Model
mon Stock Information
The Price-Earnings Ratio
Focus on Principles
Incremental Benefits
The incremental benefits from owning a financial security are its expected future cash flows.
Time Value of Money
The value of a financial security is the present value of its expected future cash flows.
Risk-Return Trade-Off
Value and required return reflect the security’s risk
Focus on Principles
Two-Sided Transactions
Use the fair price of a financial security pute its expected return, because the fair price does not favor either side in a transaction.
Efficient Capital Markets
Estimate the required return for a financial security with its expected return.
Options
Recognize a call provision’s value to the issuer.
Bonds
Bonds represent loans extended by investors to corporations and/or the government.
Bonds are issued by the borrower, and purchased by the lender.
The legal contract underlying the loan is called a bond indenture.
Key Features of Bonds
The par (or face or maturity) value is the amount repaid (excluding interest) by the borrower to the lender (bondholder) at the end of the bond’s life. The par value for . corporate bonds is $1000.
The coupon rate determines the “interest” payments. Total annual amount = coupon rate x par value. . corporate bonds pay semi-annually.
A bond’s maturity is its remaining life, which decreases over time. Original maturity is its maturity when it’s issued. The firm promises to repay the par