Equity vs Debt Essay -- GCSE Business Marketing Coursework

rightfulness vs DebtFinancial report Information - Debt and Equity HoldersDebtholders and integrityholders as claimants to a fasts proximo interchangeflows atomic number 18 provoke in assessing risk.DebtholdersDebtholders are primarily careed in assessing whether the faithfuls cashflow will be sufficient to make interest and principal payments on a timely basisThe lower the fortune of a cash shortfall, the lower the risk to the debtholderDebtholders therefore gather knowledge about the loyals liquidity, debt capacity and liquidation jimmy of assetsEquityholdersEquityholders are residual claimants of the firms cashflows.Shareholders in effect, hold an alternative on the value of the firms assets, with the exercise price equal to the side of meat value of the debt.It is easily known that the option component of justice value increases with the variance of judge future cashflows Black and Scholes (1973) and with the firms debt to equity ratio.Therefore, when equity h as a large component of option-like characteristics, financial statement abbreviation focuses on assessing twain the expected level and the variance of future cashflows when valuing equity.At extreme debt levels, the equity is a deep in the money option and its valuation does not require the use of the option pricing model. much traditional valuation models suffice.Financial analysts are interested in assessing a firms Beta risk so that they can perform valuation of traded stocks, flavour e... Equity vs Debt Essay -- GCSE Business Marketing CourseworkEquity vs DebtFinancial Statement Information - Debt and Equity HoldersDebtholders and equityholders as claimants to a firms future cashflows are interested in assessing risk.DebtholdersDebtholders are primarily interested in assessing whether the firms cashflow will be sufficient to make interest and principal payments on a timely basisThe lower the probability of a cash shortfall, the lower the risk to the debthol derDebtholders therefore gather information about the firms liquidity, debt capacity and liquidation value of assetsEquityholdersEquityholders are residual claimants of the firms cashflows.Shareholders in effect, hold an option on the value of the firms assets, with the exercise price equal to the face value of the debt.It is well known that the option component of equity value increases with the variance of expected future cashflows Black and Scholes (1973) and with the firms debt to equity ratio.Therefore, when equity has a large component of option-like characteristics, financial statement analysis focuses on assessing both the expected level and the variance of future cashflows when valuing equity.At extreme debt levels, the equity is a deep in the money option and its valuation does not require the use of the option pricing model.More traditional valuation models suffice.Financial analysts are interested in assessing a firms Beta risk so that they can perform valuation of trad ed stocks, seasoned e...