FINA 30213 Study Guide - Midterm Guide: Consumption Smoothing, Cash Flow, Preferred Stock
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Shift risk/reward from one party to another risk is in the equity (more debt increase in the risk per share of equity) Large size of firms requires separate principals and agents: can own and vote but don"t manage the day-to-day processes as it would be too difficult and time-consuming. They are also don"t have the be experts on the subject but can hire people who are: how to make agents behave: (yahoo example of being too greedy, performance-based compensation, boards of directors. 1: market prices should equal the fair value estimate of a security"s expected future risky cash flows. The market"s pricing of securities reveals if real investment is profitable or unprofitable: guides real investors in allocating capital productively. Interest rates keep companies from making bad or risky decisions. In communist countries it is difficult to tell what is actually a good investment or not.