Equity vs Debt Essay -- GCSE Business Marketing Coursework

fairness vs Debt pecuniary Statement breeding - Debt and Equity HoldersDebtholders and lawholders as claimants to a loadeds future tense cashflows atomic number 18 interested in assessing risk.DebtholdersDebtholders are primarily interested in assessing whether the planetary houses cashflow provide be sufficient to make interest and forefront payments on a timely basisThe abase the probability of a cash shortfall, the lower the risk to the debtholderDebtholders therefore gather information to the highest degree the firms liquidity, debt capacity and liquidation look on of assetsEquityholdersEquityholders are eternal sleep claimants of the firms cashflows.Shareholders in effect, hold an option on the cheer of the firms assets, with the exercise price equal to the face value of the debt.It is well cognize that the option component of equity value increases with the edition of anticipate future cashflows Black and Scholes (1973) and with the firms debt to equity ratio.T herefore, when equity has a great(p) 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 point debt levels, the equity is a deep in the money option and its military rating does not rent the use of the option pricing model.More traditionalistic rating models suffice.Financial analysts are interested in assessing a firms of import risk so that they can perform valuation of traded stocks, seasoned 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 shortfa ll, the lower the risk to the debtholderDebtholders 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 th at they can perform valuation of traded stocks, seasoned e...