Skip to Main Content
Corporate Finance, 5th Edition
book

Corporate Finance, 5th Edition

by Pierre Vernimmen, Pascal Quiry, Maurizio Dallocchio, Yann Le Fur, Antonio Salvi
December 2017
Intermediate to advanced content levelIntermediate to advanced
1024 pages
32h 22m
English
Wiley
Content preview from Corporate Finance, 5th Edition

Chapter 34 Debt, equity and options theory

Light too bright to see by

The theories of corporate finance examined so far may have given the impression that the only difference between debt and equity is the required rate of return. However, there is a big difference between the 10% return required by creditors and that required by shareholders.

Shareholders simply hope to achieve this rate, which forms an average of rates that can be either positive or negative. The actual return can range from 0% to infinity, with the entire range of variations in between!

Creditors are assured of receiving the required rate, but never more. They can only hope to earn the 10% return but, with a few exceptions, this hope is almost always fulfilled. So here we have the first distinction between creditors and shareholders: the probability distribution of their remuneration is completely different.

That said, although the creditor’s risk is very low, it is not nil. Capitalism is built on the concept of corporation, which legally restricts shareholders’ liability with respect to creditors. When a company defaults, shareholders hold a “trump card” that allows them to hand the company, including its liabilities, over to the lenders.

In the rest of this chapter, we will concentrate on the valuation of companies in which shareholders’ responsibility is limited to the amount they have invested. This applies to the vast majority ...

Become an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month,
and much more.
Start your free trial

You might also like

Corporate Finance For Dummies

Corporate Finance For Dummies

Michael Taillard
Fundamentals of Corporate Finance, 4th Edition

Fundamentals of Corporate Finance, 4th Edition

Robert Parrino, David S. Kidwell, Thomas Bates, Stuart L. Gillan
Corporate Finance Theory and Practice, Third Edition

Corporate Finance Theory and Practice, Third Edition

Pascal Quiry, Maurizio Dallocchio, Yann Le Fur, Antonio Salvi
Corporate Finance: A Practical Approach, Second Edition

Corporate Finance: A Practical Approach, Second Edition

CFA Michelle R. Clayman, CFA Martin S. Fridson, CFA George H. Troughton

Publisher Resources

ISBN: 9781119424482Purchase book