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1. Why is share valuation more difficult than bond valuation? Be sure to identify the risks...

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Finance

1. Why is share valuation more difficult than bond valuation? Besure to identify the risks and uncertainties faced by shareholdersthat do not affect bond holders.

2. Discuss the following statements:

  1. The debate surrounding shareholder and stakeholder theory isreally just a matter of law.
  2. The price we are willing to pay now to compensate for futureclimate damages is determined largely by the discount rate that isused.
  3. People care only about maximizing their wealth, and don’t careabout their impacts on society through their investments.

Answer & Explanation Solved by verified expert
4.4 Ratings (892 Votes)
Share valuation ismore difficult than bond valuationIn case of share the return a shareholder receives in the formof dividend Whereas in case of bond the return a bond holder willreceive is known as interest against agreed coupon rateThe dividend is paid on net income of the firm after theadjustment of depreciation interest payment tax payment and ifpreference holders exist and if the firm declares dividend then thepreference shareholders to be paid earlier before making thepayment of shareholders iceIt is from aforesaid statement we notice that before calculatingnet income distributable for dividend the interest has already beenconsidered after the deduction of interest from earnings beforeinterest and tax amount there are several steps to overcomeTherefore the presence of complexity should be there in valuingthe net earnings of the firm which is one of the base of sharevaluation as the value of the firm depends on the value of thewealth of the shareholders that value of wealth is correlated withthe net income of the firmIn case of share valuation generally two to three models carryvalid importanceIllustration of share valuation model and comparing it withbond1 Constant growth modelThis model is made up with an assumption that the dividend will grow at the samerate up to indefinite future The constant growth considerstime value of money The rate of growth is taken from the pastrecords of dividend earnings But this model does not forecastabout the future dividend and future selling priceOn the contrary the coupon rate of a bond is fixed The bondholders know how much they will get at the end of the bond terms ormaturity The share holders if depend on constant growth model byassuming certain rate of growth and predict the future earnings itshould    See Answer
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Transcribed Image Text

1. Why is share valuation more difficult than bond valuation? Besure to identify the risks and uncertainties faced by shareholdersthat do not affect bond holders.2. Discuss the following statements:The debate surrounding shareholder and stakeholder theory isreally just a matter of law. The price we are willing to pay now to compensate for futureclimate damages is determined largely by the discount rate that isused. People care only about maximizing their wealth, and don’t careabout their impacts on society through their investments.

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