Topic 2: Valuation

Question 1

capital structure

Answer 1

the relative proportions of debt, equity and other securities a firm has outstanding

Question 2

common types of securities

Answer 2

• bonds (debt)
• ordinary shares (equity)
• preference shares (equity)

Question 3

capital structure equation

Answer 3

V = D + E
V = PV of cash flows generated by the firm
D = PV of cash flows generated by debt securities
E = PV of cash flows generated by equity securities

Question 4

capital structure: debt

Answer 4

• bonds sold by firm/ gov when they wish to borrow money from the public for a long period of time (at least 1 yr)
• ## gov bonds (issued by aus treasury) considered a risk-free investment in developed countries bc no risk of gov not making payments + defaulting