Question

a. Why is it important for financial managers to understand the valuation process of shares and bonds?

  b. What are the three key inputs to the valuation process?

Answer 1

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a. The key goal of the financial manager is wealth maximization.

For the company's wealth maximization he needs to understand the valuation process of shares and bonds.

Wealth Maximization of the business:

The wealth of a firm is interpreted is the market price of the firms.

The market price of a firm represents 1.The judgment of all market participants about what should be the value of the particular firm.
2. It takes into account
a. earnings per share,
b. risk of these earnings
c. dividend policy.

b. The three key inputs to the valuation process:
1. The expected cash flow from the assets over its lifetime.
2. The timing of the cash flow.
3. The required rate of return from the cashflows to satisfy the cost of capital & risk levels.