Search

This article focuses on risk and valuation within the securities markets. The author attempts to position the problem of risk and security valuation into perspective. Risk relates to the possibility that actual returns may vary from expected returns. This paper contends that risk and valuation are inseparable. Several topics are discussed, including a mathematical formula detailing the term structure of interest rates that are a result of the equilibrium conditions in the capital markets, the risk-premium approach, and the expectation-variance portfolio approach.

A response by Alexander A. Robicheck and Stewart C. Myers to an article that was written by Houng-Yhi Chen about their article "Conceptual Problems in the Use of Risk-Adjusted Discount Rates" in the December 1966 issue is presented. The authors argue that Chen's assertion that their use of a risk-adjusted discount rate is unfounded. They counter that discounting expected returns in a risk adjusted environment shows that expected returns will increase in risk. Otherwise, they state that the algebra used by both parties is similar.

This paper discusses several problems in the theory of optimal capital structure for corporations. A proposal by economists F. Modigliani and M.H. Miller is referenced which suggests that the total market value of the firm is unaffected by leverage in the absence of taxes on corporate income and under the assumption of perfect markets. The authors prove the proposition that the mixture of debt does not affect the value of the firm, examining a number of the proposition's objections. The problem of optimal capital structure is looked at, focusing on corporate taxes, costs of bankruptcy, and the effects of present borrowing on future financing strategies.