What Is a Default Swap and What Is Its Use

question 1

Essay

What is a default swap and what is its use?

Determine the price of a stock based on its expected future dividends and sale price.

Apply the dividend discount model for constant and varying growth rates to estimate stock prices.

Calculate the Net Present Value of Growth Opportunities (NPVGO).

Understand the relationship between the required rate of return, dividend growth, and stock price valuation.

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Definitions:

Target Company

A firm that another company seeks to acquire.

Cost of Equity

The return that shareholders require for investing in a company's equity, representing the compensation the market demands in exchange for owning the asset and bearing the risk of ownership.

Acquiring Firm

A company that gains control over another company by purchasing its shares or assets.

Real Options

Occur when managers can influence the size and risk of a project’s cash flows by taking different actions during the project’s life. They are referred to as real options because they deal with real as opposed to financial assets. They are also called managerial options because they give opportunities to managers to respond to changing market conditions. Sometimes they are called strategic options because they often deal with strategic issues. Finally, they are also called embedded options because they are a part of another project.