Question

(a) What is the need to study valuation of bonds and stocks for an investor ? (b)Define cost of capital .Explain the significance of cost of capital in financial management

Answer 1

Ans a) Valuation of financial instruments are very inmportant for the investors because it helps them to find in which stock they should take position. It is important for mainly fundamental investors and other stock brokerage firm which gives suggestion to its client on which stock or bond need to bought, sold or hold. It also helps investor to find which stock is overpriced and underpriced as per its fundamanta valuaiton. If they found the current market price as over price then they short the position and at the same time if they find it underprice then they will buy the stock and make profits.

Ans b) Cost of capial is minimum return required on the given financial investment like on stocks or bonds.

It has huge significance in financial management it helps in finding the stocks or bonds which can help in generating postitive net cashflwo. It also helps in finding underprice and overprice financila instruments. If some investment is expected to generate return more than cost of capital then once should select that project.