The Fisher Model and Financial Markets
This monograph represents a unified coherent perspective of financial markets and the theory of corporate finance. The Fisher model is used in corporate finance texts to note the foundations of the net present value rule, but has not been developed further in textbooks as a perspective for students of the finance discipline. This book articulates corporate finance from a common perspective and model: by generalizing the Fisher model to include risks, it is possible to exposit and prove the classic corporate finance theorems and to establish a common foundation for the discipline. The classic theorems of corporate finance are collected, stated, and some are proved. The reader is challenged to prove corollaries and theorems to see how the model provides the fundamental building blocks for the discipline.
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1958 Modigliani–Miller Theorem adjusted present value agency cost agency problem asset basis stock bond issue bondholders call option capital structure ceteris paribus consider constrained maximization problem consumption pair convertible bond corporate account corporate ﬁnance corporate manager corporate value current shareholder value debt issue decisions on corporate denote dollars equivalently ﬁnance the investment ﬁnancial market ﬁrm equals ﬁrm’s ﬁrst order conditions Fisher model Fisher separation result Fisher separation theorem hedged Hence hidden knowledge problem implicitly deﬁned incentives indifference curves individual’s investment decision investment level investment project investors levered ﬁrm MacMinn manager’s Myers and Majluf net present value nexus of contracts Note objective function personal account portfolio promised payment rate of return risk adjusted present risk aversion risk management risk shifting problem safe debt shown in Figure stock market value stock options stock value sufﬁciently under-investment problem unhedged utility function yields