WHAT IS UNIQUE ABOUT FINANCIAL SERVICE FIRMS?

Financial service firms have much in common with non-financial service firms. They have to negotiate the trade off between profits and risk, to worry about competition, and want to grow rapidly over time. If they are publicly traded, they are judged by the total return they make for their stockholders, just as other firms are. This section, though, focuses on those aspects of financial service firms that make them different from other firms and considers the implications for valuation.

Debt: Raw Material or Source of Capital

When we talk about capital for non–financial service firms, we tend to talk about both debt and equity. A firm raises funds from both equity investors and bondholders (and banks) and uses these funds to make its investments. When we value the firm, we value the assets owned by the firm, rather than just the value of its equity.