chapter 13 notes

chapter 13 notes - BUS 320 Chapter 13 notes 1 Target...

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1 BUS 320 Chapter 13 notes
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2 Target Capital Structure Optimal Capital Structure is the structure that would maximize firm’s stock price and therefore minimizes Weighted Average Cost of Capital (WACC) Difficult to estimate with much confidence. More often thought of as a range. Setting structure involves tradeoff between risk and return. Using more debt will raise risk borne by stockholders Using more debt generally increases the expected return on equity.
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3 Debt 2 Advantages Interest paid is tax deductible where dividends are not (lowers cost of debt) Return on debt is fixed (stockholders do not have to share profits if firm is successful) Disadvantages More debt increase firm’s risk (debt raises cost of both debt and equity capital) Greater potential for bankruptcy.
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4 Factors influencing capital structure Decisions Business Risk Financial Risk
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5 Business risk Single most important determinant of capital structure. Riskiness inherent in the fir,’s operations if it uses
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This note was uploaded on 04/12/2008 for the course BUS 320 taught by Professor Sloan during the Fall '08 term at N.C. State.

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chapter 13 notes - BUS 320 Chapter 13 notes 1 Target...

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