Capital Structure

Capital Structure - CAPITAL STRUCTURE Why be concerned with...

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CAPITAL STRUCTURE
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Why be concerned with capital structure? want to minimize the cost of capital to the firm, so can maximize the value of the firm. o Both bondholders and equity holders provide capital to the firm o The required rate of return each requires is the opportunity cost of investing their resources in alternatives with equivalent risk.
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o The firm should accept only those projects that, after taxes, provide enough cash flow to pay investors their expected return + repay original principal + have something left over to increase the wealth of the existing shareholders. want to find the optimal mix of debt and equity financing that minimizes the cost of capital.
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Trade-off Model Assumes that observed capital structures are due to individual firms trading off the tax benefits of debt against increased agency costs as debt levels increase. Evolved from Modigliani and Miller’s Works well for observed corporate debt
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Capital Structure - CAPITAL STRUCTURE Why be concerned with...

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