FIN335 CH13_Capital Structure.pptx - Capital Structure and...

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Capital Structure and Leverage Chapter 13 Sources of Risk Business, Financial, & Operating
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Capital Structure RHS is called the financial structure of the firm The Firm’s Financial Structure includes; funds obtained in the money markets (short term) funds obtained in the capital markets (long term). Capital Structure is concerned with long term funds: debt and equity.
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Optimal Capital Structure 1. Perfect mix of debt and equity that minimizes the cost of capital and maximizes the value of the firm. (See Fig 13.6) 2. Firm’s market value = discounted future cash flows. 3. Risk → Required ROR → Price (value) Sources of Risk? i. Business ii. Financial iii. Operating
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BUSINESS RISK A. Business Risk: changes in revenues caused by business cycles B. BR leads to uncertainty about future operating income (EBITDA) C. The more sensitive the firm’s sales to economic cycles, the more volatile the firm’s EBITDA.
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