Ch 15 Capital Structure Part I

Ch 15 Capital Structure Part I - Chapter 15 Capital...

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Chapter 15 Capital Structure Part I
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5 FINA 111 – Part II FINA 111 Part II Valuation of Securities Measuring and Pricing Risk Financing Policy Bonds Ch 6 Stocks Ch 9 Risk-Return Tradeoff Ch 10 Risk Diversification and Risk Pricing Ch 11 Cost of Capital Ch 12 Debt Policy Ch 15 Payout Policy Ch 16 Done Done Next Done Done Done
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6 Objective of Financial Management Maximize Value of Firm (Maximize PPS) Welfare of Stakeholders Financial Policies Maximize wealth of investors
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7 Financial Policies Short term Assets: Working Capital policy Ch 18 Financing policy: Cost of capital Ch 12 Capital Structure Ch 15 Payout policy Ch 16 Long term Assets: Capital Investment policy Ch 7,8 Maximize Value of firm
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8 Firm Valuation Firm Valuation Measuring and Pricing Risk Ch 10,11 Asset Valuation Ch 4,7,8,18 Financing Policies: Cost of Capital Ch 12 Capital Structure Ch 15 Payout Policy Ch 16 Securities Valuation: Bonds Ch 6 Stocks Ch 9 External Factors
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9 Is Debt a Burden or a Threat?
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Is Debt an Opportunity?
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11 Differences Between Debt and Equity c Debt r Not an ownership interest r Creditors do not have voting rights r Interest is considered a cost of doing business and is tax- deductible r Creditors have legal recourse if interest or principal payments are missed r Excess debt can lead to financial distress and bankruptcy c Equity r Ownership interest r Common stockholders vote to elect the board of directors and on other issues r Dividends are not considered a cost of doing business and are not tax deductible r Dividends are not a liability of the firm until declared. Stockholders have no legal recourse if no dividends are declared r An all-equity firm cannot go bankrupt
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12 Capital Structure Outline Capital Structure Theory In perfect Capital markets Miller-Modigliani Propositions With taxes Miller-Modigliani Propositions With taxes and financial Distress costs Trade-off theory Agency costs and Asymmetric information The Capital Structure Decision
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13 Chapter Outline 1. Capital Structure - Introduction 2. Capital Structure in Perfect Capital Markets 3. Debt and Taxes 4. Costs of Bankruptcy and Financial Distress 5. Optimal Capital Structure: The Tradeoff Theory 6. Additional Consequences of Leverage: 6A. Agency Costs 6B. Asymmetric Information 7. Capital Structure: Putting It All Together
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14 Learning Objectives c Examine how capital structures vary across industries and companies c Understand why investment decisions, rather than financing decisions, fundamentally determine the value and cost of capital of the firm c Describe how leverage increases the risk of the firm’s equity c Demonstrate how debt can affect firm value through taxes and bankruptcy costs
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15 Learning Objectives c Show how the optimal mix of debt and equity trades off the costs (including financial distress costs) and benefits (including the tax advantage) of debt
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This note was uploaded on 08/10/2011 for the course FINA 101 taught by Professor X during the Spring '11 term at HKUST.

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Ch 15 Capital Structure Part I - Chapter 15 Capital...

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