L7b - Lecture 7 Capital Structure and Leverage 7-2 Lecture...

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Lecture 7 Capital Structure and Leverage
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7-2 Lecture Outline Business risk and Financial risk Optimal capital structure Hamada Equation
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7-3 Uncertainty about future operations (EBIT) What determines business risk? Uncertainty about demand (sales) Uncertainty about output prices Uncertainty about costs Business Risk
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7-4 Financial Risk Financial risk is the additional risk concentrated on common stockholders (ROE) as a result of using debt Business risk depends on business factors such as competition, product liability, and operating leverage. Financial risk depends only on the types of securities issued.
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7-5 Optimal Capital Structure The target capital structure is the mix of debt, preferred stock, and common equity with which the firm s stock price is maximized. It is the same capital structure that minimizes the WACC.
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Finding Optimal Capital Structure The firm s optimal capital structure can be determined two ways: Minimizes WACC. Maximizes stock price.
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This note was uploaded on 09/11/2011 for the course ECON 300 taught by Professor Grifith during the Summer '10 term at CSU Long Beach.

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L7b - Lecture 7 Capital Structure and Leverage 7-2 Lecture...

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