week_11 - Week 11 Tutorial Emily Lo Capital Structure...

Info icon This preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Week 11 Tutorial Emily Lo
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Capital Structure Firm’s objective >> maximise firm/SH value Valuing a firm based on cash flows Optimal capital structure maximises Shareholder wealth by >> maxmising firm value or >> minimising WACC V = C t (1 + WACC ) t t = 1 n
Image of page 2
Capital Structure: Theories Is there an optimal capital structure? Modigliani & Miller (M&M) >> Perfect Market >> Imperfect Market Static (Trade off) theory Signaling Theory Pecking Order Theory Agency Theory Free Cash Flow Theory
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Modigliani & Miller (M&M): Perfect Capital  Market Proposition I >> The value of a firm is independent of capital structure i.e. size of pie does not depend on how it is sliced >> market value of a firm should be determined by the earning power (cash flows) and risk of its real assets >> capital structure does not affect firm value because of homemade leverage Proposition II >>expected rate of return on a levered firm’s equity V L = D + E = EBIT (1 - T c ) R A = V U R E = R A + D E ( R A - R D )
Image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern