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

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Week 11 Tutorial Emily Lo
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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
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Capital Structure: Theories Is there an optimal capital structure? >> Perfect Market >> Imperfect Market Static (Trade off) theory Signaling Theory Pecking Order Theory Agency Theory Free Cash Flow Theory
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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 V L = D + E = EBIT (1 - T c ) R A = V U R E = R A + D E ( R A - R D )
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This note was uploaded on 01/09/2012 for the course FINS 1613 taught by Professor Drkhshim during the Three '10 term at University of New South Wales.

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

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