Chapter 12 lg6 leverage and capital structure 539 124

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Unformatted text preview: n framework for use in making capital structure decisions should include the two key factors of return and risk. This section describes the procedures for linking to market value the return and risk associated with alternative capital structures. Linkage To determine the firm’s value under alternative capital structures, the firm must find the level of return that must be earned to compensate owners for the risk being incurred. Such a framework is consistent with the overall valuation framework developed in Chapters 6 and 7 and applied to capital budgeting decisions in Chapters 9 and 10. The required return associated with a given level of financial risk can be estimated in a number of ways. Theoretically, the preferred approach would be first to estimate the beta associated with each alternative capital structure and then to use the CAPM framework presented in Equation 5.8 to calculate the required return, ks. A more operational approach involves linking the financial risk associated wit...
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This document was uploaded on 01/19/2014.

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