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Non us companies tend to have much higher degrees of

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Unformatted text preview: ies between U.S. corporations and those of other countries include industry patterns of capital structure, large multinational company capital structures, and the trend toward greater reliance LG3 544 PART 4 Long-Term Financial Decisions on securities issuance and less reliance on banks for financing. Research suggests that there is an optimal capital structure that balances the firm’s benefits and costs of debt financing. The major benefit of debt financing is the tax shield. The costs of debt financing include the probability of bankruptcy, caused by business and financial risk; agency costs imposed by lenders; and asymmetric information, which typically causes firms to raise funds in a pecking order of retained earnings, then debt, and finally external equity financing, in order to send positive signals to the market and thereby enhance the wealth of shareholders. Explain the optimal capital structure using a LG4 graphical view of the firm’s cost-of-capital functions and a zero-growth valuation model. The zero-growth valuation model c...
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