roof Structure Concepts
This chapter examines some of the basic concepts employ in determining a securelys optimal capital structure. It deals only with the total permanent sources of a blind drunks pay.
Capital Structure
The percentage of long-term securities and permanent short debt that the loyal uses to finance its long-term assets
The permanent debt, preferred stock, and greenness stock on a heartys oddment sheet
Financial Structure
The firms financial structure includes the firms capital structure plus current liabilities
change magnitude debt levels:
Increase riskiness to stockholders
Increase stockholders required rate of return
Capital structure decisions involve trade-offs between risk and expected return
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Theory
Addresses the misgiving: Is there an optimal capital structureâ€"a financing proportion that will maximize stockholder wealth and if so, what is it?
M&M Models (1958, 1963)
Assumptions:
No transaction costs
No bankruptcy costs
No government regulation, including levyes
Costless information, available to all
unblemishedly competitive market
With Perfect Capital Markets (PCM)
Show debt levels do not affect firm value
Capital structure is irrelevant to firm value
V L = V U
With PCM, but with corporate taxes
Show cast upd debt increases firm value
The optimal debt level is close to 100% debt
The benefit of debt comes from the tax shield
Not from kd < ke
V L = V U + (t)(D)
The true World
Agency costs and costs of financial distress increase with increased debt levels
These costs offset the benefit of the tax shield
V L = V U + (t)(D) PV(agency costs)
PV(costs of financial distress)
Financial mourning/Bankruptcy Costs
Lenders whitethorn demand higher interest rates.
Lenders may decline to lend at all.
Customers may shift their bank line to other firms.
Distress incurs extra accounting &...If you want to locomote a full essay, order it on our website: Ordercustompaper.com
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