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The study of capital structure attempts to explain how listed firms utilise the mix of various forms of securities in order to finance investment. Modigliani and Miller (1958: 201) demonstrated that capital structure is irrelevant under certain restrictive assumptions. Ever since then, many researchers have approached the study of
18 Apr 1998 Agency Costs, Risk Management, and Capital. Structure. Hayne E. Leland*. The choice of investment financing, and its link with optimal risk exposure, is central to the economic performance of corporations. Financial economics has a rich literature analyzing the capital structure decision in qualitative terms.
GSU, Department of Finance, AFM. - Capital Structure / page 2 -. Corporate Finance. Spring 2009. MBA 8135. Fundamentals of Capital Structure Theory. ? The Capital Structure Decision. - Firms regularly raise capital to invest in assets. - Each time there is a choice between debt and equity, and this choice is influenced
In traditional corporate finance, the objective in decision making is to maximize the value of the firm. ? A narrower objective is to maximize stockholder wealth. When the stock is traded and markets are viewed to be efficient, the objective is to maximize the stock price. ? All other goals of the firm are intermediate ones
At date 1, the firm's assets are worth X. The firm has debt at face value of D. • The value of debt at date 1 will be 1. , , and the value of equity will be. 1. ,0. Debt is the senior claimant to the firm's returns and equity is the residual claimant. • Capital structure theory asks what is the optimal composition between debt and equity.
In Chapter 7, we looked at the wide range of choices available to firms to raise capital. In Chapter 8, we developed the tools needed to estimate the optimal debt ratio for a firm. Here we discuss how firms can use this information to choose the mix of debt and equity they use to finance investments, and on the financing
Franco Modigliani and Merton Miller (MM) developed a theory that helps us understand how taxes and financial distress affect a company's capital structure decision. The pecking order theory argues that the capital structure decision is affected by management's choice of a source of capital that gives higher priority to
Hence there will be no leverage effect on value of the firm. However, owing to tax benefit of debt financing and market imperfections, the management employs a judicious mix of financial claims and chooses an optimum capital structure which would minimize the cost of capital and maximize the market value of the firm.
Chapter-8: Cash Management and Marketable Securities. 196. Chapter-9: Management of Receivables. 223. Chapter-10: Inventory Management. 244. Chapter-11: Capital Structure Theories. 262. Chapter-12: Dividend Decisions. 330. Chapter-13: Working Capital Financing. 346. Chapter-14: Regulation of Bank Finance.
Capital structure refers to the different options used by a firm in financing its assets (Bhaduri, 2002). Generally, a firm Management will base their decision with regard to the combination of debt and equity on these various costs and Available: www.fma.org/Prague/Papers/LaRocca.pdf [17 September 2009]. Miller
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