Capital Structure V2 Flashcards
1
Q
Modigliani Miller NO TAX
A
- firm value is independent of capital structure
- WACC does not change, so debt and equity are equally expensive
- If you do not like capital structure as an investor you can change it, risklesslt
2
Q
Incremental costs of debt
A
coupon on debt + increase in k-e
3
Q
Lever the unlevered firm
A
if you want magnification of debt, you can buy stock with personally borrowed money (on margin)
4
Q
Vertical slice
A
unlever the levered firm
you put some money in risky stock and the rest in a less risky asset like bond
5
Q
Ultimate value of a financial asset
A
Abiltiy to lay claim to a future cash flow
6
Q
Modigliani Miller WITH TAX
A
- More debt reduces tax exposure, and increase investor value.
2.
7
Q
Debt and stock price
A
Price goes down BUT stockholder value goes up because lower price combined with money from bondholders leave them wealthier
8
Q
Debt vs Equity, no-tax
A
debt is cheaper because it reduces tax exposure
9
Q
Traditional position implication
A
0< debt:capital <1
10
Q
MM w/ tax implication
A
Go 100% debt
11
Q
MM w/o tax impication
A
no difference
