CF Chapter 14 Flashcards
What is the capital structure?
The relative proportions of debt, equity and other securites that a firm has outstanding
What is unlevered equity?
Equity in a firm with no debt
What is levered equity?
Equity in a firm with debt
What are the condition called perfect capital markets?
- Investors and firms can trade the same set of securites at competitive market prices equal to the present value of their future cash flows
- There are no taxes, transaction costs or issuance costs associated with security trading
- A firms financing decisions do not change the cash flows generated by its investments nor do they reveal new information about them
What is MM proposition I?
In a perfect capital market, the total value of a firms securities is equal to the market value of the total cash flows generated by its assets and is not affected by its choice of capital structure
What is homemade leverage?
Use leverage in their own portfolio to adjust the leverage choice made by the firm
What is the market value balance sheet?
- All assets and liabilities of the firm are included
- All values are current market values rather than historical costs
What is leveraged recapitilization?
When a firm repurchases a significant percentage of its outstanding shares with borrowed cash
What is MM proposition II?
The cost of capital of levered equity increases with the firms market value debt-equity ratio
What is fallacy leverage and earning per share?
Leverage can increase a firms expected earnings per share
What is fallacy Equity issuances and dilution?
Issuing equity will dilute existing shareholders ownership, so debt financing should be used instead
What is the conservation of value principle?
With perfect capital markets, financial transactions neither add not destroy value, but instead represent a repackaging of risk
