debt financing Flashcards
What is capital structure?
A firm’s mix of debt and equity financing
What is financial leverage?
The use of debt as an attempt to increase returns to equity
The Modigliani-Miller approach says that to find the value maximising combination of securities, the manager should:
Stop worrying
What are some Modigliani-Miller assumptions?
- Competitive markets
- Efficient markets
- Absence of taxation
- Absence of bankruptcy costs
- Financing decisions dont affect investment opportunities
Leverage increases the expected stream of earnings per share, but not the:
Share price
The operating income and the market value of assets is more important than
Composition of financial assets (capital structure)
Leverage creates a positive spread between the expected return on equity and the:
Weighted expected return of financial assets
Why do investors demand a higher return from levered firms?
To compensate for the extra risk
MM’s proposition 1 says that financial leverage has no effect on:
Shareholder’s wealth
MM’s proposition 2 says that the rate of return shareholders can expect to receive on their shares increases as the firm’s __ __ ratio increases
Debt-equity
Leverage has no effect on the:
Cost of capital
As the firm borrows more, the risk of __ increases and the firm is required to pay higher rates of __
- Default
- Interest
