Essay 4 Flashcards
What is a capital structure
Proportions of debt and equity that finances firm
How can form increase value
Effective capital structure e
What is MM porposition
Value of firm unaffected by capital structure
Hypothetical worl d
No taxes
Managers have best intentions
Borrow and lend at risk free rate
No bankruptcy
What is a financing decision
Decision on financial asset that has claims on a real asset
In perfect world what happens to debt
Cost and benefits of debt are eliminated
Positives of debt
Increases discipline to management within firms
Tax deductible
Negatives of debt
Distress costs
Agency costs
Bankruptcy cost
Loss of future financial flexibility
Tax proposition
Increased tax rate = increased use of debt
Agency cost proposition
Increased agency cost incurred when lending to a firm = decreased debt
Bankruptcy proposition
Increased uncertainty about future cash flows = greater probability of bankrupt = less debt
Greater indirect cost of bankruptcy = less debt
Future financials proposition
Increased uncertainty about future financial flexibility = less debt
What’s is pecking order theory
Internal finance - debt - equity
External financing more expensive due to the asymmetry of info between investors and firm
What does stock issue create
Signalling effect where it looks like firm are trying to sell overpriced stocks
What agrees with pecking order theory
Survey results from Morgan Stanley
