UNIT 10 Capital Structure知识点.docVIP

UNIT 10 CAPITAL STRUCTURE POLICY 10.1 Introduction Decisions about a firm’s debt/ equity ratio is called capital structure decisions. A firm can choose any capital structure that it wants. If management so desired, a firm could issue some bonds and use the proceeds to buy back some stock, thereby increasing the debt/ equity ratio. Alternatively, it could issue stock and use the money to pay off some debts, thereby reducing the debt/equity ratio. Activities, such as these, that alter the firm’s existing capital structure are called capital restructuring. In general, such restructuring take place whenever the firm substitutes one capital structure for another while leaving the firm’s asset unchanged. How should a firm go about choosing its debt/ equity ratio? Here, as always, we assume that the guiding principle is to choose the course of action that maximizes the value of a share of stock. Hence, financial manager should choose a capital structure that maximizes the value of the firm. 10.2 Capital Structure and the Cost of Capital The primary reason for studying the weighted average cost of capital WACC is that the value of the firm is maximized when the WACC is minimized. WACC is the discount rate that is appropriate for the firm’s overall cash flows. Since values and discount rates move in opposite direction, minimizing the WACC will maximize the value of the firm’s cash flows. Thus, financial manager will choose the firm’s capital structure so that the WACC is minimized. For this reason, we will say that one capital structure is better than another if it results in a lower WACC. Further, we say that a particular debt/ equity ratio represents the optimal capital structure if it results in the lowest possible WACC. This is sometimes called the firm’s target capital structure.The Effect of Financial Leverage Gearing Financial leverage or gearing refers to the extent to which the firm relies on debt. The more debt financing a firm uses in it