财务管理英文Chapter17.pptVIP

Chapter 17 Capital Structure Determination Chapter Objectives Discuss the impact of financial leverage on a firm’s capital structure. Outline both MM Proposition I and MM Proposition II. Discuss the impact of corporate taxes on MM Propositions I and II. Explain the impact of bankruptcy costs on the value of a firm. Identify a firm’s optimal capital structure. Capital Structure Capital Structure -- The mix (or proportion) of a firm’s permanent long-term financing represented by debt, preferred stock, and common stock equity. Concerned with the effect of capital market decisions on security prices. Assume: (1) investment and asset management decisions are held constant and (2) consider only debt-versus-equity financing. A Conceptual Look --Relevant Rates of Return ki = the yield on the company’s debt A Conceptual Look --Relevant Rates of Return A Conceptual Look --Relevant Rates of Return Capitalization Rate Net Income Approach Net Income Approach -- A theory of capital structure in which the weighted average cost of capital will decrease and the total value of the firm will increase as financial leverage is becoming greater. Assume: Both ki and ke are unrelated to the financial leverage. Optimal Capital Structure -- The capital structure that minimizes the firm’s cost of capital and thereby maximizes the value of the firm. Net Income Approach Summary of NI Approach Critical assumption is both ki and ke remain constant. As long as ki and ke are constant, ko is a decreasing linear function of the debt-to-equity ratio. Thus, there is a optimal capital structure when B/V is 100%. Net Operating Income Approach Net Operating Income Approach -- A theory of capital structure in which the weighted average cost of capital and the total value of the firm remain constant as financial leverage is changed. Assume: Both ki and ko remain constant. Required Rate of Return on Equity Summary of NOI Approach Critical assumption is ko remains constant. An increase in cheaper debt f