Capital Structure

1.Capital Structure In finance, majuscule complex body part refers to the way a corporation finances its assets through some combination of law, debt, or hybrid securities. A sloppeds capital structure is and so the composition or structure of its liabilities. For example, a firm that sells $20bn dollars in equity and $80bn in debt is said to be 20% equity financed and 80% debt financed. The firms ratio of debt to total support, 80% in this example, is referred to as the firms leverage. The Modigliani-Miller theorem, proposed by Franco Modigliani and Merton Miller, forms the basis for modern thinking on capital structure, though it is generally viewed as a rigorously theoretical resolving power since it assumes away many important situationors in the capital structure decision. The theorem states that, in a correct market, the economic rank of a firm is unaffected by how that firm is financed. This result provides the base with which to examine real world reasons why capital structure is relevant, that is, a companys value is affected by the capital structure it employs. These other reasons include bankruptcy be, function costs and asymmetric information. This analysis can then be extended to look at whether there is in fact an optimal capital structure: the one which maximizes the value of the firm.

Capital structure in a perfect market Assume a perfect capital market (no transaction or bankruptcy costs; perfect information); firms and individuals can borrow at the same engage rate; no taxes; and investment decisions arent affected by financing decisions. Modigliani and Miller made two findings under these conditions. Their first proposition was that the value of a company is independent of its capital structure. That is, you cannot change the surface of a cake by cutting it into different surface pieces. Their second proposition stated that the cost of equity for a leveraged firm is equal to the cost of equity for an unleveraged firm, plus an added premium for financial risk. That... If you want to get a full essay, order it on our website: Ordercustompaper.com

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