文档介绍：Irwin/McGraw-Hill
Chapter 15
Fundamentals of Corporate Finance
Third Edition
The Capital Structure Decision
Brealey Myers Marcus
slides by Matthew Will
Irwin/McGraw-Hill
The McGraw-panies, Inc.,2001
Topics Covered
Debt and Value in a Tax Free Economy
Capital Structure and Corporate Taxes
Cost of Financial Distress
Explaining Financial Choices
M&M (Debt Policy Doesn’t Matter)
Modigliani & Miller
When there are no taxes and capital markets function well, it makes no difference whether the firm borrows or individual shareholders borrow. Therefore, the market value of pany does not depend on its capital structure.
M&M (Debt Policy Doesn’t Matter)
Assumptions
By issuing 1 security rather than 2, company diminishes investor choice. This does not reduce value if:
Investors do not need choice, OR
There are sufficient alternative securities
Capital structure does not affect cash flows ...
No taxes
No bankruptcy costs
No effect on management incentives
Example - River Cruises - All Equity Financed
M&M (Debt Policy Doesn’t Matter)
Example
cont.
50% debt
M&M (Debt Policy Doesn’t Matter)
Example - River Cruises - All Equity Financed
- Debt replicated by investors
M&M (Debt Policy Doesn’t Matter)
Weighted Average Cost of Capital without taxes (traditional view)
r
D
V
rD
rE
Includes Bankruptcy Risk
Weighted Average Cost of Capital without taxes (M&M view)
r
D
V
rD
rE
Includes Bankruptcy Risk
Financial Risk - Risk to shareholders resulting from the use of debt.
Financial Leverage - Increase in the variability of shareholder returns es from the use of debt.
Interest Tax Shield- Tax savings resulting from deductibility of interest payments.
. & Corporate Taxes