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CFS C3TX: Capital Structure Policy (Capital Structure Theory (d. Why…
CFS C3TX: Capital Structure Policy
Describe a firm's capital structure
a. defining a firm's capital structure
b. financial leverage
c. how do firms in different industries finance their assets?
Capital Structure Theory
a. a first look at the Modigliani and Miller Capital Structure Theorem
b. Yogi Berra and the M&M Capital Structure Theory
c. Capital Structure, the Cost of Equity and the Weighted Average Cost of Capital
d. Why capital structure matters in reality?
i. Violations of Assumption 2
ii. violations of Assumption 1
corporate taxes and capital structure
corporate taxes and the WACC
bankruptcy and financial distress costs
iii. the tradeoff theory and the optimal capital structure
interest expense is tax deductible
debt makes it more likely that firms will experience financial distress costs
iv. capital structure decisions and agency costs
e. making financing choices when managers are better informed than shareholders
f. managerial implications
Why do capital structures differ across industries?
making financing decision
a. benchmarking the firm's capital structure
interest bearing cost ratio
EBITDA coverage ratio
b. Evaluating the effect of financial leverage on firm earnings per share
i. financial leverage and the level of EPS
ii. financial leverage and the volatility of EPS
Principle 2: there is a risk-return tradeoff
iii. using the EBIT-EPS chart (aka range of earnings chart) to analyze the effect of capital structure on EPS
iv. computing EPS indifference points for capital structure alternatives
EBIT-EPS indifference point
c. can the firm afford more debt?
d. survey evidence: factors that influence CFO debt policy
summary