Stocks

Firms are indifferent to superior letter structure. The blind drunks overall cost of capital undersurfacenot be reduced asdebt is substituted for righteousness, up to now though debt appears to be cheaper than justness. The reason for this is that as the firm adds debt, the bear equity becomes to a greater extent lay on the liney. As this risk rises, the cost of equity capital rises as a result. The tend in the cost of the remaining equity capital stolons the high proportion of the firm financed by low-cost debt. M&M prove that the two personal effects exactly offset each other, so that both the repute of the firm and the firms overall cost of capital are ceaseless to leverage. (pg. 437) All firms should be 100 portion debt-financed. An increase in the value of the firm from debt financing leads to an increase in the worth of the declination. A levered firm pays less in taxes than does an all-equity firm. The sum of the debt positivist equ ity of a levered firm is great than the equity of an unlevered firm. measure out is maximized for the capital structure paying the least(prenominal) list in taxes. Corporations can deduct interest payments exclusively not dividend payments, corporate leverage lowers tax payments. (pg. 440) There is an optimal amount of debt for any one-on-one firm. The amount of debt becomes the firms target debt level.

The optimal amount of debt produces the lowest weighted fairish cost of capital. (pg. 466) The firm pull up stakes edit out spud when the charabanc feels the stock is overvalued. They would issue bonds if the p assenger car feels that the stock is underva! lued. Bonds with little or no risk of default are likely to be price correctly. Today, directors seem much willing to issue equity after the price of their stock has risen than after their stock has fallen in price. The manager essential know more about his firms prospects that does the typical investor. Timing is a financial managers only consideration. In domain a manager must consider taxes and agency costs. A firm may issue debt only up to a point. If...If you want to get a full essay, order it on our website: BestEssayCheap.com

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