Summary Capital Strucure (Copeland and Weston=
Capital Structure and the Cost of Capital: TheoryChapter 13 :Financial Theory and Corporate Policy (Copeland and Weston) INTRODUCTION
In the summary of the following chapter is shown the mixture of the financial source of a company. There are the sources of debt and equity but also the financing affects of the cost of capital. Furthermore, it shows its connections to the shareholder's wealth and how to calculate the cost of capital in a specific situation where the risk is depending from the case.
THE VALUE OF THE FIRM GIVEN CORPORATE TAXES ONLY THE VALUE OF THE LEVERED FIRM
According to the theory of cost od capital, corporate valuation and capital structure of Modgliani and Miller there is either implicity or explicity assumed for the folowing expressions: Capital markets are frictionless. Individuals can borrow and lend at the risk-free rate. There are no costs to bankruptcy. Firms issue only two types of claims: risk-free debt and (risky) equity. All firms are assumed to be in the same risk class. Corporate taxes are the only form of government levy (i.e., there are no wealth taxes on corporations and no personal taxes). All cash flow streams are perpetuities (i.e., no growth). Corporate insiders and outsiders have the same information (i.e., no signaling opportunities). Managers always maximize the shareholder's wealth (i.e., no agency costs)
The theory is not realistic but later we will se that the discrepancy is not very high and does not really effect the values of the model.
Let us be more specific with the point “All firms are assumed to be in the same risk class.” The return I is the same return J when we assume that the cash flow just differ by an factor and is given by:
because the the return is given by
and with the assumption
The value of an unlevered firm is for This represents the value for an unlevered firm because it contains the discounted value of a perpetual.
To distinguish
In the summary of the following chapter is shown the mixture of the financial source of a company. There are the sources of debt and equity but also the financing affects of the cost of capital. Furthermore, it shows its connections to the shareholder's wealth and how to calculate the cost of capital in a specific situation where the risk is depending from the case.
THE VALUE OF THE FIRM GIVEN CORPORATE TAXES ONLY THE VALUE OF THE LEVERED FIRM
According to the theory of cost od capital, corporate valuation and capital structure of Modgliani and Miller there is either implicity or explicity assumed for the folowing expressions: Capital markets are frictionless. Individuals can borrow and lend at the risk-free rate. There are no costs to bankruptcy. Firms issue only two types of claims: risk-free debt and (risky) equity. All firms are assumed to be in the same risk class. Corporate taxes are the only form of government levy (i.e., there are no wealth taxes on corporations and no personal taxes). All cash flow streams are perpetuities (i.e., no growth). Corporate insiders and outsiders have the same information (i.e., no signaling opportunities). Managers always maximize the shareholder's wealth (i.e., no agency costs)
The theory is not realistic but later we will se that the discrepancy is not very high and does not really effect the values of the model.
Let us be more specific with the point “All firms are assumed to be in the same risk class.” The return I is the same return J when we assume that the cash flow just differ by an factor and is given by:
because the the return is given by
and with the assumption
The value of an unlevered firm is for This represents the value for an unlevered firm because it contains the discounted value of a perpetual.
To distinguish