OPTIMAL CAPITAL STRUCTURE INTRODUCTION This report tries to visualize “OPTIMAL CAPITAL STRUCTURE” and represent the facts that include features of capital structure‚ determinants of capital structure‚ and patterns of capital structure‚ types and theories of capital structure‚ theory of optimal capital structure‚ risk associated with capital structure‚ external assessment of capital structure and some assumption related to capital structure. BROAD OBJECTIVE • To determine features of capital structure
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related to firms’ capital structures. My tests address the simultaneity of these decisions and distinguish between debt types with different theoretical implications for managerial incentives. Pay–performance sensitivity decreases in straight-debt leverage‚ but is higher in firms with convertible debt. Furthermore‚ stock option policy is the component of CEO pay that is most sensitive to differences in capital structure. The results strongly support the hypothesis that firms trade-off shareholder-manager
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Finance Seminar Homework #1 Capital Structure Shyam-Sunder and Myers‚ “Testing Static Tradeoff Against Pecking Order Models of Capital Structure”‚ JFE 1999 1. What is the main research question of the paper? The theory of capital structure has been dominated by the search for optimal capital structure. It predicts reversion of the actual debt ratio towards a target or optimum‚ and it predicts a cross-sectional relation between average debt ratios and asset risk‚ profitability‚ tax status and asset
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WHY IS FINANCIAL LEVERAGE A DOUBLE-EDGED SWORD Financial leverage means acquiring assets using funds provided by creditors and preferred stockholders to improve Return on Equity (ROE) of a company rather than utilizing owners’ equity. If a company can borrow money at a rate lower than the return on assets or ROI then the owners’ equity position will be improved. This occurs because less of the equity is required to purchase the assets. It is a double-edged sword and may be positive or negative.
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2011 ∗ These notes are preliminary and under development. They are made available for FINS 1613 S1 2011 students only and may not be distributed or used without the author’s written consent. ∗ 1 Contents 1 Introduction 2 Financial Leverage 3 M&M Proposition I: Capital Structure Irrelevance 4 M&M Proposition II: Capital Structure Irrelevance 4.1 4.2 M&M Proposition II With Riskless Debt . . . . . . . . . . . . . . . . . . . . . . . . M&M Proposition II with Riskless Debt: Betas . .
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UDC: 658.14 Keywords: determinants of capital structure – extent of leverage – listed companies in the Czech Republic Determinants of Capital Structure Empirical Evidence from the Czech Republic Patrik BAUER* The modern theory of capital structure was established by Modigliani and Miller (1958). Thirty-seven years later‚ Rajan and Zingales (1995‚ p. 1421) stated: “Theory has clearly made some progress on the subject. We now understand the most important departures from the Modigliani and
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After-Tax Interest Rate 2.4% 1.1% Net Financial Leverage 0.42 -0.16 Answer: IBM Analysis Return on Operation Asset = NOPAT/sales * Sales/net assets = 9.00%* 2.16 =19.44% Borrowing multiplier = ROA- EATR =19.44%-2.40% =17.04% Return on Leverage = Borrowing multiplier * Net Financial leverage =17.04%*0.42 = 7.15% ROE = ROA* Net Financial Leverage 26.7% = X*0.42 X=63.57 ROA = 63.57%
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in a stock repurchase program. Led by Chief Financial Officer Susan Collyns‚ the financial team of CPK was reviewing the preliminary results for the second quarter to determine if the stock repurchase program would provide a significant financial leverage for the company. The goal was to determine if the company can maintain the necessary financial stability to meet the expected growth trajectory for 2008 while utilizing debt financing for the buyback program. Having started the company using the
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countries rebalance their leverage following equity issuances. The results are more in line with the dynamic trade-off theory rather than the equity market timing or pecking order hypothesis of capital structure. In other words‚ firms have their target capital structures‚ determined by the marginal benefits of debt and costs associated with debt. Therefore‚ this implies that firms adjust their capital structure in response to the temporary shocks that cause their leverage to deviate from the target
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whether the company invests equity in positive valued projects that exceed the cost of capital‚ which will boost the equity value-to-book multiple. The effectiveness of the financial strategy can be evaluated by a number of factors including financial leverage. The company’s strategy also affects its perceived risk‚ which drives the price-to-earnings multiple. c. Operational efficiency‚ which is largely determined by the firm’s asset utilization‚ is a component of the ROA calculation‚ which is a profitability
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