公司理财第五版高等院校双语教材·金融系列-chapter 14(PPT 44页).ppt

Chapter 14
Debt policy
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Objectives
Analyze the effect of debt finance on the risk and required return of equityholders
Appreciate the advantages and disadvantages of debt finance
Cite the various costs of financial distress
Explain why the debt-equity mix varies across firms and across industries
Summarize the bankruptcy procedures for firms that cannot pay their creditors
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Content
How borrowing affects value in a tax-free economy
Capital structure and corporate taxes
Costs of financial distress
Explaining financing choices
Bankruptcy procedures
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Capital structure: the mix of long-term debt and equity financing
The value of those cash flows determines the value of the firm and therefore determines the aggregate value of all the firm’s outstanding debt and equity securities. If the firm changes its capital structure, say, by using more debt and less equity financing, overall value should not change.
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MM proposition: When there are no taxes and capital markets function well, the market value of pany does not depend on its capital structure.
In other words, financial managers cannot increase value by changing the mix of
securities used to finance pany.
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MM’s argument
Restructuring: process of changing the firm’s capital structure without changing its assets
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How borrowing affects earnings per share
Borrowing increases earnings per share (EPS) when
operating e is greater than $100,000 but reduces it when operating e is less than $100,000.
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MM’s proposition I (Debt irrelevance proposition): The value of a firm is unaffected by its capital structure.
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How borrowing affects risk and return
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Debt financing does not affect the operating risk or, equivalently, the business risk of the firm
Operating risk or business risk: risk in firm’s operating e
But with less equity outstanding, a cha