25557 Chapter Notes - Chapter 17: Root Mean Square, Capital Structure, Discount Window
Document Summary
Capital structure - a rm"s mix of debt and equity. When a rm issues both debt and equity securities, the cashf lows produced by its assets are split into two streams, the safer stream to the debt holders and the riskier stream to the shareholders. A rm attempts to nd the optimal combination of debt and equity that maximises the overall market value of the rm and shareholders wealth. Mm argues that debt policy is irrelevant as an application of the law of conservation value. Cash ows may be divided into as many parts, the value of the parts will always sum the value of the original stream. If operating is greater than , the return to shareholders is increased by leverage. If income is less than , the return is reduced by leverage. The return is unaffected by leverage if income is exactly . Discount rate applied to future earnings increases as risk increases.
