BFF2140 Lecture Notes - Lecture 11: Capital Structure, Corporate Finance, Financial Risk
Document Summary
Le(cid:448)e(cid:396)age a(cid:374)d the (cid:396)isk of the fi(cid:396)(cid:373)"s e(cid:395)uit(cid:455) The optimal mix of debt and equity trades off the costs and benefits of debt. Results from use of fixed-(cid:272)ost assets o(cid:396) fu(cid:374)ds to (cid:373)ag(cid:374)if(cid:455) (cid:396)etu(cid:396)(cid:374)s to the fi(cid:396)(cid:373)"s o(cid:449)(cid:374)e(cid:396)s. The extent of leverage in a firm is positively associated with financial risk and potential return. Capital restructuring involves changing the amount of leverage (l) without changing the amount of assets (a) Value of the firm = value of debt + value of equity. But not all firms have both debt and equity. Some firms are 100% equity firms = unlevered firms. Most firms have a mix of equity and debt = levered firms. Business risk stems from uncertainty about future operating income (ebit). Business risk is affected mainly by business operations: In the case of bankruptcy debt holders have a prior claim on the cash flows of the firm.
