Management and Organizational Studies 3311A/B Lecture Notes - Lecture 4: Capital Structure, Cash Flow, Retained Earnings

• School: Western University
• Department: Management and Organizational Studies
• Course: Management and Organizational Studies 3311A/B
• Professor: Jun Wang

Document Summary

The capital structure decision: capital structure is a firm"s mix of long-term financing. It determines: the claim that shareholders have on the cash flows generated by the firm, the risk faces by shareholders (leverage) Mm i debt irrelevance (no tax: modigliani-miller demonstrate that the capital structure of a firm does not affect its value when, there are no taxes, there are no transactions costs, there is complete information, and. Investors and firms face a common borrowing rate: capital structure does not affect a firm"s value. I. e. its assets and operations it only affects value distribution. Mm ii (no tax: under the maintained assumptions, the use of debt implies a change in risk for shareholders which is entirely compensated for by an increase in expected return. R0 is the cost of asset/cost of unlevered stock. Rd is the cost of debt/cost of levered stock.