Management and Organizational Studies 2310A/B Chapter Notes - Chapter 16: Financial Risk, Cash Flow, Systematic Risk

• School: Western University
• Department: Management and Organizational Studies
• Course: Management and Organizational Studies 2310A/B
• Professor: Nick Khanert

Document Summary

Change in the value of the firm is the same as the net effect of the shareholders. Financial managers try to find the capital structure that maximizes the value of the firm - the. Npv rule applies to capital structure decisions, and the change in the value of the overall firm is the npv of a restructuring. The value of the firm is maximized when the wacc is minimized. Financial leverage is the extent to which a firm relies on debt - the more debt, the more financial leverage. Degree of financial leverage = % change in eps / % change in ebit. = (eps1 - eps2) / eps2 (ebit1 - ebit2) / ebit2. Degree of financial leverage = ebit / (ebit - interest) Homemade leverage: use of personal borrowing to change the overall amount of financial leverage to which the individual is exposed. Capital structure and the cost of equity capital.