Management and Organizational Studies 2310A/B Chapter Notes - Chapter 16: Tax Shield, Transaction Cost, Weighted Arithmetic Mean

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

Document Summary

16. 1 capital structure choices: relative proportions of debt, equity, and other sercurities that a firm has outstanding constitute of capital structure. Capital structure choices within industries: two competing firms may take different choices about their debt to value ratios. A firms financing decision does not change the cash flows its investments generate. Equity financing: first consider raising money solely by selling equity to friends and family, unlevered equity: equity in the firm with no debt. The effect of leverage on risk and return: criticism: even with perfect capital markets, leverage would affect a firms value. It is inappropriate to discount the cash flows of levered equity at the same discount rate we used for unlevered equity. Net effect of wacc remains unchanges: as the amount of debt increases, debt becomes riskier, the debt cost of capital also rises. Which 100% debt, the debt would be almost risky as the assets themselves (similar to unlevered equity)