Management and Organizational Studies 2310A/B Chapter Notes - Chapter 16: Capital Structure, Cash Flow, Capital Market

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

Document Summary

The relative proportions of debt, equity and other securities that a firm has outstanding constitute it"s capital structure. When corporations raise funds from outside investors, corporations must choose which type of security to issue and what type of capital structure to have. Debt to value ratio: the fraction of a firm"s total value that corresponds to debt. Debt levels financial managers choose vary across industries. Two competing firm"s may make different choices about their debt to value ratios. Unlevered equity: equity in a firm with no debt. Levered equity: equity in a firm with outstanding debt. M&m proposition i: in a perfect capital market, the total value of a firm is equal to the market value of the free cash flows generated by it"s assets and is not affected by it"s choice of capital structure. Homemade leverage: leverage that investors use in their own portfolios to adjust the leverage choice a firm has made.